MODULE 2 – THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM

By definition, this equation must remain in balance on a company’s financial

statements. The balance sheet itself is in fact a reflection of this equation.
Should a company’s financial statements show one side of the equation unequal
to another, then the balance has been lost and an accounting error has been
made. (Note, however, that the flip side of this circumstance does not hold
true. Having the books in balance does not exclude an error from being
present.)

Double-entry bookkeeping as stated, accountants must keep the equation in

balance. To this end, they employ a system called double-entry bookkeeping to
record every business transaction in view of both sides of the equation. Thus
each journal entry contains two parts; it notes either an equal impact
(increase or decrease) to both sides of the equation, or it notes an equal and
opposite impact to a single side. For example, if your company received a bank
loan for $15,000, then your assets (one side of the equation) would increase
by $15,000 but so would your liabilities (other side of the equation). On the
other hand, if you purchased laboratory equipment for $5,000, then your cash
assets (one side of the equation) would decrease by $5,000 but your equipment
assets (same side) would equally increase, thus maintaining the balance. This
recording of equal (or equal and opposite) impacts—called debits and credits —
to more than one account for every event recognizes and reflects the fact that
in all business transactions in order to gain one thing, another thing must be
given up or exchanged.

Learning Outcomes
After studying this chapter, the learners should be able to:
1. Describe the parts of an information system.
2. Explain how an accounting information system helps the decision
makers.
3. Define the elements of financial statements.
4. Describe the account (the simple T-account) and its uses.
5. Understand what is meant by the accounting equation and prove
validity of the “mirror image” concept.
6. Illustrate the accounting equation.
7. Understand what is meant by the double-entry system.
8. Explain how the double-entry system follows the rules of the
accounting equation.
9. Define debits and credits.
10. Summarize the rules of debit and credit as applied to balance
sheet and income statement accounts.
11. Describe the nature of the typical account titles used in
recording transactions.
12. Analyze and state the effects of business transactions on an
entity’s assets, liabilities and owner’s equity and record these
effects in accounting equation form using the financial
transaction worksheet and the T-Accounts.
13. Distinguish between revenue and receipts.

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 Lesson 1
The Accounting Information System and the Elements of Financial
Statements

I. Learning Outcomes
1. describe the accounting information system;
2. define the elements of financial statements;
3. describe the account (the simple T-Account) and its uses;
4. understand what is meant by the double-entry system;
5. understand the accounting equation;
6. define debits and credits; and
7. identify the accounts under the statement of financial
position/balance sheet and those under the statement of income/income
statement.

II. Pre-Assessment

Name: _____________________________________ Time: __________________________

Instruction: Before each statement, write TRUE if the statement is correct or

write FALSE if the statement is incorrect.

1. An accounting information system is the combination of personnel,

records and procedures that a business uses to meet its need for
financial form.
2. The elements of the statement of financial position/balance sheet
are: assets, liabilities and expenses.
3. The elements of the statement of income/income statement are:
owner’s equity, income and expenses.
4. The owner’s equity is affected by increases in owner’s capital and
owner’s withdrawal only.
5. Profit or net income occurs when expenses are greater than income.
6. Expenses are decreases in economic benefits during the period that
results to an inflow of resources.
7. Equity is the residual interest on the assets of an entity after
deducting liabilities.
8. Assets are the resources that the entity owns.
9. Cash, accounts payable, rent, salaries and wages are examples of
liabilities.
10. Income increases equity.

III. Lesson Map

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 Statement of
Financial Position

Elements of
Financial
Statements

Statement of
Owner’s Equity
Income

The map describes the important topic discussed in this lesson, the basic
elements of the financial statements: that of the statement of financial
position/balance sheet, that of the statement of income/income statement and
that of the owner’s equity.

IV. Core Content

ENGAGE

Name: _____________________________________Time: ___________________________

Instruction: For each of the following items, give an example of a business

transaction that has the described effect on the accounting equation:

1. Decrease an asset and decrease a liability.

_____________________________________________________________________

2. Increase an asset and increase owner’s equity.

______________________________________________________________________

3. Increase an asset and increase in liability.

______________________________________________________________________

4. Increase in one asset and decrease in another asset.

______________________________________________________________________

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 5. Decrease an asset and decrease owner’ equity.

_____________________________________________________________________

EXPLORE

Name: ________________________________ Time: __________________________

In your family’ daily routine activities, enumerate at least five (5)

activities where accounting is applied.

1. ______________________________________________________

2. ______________________________________________________

3. ______________________________________________________

4. ______________________________________________________

5. ______________________________________________________

EXPLAIN

PARTS OF AN INFORMATION SYSTEM

An information system is a collection of people, procedures, software,

hardware and data which works together to provide information essential to
running an organization.

People

People are competent end users working to increase their productivity. End
users use hardware and software to solve information-related or decision-
making problems.

Procedures

Procedures are manuals and guidelines that instruct end users on how to use
the software and hardware.

Software

Software is another name for programs-instructions that tell the computer how
to process data. There are basically two kinds of software:

System Software

System software is background software that helps a computer manage its

internal resources. An example is the operating system. Windows and Linux are
popular operating systems.

Application Software

Application software performs useful work on general-purpose problems. The two

types of applications software are basic applications and advanced
applications.

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Basic applications include:
 Browsers-navigate, explore, find information on the Internet.
 Word processor-prepare written documents.
 Spreadsheet-analyze and summarize numerical data.
 Database management system--organize and manage data and information.
 Presentation graphics-communicate a message or persuade other people.

Advanced applications include: -Multimedia-integrate video, music, voice, and

graphics to create interactive presentations,
 Web publishers-create interactive multi-media Web pages.
 Graphics programs-create professional publications, draw, edit, and
modify images.
 Virtual reality-create realistic three-dimensional virtual or simulated
environments.
 Artificial intelligence-simulated human thought processes and actions.
 Project managers-plan projects, schedule, people, and control resources.

Hardware

Hardware consists of input devices, the system unit, secondary storage, output
devices, and communication devices.
Input Devices

Input devices translate data and programs that humans can understand into a
form the computer can process. The more common are the keyboard, mouse,
scanner, digital camera and microphone.

The System Unit

The system unit consists of electronic circuitry with two parts:
 Central processing unit (CPU)--controls and manipulates data to produce
information,
 Memory (primary storage)-temporarily holds data, program instructions,
and processed data.

Secondary Storage

Secondary storage stores data and programs. Three most common storage media
are: flash drive, hard disk and optical disk.

Output Devices

Output devices output processed information from the CPU. Two important output
devices are: monitor and printer.

Communications Devices

These send and receive data and programs from one computer to another. A
device that connects a microcomputer to a telephone is a modem.

Data

Data is the raw material for data processing. Data consists of numbers,
letters and symbols and relates to facts, events and transactions. Data
describes something and is typically stored electronically in a file. A file
is a collection of characters organized as a single unit. Common types of
files are: document, worksheet and database.

ACCOUNTING INFORMATION SYSTEM

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Every business organization must have an accounting information system which
will generate reliable financial information needed by the decision-makers in
a timely manner. The design and operation of a system must consider the
anticipated users of the information and the types of decisions they are
expected to make. The design of the system to meet the entity's information
requirement depends on the firm's size, nature of operations, volume of
transaction data, organizational structure, form of business and extent of
government regulation. These will influence the way in which information is
accumulated and reported in the financial statements.

An accounting information system is the combination of personnel, records and

procedures that a business uses to meet its need for financial information.
Most firms have an accounting manual that specifies the policies and
procedures to be followed in accumulating information within the accounting
information system. This manual details what events are to be recorded in the
accounts, and when and how the information is to be classified and
accumulated.

Economic The
Activities Accounting
Process

Decision Accounting
Makers Information

An effective accounting information system should achieve the following

objectives:

 To process the information efficiently at the least cost (cost-benefit

principle).
 To protect entity's assets, to ensure that data are reliable, and to
minimize wastes and the possibility of theft or fraud (control
principle).

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  To be in harmony with the entity's organizational and human factors
(comparability principle).
 To be able to accommodate growth in the volume of transactions and for
organizational changes (flexibility principle).

The preceding diagram illustrates how economic activities flow into the
accounting process, which produces accounting information. This information is
then used by decision makers in making economic decisions and taking specific
actions; thus, resulting in economic activities. The cycle goes on.

TYPES OF ACCOUNTING INFORMATION SYSTEMS

In general terms, companies use three types of accounting information systems

to record the results of transactions: manual systems, computer-based
transaction systems and database systems. All of these systems are designed to
capture information regarding accounting events to prepare financial
statements. In a nutshell manual systems utilize paper-based journals (general
and special) and ledgers (general and subsidiary). Computer-based transaction
systems replace paper records with computer records. Database systems embed
accounting data within the business event data on which they are based.

Computer-Based Transaction Systems

Manual systems rely on human processing so they are labor intensive and may be
inefficient in today's complex business environment. Because manual systems
rely on human processing, they may be prone to error. To overcome these
deficiencies, many companies have computerized their accounting processes.

A computer-based transaction system maintains accounting data separately from

other operating data. That is, the accounting records are kept separately from
the records required for the expenditure, revenue and conversion processes.
Suffice it to say, at this point, that there is a greater degree of
compartmentalization of work to preserve the integrity of the accounting
information system but not as ideal as the database system.

This system treats information in the same manner as a manual system. The user
is simply filling in a computer screen that looks and oftentimes acts like a
source document. Some of the advantages of this system are as follows:

 Transactions can be quickly posted to the appropriate accounts,

bypassing the journalizing process.
 Detailed listings of transactions can be printed for review at any time.
 Internal controls and edit checks can be used to prevent and detect
errors.
 A wide variety of reports can be prepared.

Accounting packages consists of several modules. A module is a program which

deals with one particular part of a business accounting system. A simple
accounting package might consist of only one module, in which case it is
called a stand-alone module. But more often it will consist of several
modules, in which case, it will then be called a suite. Examples include
QuickBooks and Peachtree. Examples include QuickBooks and Peachtree.

Database Systems

Relational database systems such as enterprise resource planning (ERP) depart

from the "accounting equation" method of organizing data. These ERP systems
such as SAP, Oracle and PeopleSoft capture data, both financial and non-
financial, and store that information in a data warehouse. Database systems

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reduce inefficiencies and redundancies that often exist in transaction-based
systems.

For example, in transaction-based systems, customer information (like name,

address, phone, credit limit) is often maintained separately from customer
account information. Thus, a salesperson who does not know a customer's
balance might inadvertently encourage a customer to purchase items that exceed
that credit limit. Also, separate departments have special information needs
such that when a database system is not used then the same customer
information may be recorded several times. Advantages of database systems
include:

 The system recognizes business rather than just accounting events.

 The system supports reduction in operating inefficiencies.
 The system eliminates redundant data.

STAGES OF DATA PROCESSING

Processing of raw data into useful accounting information then finally into
summarized reports follows the usual input-processing-output progression. Each
transaction entered into the accounting system should be supported by source
documents like customer invoices, vendor invoices, deposit slips, checks, time
cards and memos. These documents serve as evidence that a particular
transaction occurred. They also provide the necessary details and supports.
The computer, with the use of the accounting software, then processes the
inputs. As will be discussed later, the manual system of journalizing,
posting, preparing the trial balance and updating the accounts are done almost
instantaneously. When required, the financial statements and other accounting
reports can be viewed on the screen or printed as output documents.

In many situations, manual systems are inferior to computerized systems in

terms of productivity, speed, accessibility, quality of output, incidence of
errors and bulk.

ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements defined in the March 2018 Conceptual

Framework for Financial Reporting (2018 Conceptual Framework) are:

 assets, liabilities and equity-relate to a reporting entity's financial

position; and
 income and expenses - relate to a reporting entity's financial
performance.

In summary, the elements of financial statements are defined as follows:

Element Definition/Description
A present economic resource controlled by the entity as a
Asset result of past events. An economic resource is a right that
has the potential to produce economic benefits.
Liability A present obligation of the entity to transfer an economic
resource as a result of past events.
Equity The residual interest in the assets of the entity after
deducting all its liabilities.
Increases in assets, or decreases in liabilities, that result
Income in increases in equity, other than those relating to
contributions from holders of equity claims.
Decreases in assets, or increases in liabilities, that result
Expenses in decreases in equity, other than those relating to
distributions to holders of equity claims.

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Financial Position

Asset

Per March 2018 Conceptual Framework for Financial Reporting (Conceptual

Framework), asset is a present economic resource controlled by the entity as a
result of past events. An economic resource is a right that has the potential
to produce economic benefits. There are three aspects to these definitions:
"right"; "potential to produce economic benefits"; and "control".

Rights that have the potential to produce economic benefits take many
forms, including:

(a) rights that correspond to an obligation of another party, for

example:

i. rights to receive cash.

ii. rights to receive goods or services.
iii. rights to exchange economic resources with another party on
favorable terms. Such rights include, for example, a forward
contract to buy an economic resource on terms that are currently
favorable or an option to buy an economic resource.
iv. rights to benefit from an obligation of another party to transfer
an economic resource if a specified uncertain future event occurs.

(b) rights that do not correspond to an obligation of another party, for

example:

i. rights over physical objects, such as property, plant and

equipment or inventories. Examples of such rights are a right to
use a physical object or a right to benefit from the residual
value of a leased object.
ii. rights to use intellectual property.

An economic resource could produce economic benefits for an entity by

entitling or enabling it to do, for example, one or more of the following:

a) receive contractual cash flows or another economic resource;

b) exchange economic resources with another party on favorable terms;
c) produce cash inflows or avoid cash outflows by, for example:

i. using the economic resource either individually or in combination

with other economic resources to produce goods or provide
services;
ii. using the economic resource to enhance the value of other economic
resources; or
iii. leasing the economic resource to another party;

d) receive cash or other economic resources by selling the economic

resource; or
e) extinguish liabilities by transferring the economic resource.

An entity controls an economic resource if it has the present ability to

direct the use of the economic resource and obtain the economic benefits that
may flow from it. Control includes the present ability to prevent other
parties from directing the use of the economic resource and from obtaining the
economic benefits that may flow from it. It follows that, if one party
controls an economic resource, no other party controls that resource.

9
Liability

A liability is a present obligation of the entity to transfer an economic

resource as a result of past events. For a liability to exist, three criteria
must all be satisfied:

a) the entity has an obligation;

b) the obligation is to transfer an economic resource; and
c) the obligation is a present obligation that exists as a result of
past events

An obligation is a duty or responsibility that an entity has no practical

ability to avoid. An obligation is always owed to another party (or parties).
The other party (or parties) could be a person or another entity, a group of
people or other entities, or society at large. It is not necessary to know the
identity of the party (or parties) to whom the obligation is owed. If one
party has an obligation to transfer an economic resource, it follows that
another party (or parties) has a right to receive that economic resource.

Obligations to transfer an economic resource include, for example:

a) obligations to pay cash.

b) obligations to deliver goods or provide services.
c) obligations to exchange economic resources with another party on
unfavorable terms. Such obligations include, for example, a forward
contract to sell an economic resource on terms that are currently
unfavorable or an option that entitles another party to buy an
economic resource from the entity.
d) obligations to transfer an economic resource if a specified uncertain
future event occurs.
e) obligations issue a financial instrument if that financial instrument
will oblige the entity to transfer an economic resource.

A present obligation exists as a result of past events only if:

a) the entity has already obtained economic benefits or taken an action;

and
b) as a consequence, the entity will or may have to transfer an economic
resource that it would not otherwise have had to transfer.

Equity

Equity is the residual interest in the assets of the enterprise after

deducting all its liabilities. In other words, they are claims against the
entity that do not meet the definition of a liability.

Equity may pertain to any of the following depending on the form of business
organization:

 In a sole proprietorship, there is only one owner's equity account

because there is only one owner.
 In a partnership, an owner's equity account exists for each partner.
 In a corporation, owners' equity or stockholders' equity consists of
share capital, retained earnings and reserves representing
appropriations of retained earnings among others.

Financial Performance

Income is increases in assets, or decreases in liabilities, that result in

increases in equity, other than those relating to contributions from holders
of equity claims.
10
Expenses are decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of
equity claims.

It follows from these definitions of income and expenses that contributions

from holders of equity claims are not income, and distributions to holders of
equity claims are not expenses. Income and expenses are the elements of
financial statements that relate to an entity's financial performance. Users
of financial statements need information about both an entity's financial
position and its financial performance. Hence, although income and expenses
are defined in terms of changes in assets and liabilities, information about
income and expenses is just as important as information about assets and
liabilities.

THE ACCOUNT

The basic summary device of accounting is the account. A separate account is

maintained for each element that appears in the balance sheet (assets,
liabilities and equity) and in the income statement (income and expenses).
Thus, an account may be defined as a detailed record of the increases,
decreases and balance of each element that appears in an entity's financial
statements. The simplest form of the account is known as the "T" account
because of its similarity to the letter "T". The account has three parts as
follows:

THE ACCOUNTING EQUATION

Assets = Liabilities + Equity

Balance

The basic tool of accounting is the accounting equation. The left side of the
equation shows how much the business owns, and the right side of the equation
shows how much resources do the outside creditor and owner supplied to the
business.

The logic of debiting and crediting is related to the accounting equation.

Transactions may require addition to both sides (left or sides), subtractions
from both sides (left and right sides), or an addition and subtraction on the
same side (left or right sides). But in all cases the equality must be
maintained as shown above.

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Accounting is based on a double-entry system which means that the dual effects
of business are recorded. A debit side entry must have a corresponding credit
side entry. For every transaction, there must be one or more accounts debited
and one or more accounts credited and must be equal both sides. Each
transaction affects at least two accounts.

The rules of debit and credit in accounts.

ACCOUNT DEBIT CREDIT

Assets + -
Liabilities - +
Capital or Equity - +
Revenue or Income - +
Expenses + -
(+) increase; (-) decrease

The Expanded Accounting Equation:

Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Owner’s Capital + Income – Owner’s Withdrawal - Expenses

DEBITS AND CREDITS—THE DOUBLE-ENTRY SYSTEM

Accounting is based on a double-entry system which means that the dual effects
of a business transaction is recorded. A debit side entry must have a
corresponding credit side entry. For every transaction, there must be one or
more accounts debited and one or more accounts credited. Each transaction
affects at least two accounts. The total debits for a transaction must always
equal the total credits.

An account is debited when an amount is entered on the left side of the

account and credited when an amount is entered on the right side. The
abbreviations for debit and credit are Dr. (from the Latin debere) and Cr.
(from the Latin credere), respectively.

The account type determines how increases or decreases in it are recorded.

Increases in assets are recorded as debits (on the left side of the account)
while decreases in assets are recorded as credits (on the right side).
Conversely, increases in liabilities and owner's equity are recorded by
credits and decreases are entered as debits.

The rules of debit and credit for income and expense accounts are based on the
relationship of these accounts to owner's equity. Income increases owner's
equity and expense decreases owner's equity. Hence, increases in income are
recorded as credits and decreases as debits. Increases in expenses are
recorded as debits and decreases as credits. These are the rules of debit and
credit. The following summarizes the rules:

Balance Sheet Accounts Assets Liabilities and Owner's Equity Debit Credit (-)
Decreases Increases Credit Debit (+) Increases Decreases Normal Balance Normal
Balance Income Statement Accounts Debit for Credit for decreases in owner's
equity increases in owner's equity Expenses Income Debit Credit Debit Credit
(-) (+) Increases Decreases Decreases Increases Normal Balance Normal Balance

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NORMAL BALANCE OF AN ACCOUNT

The normal balance of any account refers to the side of the account--debit or
credit--where increases are recorded Asset, owner's withdrawal and expense
accounts normally have debit balances; liability, owner's equity and income
accounts normally have credit balances. This result occurs because increases
in an account are usually greater than or equal to decreases.

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ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an

enterprise's assets, liabilities, and/or equity. Events may be internal
actions, such as the use of equipment for the production of goods or services.
It can also be an external event, such as the purchase of raw materials from a
supplier. A transaction is a particular kind of event that involves the
transfer of something of value between two entities.
Examples of transactions include acquiring assets from owner(s), borrowing
funds from creditors, and purchasing or selling goods and services,

TYPES AND EFFECTS OF TRANSACTIONS

It will be beneficial in the long-term to be able to understand a

classification approach that emphasizes the effects of accounting events
rather than the recording procedures involved. This approach is quite
pioneering. Although business entities engage in numerous transactions,
transactions can be classified into one of four types, namely:

1. Source of Assets (SA)

An asset account increases and a corresponding claim (liabilities or

owner's equity) account increases.

Examples:
a. Purchase of supplies on account,
b. Sold goods on cash on delivery basis.

2. Exchange of Assets (EA).

One asset account increases and another asset account decreases.

Example: Acquired equipment for cash.

3. Use of Assets (UA)

An asset account decreases and a corresponding claim (liabilities or

equity) account decreases.

Example:
a) Settled accounts payable;
b) Paid salaries of employees.

4. Exchange of Claims (EC).

One claims (liabilities or owner's equity) account increases and another

claims (liabilities or owner's equity) account decreases.
Example: Received utilities bill but did not pay.
Every accountable event has a dual but self-balancing effect on the accounting
equation. Recognizing these events will not in any manner affect the equality
of the basic accounting model. The four types of transactions above may be
further expanded into nine types of effects as follows:

1. Increase in Assets = Increase in Liabilities (SA)

2. Increase in Assets = Increase in Owner's Equity (SA)
3. Increase in one Asset = Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner's Equity (UA)
6. Increase in Liabilities = Decrease in Owner's Equity (EC)
7. Increase in Owner's Equity = Decrease in Liabilities (EC)
14
 8. Increase in one Liability = Decrease in another Liability (EC)
9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC)

TYPICAL ACCOUNT TITLES USED

Statement of Financial Position/Balance Sheet Accounts

ASSETS
1. Current Assets (Current means that it expects to realize the asset, or
intends to sell or consume it, in its normal operating cycle, it holds
the asset primarily for the purpose of trading, or 12 months after the
reporting period). Operating cycle is the time between the
acquisition of assets for processing and their realization in cash or
cash equivalents.
 Cash. Accounts classified as Cash are:
1. Cash on Hand
a) Coins, a flat, typically round piece of metal with an
official stamp, used as money.

b) Currency (Bills), a system of money in general use in a

particular country. e.g. Philippines – Peso, USA – US
Dollar

c) Checks, a written order to a bank to pay a stated sum

from the drawer's account.

15
 d) Bank Drafts, The term bank draft refers to a negotiable
instrument that can be used as payment just like a check.
Unlike a check, though, a bank draft is guaranteed by the
issuing bank. The total amount of the draft is drawn from
the requesting payer's account—their bank account balance
decreases by the money withdrawn from the account—and is
usually held in a general ledger account until the draft
is cashed by the payee. Bank drafts provide the payee
with a secure form of payment.

e) Money Order, a money order is a certificate, usually

issued by a government or banking institution, that
allows the stated payee to receive cash on demand. A
money order functions much like a check, in that the
person who purchased the money order may stop payment.
Money orders are readily accepted and converted to cash
and are often used by people without access to a standard
checking account. These instruments are an acceptable
form of payment for small debts, both personal and
business, and can be purchased for a small service fee
from most institutions.

2. Cash in Bank, these are accounts maintained with a bank.

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 a) Savings Account, is an interest-bearing deposit account
held at a bank or other financial institution. The
prevailing interest rate for this type of bank account is
½ of 1% per annum.
b) Checking Account or Demand Deposit or Current Account, is
a non-interest bearing deposit account held at a
financial institution that allows withdrawals and
deposits. Also called demand accounts or transactional
accounts, checking accounts are very liquid and can be
accessed using checks, automated teller machines, and
electronic debits, among other methods.
c) Time or Termed Deposits, a time deposit is an interest-
bearing bank account that has a pre-set date of maturity.
A certificate of deposit (CD) is the best-known example.
The money must remain in the account for the fixed term
in order to earn the stated interest rate. Time deposits
generally pay a slightly higher rate of interest than a
regular savings account. The longer the time to maturity,
the higher the interest payment will be. Another name for
this type of investment is term deposit. Interest rate
is higher than a savings account.

3. Petty Cash Fund, a petty cash fund is a small amount of cash

kept on hand to pay for minor expenses, such as office supplies
or reimbursements. A petty cash fund will undergo periodic
reconciliations, with transactions also recorded on the
financial statements. There might be a petty cash fund, which
can be a drawer or box, in each department for larger
corporations.
4. Change Fund, a set amount of money used by a department to make
change for customers who are purchasing goods or services. The
selling of such goods or services must have been previously
approved through appropriate channels.
5. Revolving Fund, is a fund or account that remains available to
finance an organization's continuing operations without any
fiscal year limitation, because the organization replenishes
the fund by repaying money used from the account. Revolving
funds have been used to support both government and non-profit
operations.
 Cash Equivalents – investment in stocks/bonds that has remaining
3 months or less to maturity date.
 Marketable Securities - investment in stocks/bonds maturing within 3
months to 1 year.
 Notes Receivable – is a written pledge that the customer will pay
the business a fixed amount of money on a certain date. A promissory
note is issued by the borrower or buyer.

17
  Accounts Receivable – these are claims against customers arising
from sale of services or goods on credit. This type of receivable
offers less security than a promissory note.
 Biological Assets – refers to the cost of living animals and plants
that are intended for sale.
 Inventories – refer to cost or other appropriate value of
merchandise and other goods on hand, in-transit, on consignment
with other entities and in process which are intended for sale or
production.

1. Merchandise Inventory – account title used for

trading/merchandising type of business
2. For a Manufacturing firm, the accounts used for its inventory
accounts are:

a) Raw Materials, refers to the total cost of all the

components used to manufacture a product. These materials are
classified as direct materials (DM).
b) Work-in-Process Inventory, Work in process (WIP), work in
progress (WIP), goods in process, or in-process inventory are
a company's partially finished goods waiting for completion
and eventual sale or the value of these items. These items are
either just being fabricated or waiting for further processing
in a queue or a buffer storage.
c) Finished Goods Inventory, refers to the number of
manufactured products in stock that are available for
customers to purchase. The finished goods inventory formula is
an important inventory ratio that can be used to calculate the
value of these goods for sale.
d) Manufacturing Supplies Inventory, this account represents the
unused indirect materials used in production at the end of the
accounting period.
 Prepaid Expenses – this account refers to payments made in advance,
to be amortized within 1 year.

Examples:
a) Prepaid Rent, rental payment that is paid in advance.
b) Prepaid Insurance, for accounting purposes, the account is
always paid in advance for the entire year, or as may be
mentioned in the problem.
c) Unused Office Supplies, these are supplies used in
administrative function that are not yet used at the end of
the period. e.g. pencil, bond paper, fastener, computer ink,
ballpen, envelope, folder, official receipts, logbooks,
notebooks, etc.
d) Prepaid Interest, when financial institutions deducts interest
in advance from your borrowed funds, then they are classified
as prepaid interest.

2. Non-current Assets
 Property, Plant and Equipment – these are tangible assets that are
held by an enterprise for use in the production or supply of
goods or services, or for rental to others, or for administrative
purposes and which are expected to be used during more than one
period.

Examples:
a ) Land, in the business sense, can refer to real estate or
property, minus buildings, and equipment, which is designated
18
 by fixed spatial boundaries. Land ownership might offer the
titleholder the right to any natural resources that exist
within the boundaries of their land.
b) Land Improvements, are enhancements to a plot of land to make
the land more usable. If these improvements have a useful
life, they should be depreciated. If there is no way to
estimate a useful life, then do not depreciate the cost of the
improvements. If land is being prepared for its intended
purpose, then include these costs in the cost of the land
asset. They are not depreciated.

Examples of such costs are:

1. Demolishing an existing building
2. Clearing and levelling the land
c) Leasehold Improvements, are any changes made to a rental
property in order to customize it for the particular needs of
a tenant. These can include alterations such as painting,
installing partitions, changing the flooring, or putting in
customized light fixtures.
d ) Building, Pe rm an en t or t em po ra ry s tr uc tu re e nc lo se d
w it hi n ex te ri or w al ls a nd a r oo f, a nd i nc lu di ng a ll
a tt ac he d ap pa ra tu s, e qu ip me nt , an d fi xt ur es t ha t
c an no t be r em ov ed w it ho ut c ut ti ng i nt o ce il in g,
f lo or s, o r wa ll s.
e) Machinery and Equipment, mixer, construction equipment,
crane etc.
f) Furniture and Fixtures, e.g. table, chair, filing cabinet,
divider, showcase, etc.
g) Motor Vehicles and Equipment, delivery car, shuttle buses,
motorcycle, etc.
h) Office Equipment, the account includes, computer equipment,
air conditioner, shredder, photocopier, calculator, electric
fan, fax machine, telephone set, etc.
i) Tools, screw drivers etc.

 Accumulated Depreciation – a contra-asset account that contains the

sum of the periodic depreciation charges. The balance in this
account is deducted from the cost of the related asset equipment or
buildings to obtain book value.

Example: Mr. A acquired a computer equipment on July 1, 2015, amounting to

P30,000. The estimated useful life of the asset is 3 years and it is
depreciated using the straight-line method.

Computation:

Depreciation Expense for Year 1 = P10,000 x 6/12 = P5,000

Period covered for year 1 = July 1 to December 31, 2015 = 6 months only
19
How the accounts are presented in the Statement of Financial Position/Balance
Sheet and in the Statement of Income/Income Statements:

Year 1 Year 2 Year 3 Year 4

Computer Equipment 30,000 30,000 30,000 30,000

Less: Accumulated 5,000 15,000 25,000 30,000

Depreciation

Net Book Value 25,000 15,000 5,000 0

Depreciation Expense 5,000 10,000 10,000 5,000

Note:

Estimated Useful Life - is the estimated lifespan of a depreciable fixed

asset, during which it can be expected to contribute to company operations.
This is an important concept in accounting, since a fixed asset is depreciated
over its useful life.

Cost of Asset - This is defined as the original price of the asset from which

we can determine its depreciated value over the course of its useful life. ...
For example, a machine's cost includes its purchase cost, transportation
expenses, and installation charges.

 Biological Assets – the account refers to living plants that

produces seeds, seedlings, flowers or fruits and breeding stock/working
animals.
 Deposit on Returnable Containers – this account refers to
deposits on containers subject to refund upon its return, e.g. soft
drink bottles
 Intangible Assets – these are identifiable, nonmonetary assets
without physical substance held for use in the production or
supply of goods or services, for rental to others, or for
administrative purposes.

Examples:
 Goodwill - long-term asset categorized as an intangible asset.
Goodwill arises when a company acquires another entire business.
The amount of goodwill is the cost to purchase the business
minus the fair market value of the tangible assets, the
intangible assets that can be identified, and the liabilities
obtained in the purchase. The amount in the Goodwill account will
be adjusted to a smaller amount if there is an impairment in the
value of the acquired company as of a balance sheet date.
 Patents - A government license that gives the holder
exclusive rights to a process, design or new invention for a
designated period of time. Applications for patents are usually
handled by a government agency. The government agency in the
Philippines is the Intellectual Property Office in the Philippines.
 Copyrights - The legal right granted to an author,
composer, playwright, publisher, or distributor to exclusive
publication, production, sale, or distribution of a literary,
musical, dramatic, or artistic work.
 Licenses - formal permission from a governmental or other
constituted authority to do something, as to carry on some business
or profession.
20
  Franchises - A continuing relationship in which a franchisor
provides a licensed privilege to the franchisee to do business
and offers assistance in organizing, training, merchandising,
marketing and managing in return for a monetary consideration.
Franchising is a form of business by which the owner (franchisor)
of a product, service or method obtains distribution through
affiliated dealers (franchisees).
 Trademarks – is a recognizable sign, design, or expression which
identifies products or services of a particular source from those of
others, although trademarks used to identify services are usually
called service marks. The trademark owner can be an individual,
business organization, or any legal entity. A trade mark may be
located on a package, a label, a voucher, or on the product itself.
For the sake of corporate identity trademarks are also being
displayed on company buildings.
 Brand Names - the name by which a certain brand or make of
commodity is known; esp., the widely advertised name of a
widely distributed product. Example, Kleenex, Bear Brand, Alaska,
etc.
 Secret Processes - Any valuable commercial information that
provides a business with an advantage over competitors who
do not have that information. In general terms trade secrets
include inventions, ideas, or compilations of data that are
used by a business to make itself more successful.
Specifically, trade secrets include any useful formula,
plan, pattern, process, program, tool, technique, mechanism,
compound, or device that is not generally known or readily
ascertainable by the public. Whatever type of information is
represented by a trade secret, a business must take reasonable
steps to safeguard it from disclosure.
 Subscription Lists - The names of persons who have agreed to
take a newspaper, magazine or other publication, placed
upon paper, is a subscription list.
 Non-competition Agreements - The Non-Competition Clause
defines the scope of prescribed competition. The
clause typically contains four elements: (a) restricted period;
(b) restricted activities; (c) restricted business and (d)
restricted territories.

LIABILITIES
1. Current Liabilities
 Accounts Payable – represents the reverse relationship of the
accounts receivable. By accepting the goods or services, the buyer
agrees to pay for them in the future.

Point of View of the Buyer Point of View of the Seller

Accounts Payable Accounts Receivable

 Notes Payable – is like a notes receivable but in a reverse sense.

Point of View of the Buyer Point of View of the Seller

Notes Payable Notes Receivable

 Accrued Liabilities – amounts owed to others for unpaid

expenses. This account includes salaries payable, utilities
payable, interest payable and taxes payable.
 SSS Premium Payable – refers to the amount due and payable
by the enterprise to the Social Security System. This is
composed of both employer and employees’ share of SSS
Contributions.

21
The table above shows the amount to be deducted to an employee’s salary and
the amount to be contributed by the employer as its share on the total
contribution for an employee to be remitted to SSS.

Example: The salary of an employee is P12,800, the salary bracket is for

12,750 – 13,249.99, the corresponding deduction to employee’s salary amounts
to P472.30, while the amount to be contributed by the employer amounts to
P957.70 plus the EC of P10.00 The total amount to be remitted to SSS is
P1,440.00, this amount will be reported as SSS Contributions Payable at the
end of every month.
 Philhealth Premium Payable - refers to the amount due and payable by
the enterprise to the Philippine Health Insurance Corporation. This
is composed of both employer and employees’ share of PHIC
Contributions.
 Pag-ibig Premium Payable - refers to the amount due and payable
by the enterprise to the Home Development Mutual Fund. This is
composed of both employer and employees’ share of Pag-ibig
Contributions.
 Taxes Payable – this account represents the amount due to the Bureau
of Internal Revenue for the period but paid in the next accounting
period.
 Unearned Revenues – when the business entity receives payment
before providing its customers with goods or services, the amounts
received are recorded in this account. When the goods or
services are already provided to the customer, the unearned
revenue is reduced and income is recognized.
 Current Portion of Long-Term Debt – this represent the
portion of mortgage notes, bonds and other long-term indebtedness
which are to be paid within one year from the balance sheet date.
Example: On January 1, Mr. A, the proprietor of A Carwash Shop
borrowed funds from United Coconut Planter’s Bank (UCPB) for
22
 P1,000,000 payable in 5 equal installments starting December 2015.
The annual installment will be P200,000 excluding interest.

2015 2016 2017 2018 2019

Mortgage Payable – 600,000 400,000 200,000 0 0
Noncurrent Liabilities
Mortgage Payable – 200,000 200,000 200,000 200,000 0
Current Liabilities

2. Non-Current Liabilities
 Mortgage Payable – this account records long-term debt of the
business entity for which the business entity has pledged certain
assets as security to the creditor. In the event that the debt
payments are not made, the creditor can foreclose or cause the
mortgaged asset to be sold to enable the entity to settle the claim.
 Bonds Payable – business organizations often obtain substantial sums
of money from lenders to finance the acquisition of equipment and
other needed assets. They obtain these funds by issuing bonds. The
bond is the contract between the issuer and the lender specifying the
terms of repayment and the interest to be charges.

OWNER’S EQUITY
 Capital – from the Latin capitalis meaning “property”. This account
is used to record the original and additional investment of the
owner of the business entity. It is increased by the amount of
profit earned during the year or is decreased by a loss. Cash
or other assets that the owner may withdraw from the business
for personal use will ultimately reduce the account. This
account bears the name of the owner, e.g. Tuozo, Capital
 Withdrawals – when the owner of a business entity withdraws cash or
other assets, such are recorded in the drawing or withdrawal
account rather than directly reducing the capital account,
e.g. Tuozo, Withdrawal
 Income Summary – a temporary account used at the end of the
accounting period to close income and expenses. This account shows
the profit or loss for the period before closing to the capital
account.

Statement of Income/Income Statement Accounts

INCOME
 Service Income – revenues earned by performing services for a
customer or client; for example, accounting services by a CPA firm,
laundry services by a laundry shop, rental income, professional
income, interest income, miscellaneous income.
23
  Sales – revenues earned as a result of sale of merchandise; for
example, sale of building materials by a construction supplies firm,
sale of goods by absolute essentials, etc.

EXPENSES
 Cost of Sales – the cost incurred to purchase or to produce the
products sold to customers during the period; also called cost of
goods sold.
 Salaries or Wages Expense – includes all payments as a result of an
employer-employee relationship such as salaries or wages, 13 t h month
pay, cost of living allowances and other related benefits.
 Communication, light and Water – represents telephone consumption,
internet connection, postage and stamps, telegraph, load, electricity
consumption and water consumption.
 Fuel and Oil – gasoline in any type, lubricants, engine oil
 Rent Expense – cost for leased property, example, office space,
equipment or other assets. The prepaid rent account will be
recognized subsequently to this account when the rent is already due.
 Supplies Expense – this account includes all used: bond paper, paper
clip, ballpen, pentel pen, computer ink, official receipts, broom,
etc.
 Insurance Expense – portion of premiums paid on insurance coverage
(e.g. on motor vehicle, health, life, fire, typhoon or flood) in
advance recognized as prepaid rent which has expired.
 Depreciation Expense – the portion of the cost of a tangible asset
(e.g. building, equipment, furniture and fixtures) allocated or
charged as expense during an accounting period. (See discussion in
Property, Plant and Equipment – Accumulated Depreciation)
 Uncollectible Accounts Expense – the amount of receivables estimated
to be doubtful of collection and charged as expense during and
accounting period.
 Interest Expense – an expense related to use of borrowed funds. The
prepaid interest account will be recognized subsequently to this
account when the expense is already due.
 Repairs and Maintenance – for expenses incurred in repairing or
servicing the buildings, machineries, vehicles, equipment, etc. which
are owned by the business.
 Taxes and Licenses – for the amount paid for business permits,
licenses and other government dues except the Income tax which is not
allowable by law as a deduction.
 SSS, Philhealth and Pag-ibig Contributions – account title used for
the employer’s share of the total contributions reported to the
respective agency.
 Professional Fees – this account refers to amount incurred for
professional and consultancy services e.g. lawyer, cpa, engineer,
management consultant etc.
 Amortization Expense – this account refers to amount provided for
amortization of intangible assets.
 Trainings and Seminars – this account refers to an amount incurred
for officers and staff attending trainings and seminars including
expenses related thereto.
 Travel and Transportation – this account refers to amount incurred
for fares, toll fees, board and lodging, per diem, and meal
allowances of officers and employees while on official travel.
 Research and Development Expense - refers to expenses incurred in
the development and enhancement of existing products or services.
 Advertising and Promotion – this account refers to expenses incurred
for advertising and promotion of products or services.
 Charitable Contributions – refers to cash donations to charitable
institutions, or solicitations.

24
  Miscellaneous Expense – refers to all other expenses incurred not
classified under any of the specified expenses account.

V. Topic Summary

 An accounting information system is the combination of personnel,

records and procedures that a business uses to meet its need for
financial information.
 The basic summary device of accounting is the account.
 The simplest form of the account is known as the “T” account.
 The basic accounting equation is Assets = Liabilities + Equity.
 Assets are resources controlled by an entity resulting from past events
and are expected to provide inflows of future economic benefits.
 Liabilities are present obligations of an entity resulting from past
events and are expected to cause outflows of future economic benefits.
 Equity is assets minus liabilities.
 The expanded accounting equation is Assets=Liabilities+Owner’s
Capital+Income-Owner’s Withdrawals-Expenses.
 Income is increase in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those
relating to contributions from equity participants.
 Expenses are decreases in economic benefits during the accounting period
in the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
 Asset accounts have a normal balance of debit, which means increases to
the account are debited while decreases are credited.
 Liabilities accounts have a normal balance of credit, increases to the
account are credited while decreases are debited.
 Income accounts have a normal balance of credit, increases to the
account are credited while decreases are debited.
 Expenses accounts have a normal balance of debit, which means increases
to the account are debited while decreases are credited.
 The double entry system requires that for every transaction there are at
least one account debited and another account credited.

VI. References

Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st Edition.
Manila: Domdane Publishers and Made Easy Books.
Ballada, Win and Susan Ballada. (2019). Accounting Fundamentals Made East 2019
Issue- 5th Edition.Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
Ferrer, Rodiel C. and Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy,
Business and Management Part 1. Baguio City: Bandolin Enterprise.

25
 Lesson 2
Financial Transaction Worksheet and Use of T-Accounts

I. Learning Outcomes
1. define an accounting event and a transaction;
2. analyze transactions using the financial transaction worksheet; and
3. analyze transactions using the “T” Account.

I. Pre-Assessment

Name: __________________________________________ Time: ______________________

Essay. Define an accounting event and a transaction.

26
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

II. Lesson Map

Business Transaction

Financial Transaction
Worksheet T-Account

The lesson analyses business transactions in a financial transaction worksheet

and at the same time using the T-Account.

III. Core Content

ENGAGE

Name: _________________________________________ Time: _______________________

Instruction: Indicate the following sign in the appropriate column; (+) for
increases, (-) for decreases, and (+/-) for both increase and decrease.

Owner’s
Assets Liabilities
Equity
1. Cash payment by the owner
(investment)
2. Payment for taxes and licenses

27
 expense
3. Repair and maintenance of office
4. payment of rent expense
5. Purchase of office supplies on
account
6. Purchase of office supplies for
cash
7. Payment of accounts payable
8. Provide services for cash
9. Purchase of equipment and
furniture for cash
10. Purchase of equipment and
furniture giving a 30day promissory
note
11. Payment of salaries of employees
12. Personal transaction like
withdrawal of the owner
13. Provide services on account
14. Provide services for cash
15. Collection of account from a
customer
16. Payment of utility bills
17. Provide services receiving a
30day promissory note
18. Payment for other expenses
19. Bought supplies paying 50% on
cash, and the remaining on
account.
20. Rendered service receiving
partial payment on cash and the
remaining on account.

EXPLORE

Name: _________________________________________ Time: _______________________

Kaya Paba, to be able to guide the business administration students in their

pursuits to pass the accounting subject they enrolled, established the KP
Tutorial Services. On May 1, 2015, she contributed P70,000 as investment to
start the business. During the month, she entered into several transactions.
Note that she made no withdrawals during the month. The following is the
transactions worksheet prepared by her student-assistant:

CASH + ACCOUTS + OFFICE = ACCOUNT + NOTES + K. PABA,

RECEIVABLE EQUIPMENT PAYABLE PAYABLE CAPITAL
28
1 70,000 70,000
2 (45,000) 45,000
3 30,000 10,000 20,000
4 18,000 18,000
5 (5,000) (5,000)
6 7,000 7,000
7 (10,000) (10,000)
8 15,000) (15,000)
9 (7,000) (7,000)


Describe each of the above transactions.

If these transactions represent the operations of KP Tutorial Services
during month of May, what was the amount of profit or loss before
depreciation?

EXPLAIN

ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an

enterprise’s assets, liabilities, and/or equity. A transaction is a particular
kind of event that involves the transfer of something of value between two
entities.

Accountants observe many events that they identify and measure in financial
terms. A business transaction is the occurrence of an event or a condition
that affects financial position and can be reliably recorded.

FINACIAL TRANSACTION WORKSHEET

Every financial transaction can be analyzed or expressed in terms of its

effects on the accounting equation. The financial transactions will be
analyzed by means of a financial transaction worksheet which is a form used to
analyze increases and decreases in the assets, liabilities or owner’s equity
of a business entity.

When a specific asset, liability or owner’s equity item is created by a

financial transaction, it is listed in the financial transaction worksheet
using the appropriate accounts.
Illustration:

Galicano Del Mundo decided to establish a sole proprietorship business and

named it as Del Mundo Graphics Design is a graphic designer who has extensive
experience in drawing, layout, typography, lettering, diagramming and
photography. He possesses the talent to visually communicate to a target
audience with the right combination of words, images and ideas.

Del Mundo Graphics Design can do the layout and production design of
newspapers, magazines, corporate reports, journals and other publications.
The entity can create promotional displays, marketing brochures for services
and products; packaging design for products; and distinctive logos for
businesses. He also enters into agreements with clients for the progressive

29
development and maintenance of their web sites. His initial revenue stream
comes from web designing.

The owner, Galicano del Mundo, makes the business decisions. The assets of
the company belong to Del Mundo and all obligations of the business are his
responsibility. Any income that the entity earns belongs solely to Del Mundo.

When a specific asset, liability or owner’s equity item is created by a

financial transaction, it is listed in the financial transaction worksheet
using the appropriate accounts. The worksheet that follows shows the first
transaction of the Del Mundo Graphics Design. The dates are enclosed in
parenthesis.

During March 2020, the first month of operations, various financial

transactions took place. These transactions are described and analysed as
follows:

Mar 1 Del Mundo started his new business by depositing P350,000 in a

bank account in the name of Del Mundo Graphics Design at BPI
Surigao Branch.

Del Mundo Graphics Design

Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

Bal 350,000 + + + = + 350,000
350,000 350,000

The financial transaction is analysed as follows:

 An entity’ separate and distinct from Del Mundo’s personal financial
affairs is created.
 An economic resource—cash of P350,000 is invested in the business
entity. The source of this asset is the contribution made by the
owner, which represents owner’s equity. The owner’s equity account
is Del Mundo, Capital.
 The dual nature of the transaction is that cash is invested and
owner’s equity is created. The effects on the accounting equation
are as follows: increase in asset—cash from zero to P350,000 and
increase in owner’s equity from zero to P350,000.
 At this point, the entity has no liabilities, and assets equal
owner’s equity.

Mar 5 Computer equipment costing P145,000 is acquired on cash basis.

The effect of the transaction on the basic equation is:

30
 Del Mundo Graphics Design
Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
Bal 205,000 + + + 145,000 = + 350,000
350,000 350,000

This transaction did not change the total assets but it did not change the
composition of the assets—it decreased one asset—cash and increased another
asset—computer equipment by P145,000. Note that the sums of the balances on
both sides of the equation are equal. This equality must always exist.

Mar 9 Computer supplies in the amount of P25,000 are purchased on account.

Del Mundo Graphics Design

Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 - 145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
Bal 205,000 + + 25,000 + 145,000 = 25,000 + 350,000
375,000 = 375,000

Assets don’t have to be purchased in cash. It can also be purchased on

credit. Acquiring the computer supplies with a promise to pay the amount due
on a later date is called buying on account. The transaction increased both
the assets and the liabilities of the business. The asset affected is
computer supplies and the liability created is an accounts payable account.

Mar 11 Del Mundo Graphics Design collected P88,000 in cash for designing
interactive web sites for two exporters based inside Ortigas
Ecozone.

31
 Del Mundo Graphics Design
Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
Bal 293,000 + + 25,000 + 145,000 = 25,000 + 438,000
463,000 = 463,000

The entity earned income by designing web sites for clients. Del Mundo
rendered his professional services and collected revenues in cash. The effect
on the accounting equation is an increase in the asset—cash and an increase in
owner’s equity. Income increases owner’s equity. This transaction caused the
business to grow, as shown by the increase in total assets from P375,000 to
P463,000.

Mar 16 Del Mundo paid P18,000 to Ceradoy Bills Express, a one-stop bills
payment service company, for the semi-monthly utilities.

Del Mundo Graphics Design

Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
Bal 275,000 + - + 25,000 + 145,000 = 25,000 + 420,000
445,000 = 445,000

Expenses are recorded when they are incurred. Expenses can be paid in cash
when they occur, or they can be paid later. The payment for utilities is an
expenses for the month of March. It represented an outflow of resources and a
reduction of owner’s equity. Expenses have the opposite effect of income;
they cause the business to shrink as shown by the smaller amount of total
assets of P445,000.00 from previous balance of P463,000.

Mar 17 The entity has service agreements with several Netpreneurs to

maintain and update their web sites weekly. Del Mundo billed
these clients P35,000 for services already rendered during the
month.

32
 Del Mundo Graphics Design
Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
17 + 35,000 + + = + 35,000
Bal 275,000 + 35,000 + 25,000 + 145,000 = 25,000 + 455,000
480,000 = 480,000

The entity has performed services to clients so income should already be

recognized. Del Mundo is entitled to receive payment for these but the
clients did not pay immediately. Performing the services creates an economic
resource, the clients’ promise to pay the amount which is called accounts
receivable. This transaction resulted to an increase in an asset—accounts
receivable and an increase in owner’s equity of P35,000.

Mar 19 Del Mundo made a partial payment of P17,000 for the March 9
transaction.

Del Mundo Graphics Design

Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
17 + 35,000 + + = + 35,000
19 - 17,000 + + + = - 17,000 +
Bal 258,000 + 35,000 + 25,000 + 145,000 = 8,000 + 455,000
463,000 = 463,000
The transaction is a payment on account. The effect on the accounting
equation is a decrease in the asset—cash and a decrease in Liability—accounts
payable. The payment of cash on account has no effect on the asset—computer
supplies because the payment does not increase nor decrease the supplies
available to the business.

33
Mar 20 Checks totalling P25,000 were received from clients for billings
Dated March 17.

Del Mundo Graphics Design

Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
17 + 35,000 + + = + 35,000
19 - 17,000 + + + = - 17,000 +
20 25,000 + - 25,000 + + = +
Bal 283,000 + 10,000 + 25,000 + 145,000 = 8,000 + 455,000
463,000 = 463,000

Last March 17, Del Mundo billed clients for services already rendered. On
March 20, the entity was able to collect P25,000 from them. The asset—cash is
increased by P25,000. The business should not record service income on March
20 since it has already recorded the income last March 17. Total assets are
unchanged. The business merely reduced one asset—accounts receivable and
increased another—cash.

Mar 21 Del Mundo withdrew P20,000 from the business for his personal use.
Del Mundo Graphics Des ign
Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
17 + 35,000 + + = + 35,000
19 - 17,000 + + + = - 17,000 +
20 25,000 + - 25,000 + + = +
21 - 20,000 + + + = + - 20,000
Bal 263,000 + 10,000 + 25,000 + 145,000 = 8,000 + 435,000
443,000 = 443,000

Withdrawal of cash or other assets for personal use is the way by which the
owner of the entity receives advance distribution of the profits. A cash
withdrawal is a reduction to the capital investment of the owner. It resulted
to a reduction to both cash and owner’s equity accounts.

Mar 27 Warlito Blanche Publishing submitted a bill to Del Mundo for

P8,000 worth of newspaper advertisements for the month. Del Mundo
will pay this bill next month.

34
 Del Mundo Graphics Des ign
Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
17 + 35,000 + + = + 35,000
19 - 17,000 + + + = - 17,000 +
20 25,000 + - 25,000 + + = +
21 - 20,000 + + + = + - 20,000
27 + + + = 8,000 + - 8,000
Bal 263,000 + 10,000 + 25,000 + 145,000 = 16,000 + 427,000
443,000 = 443,000

Warlito Blanche rendered services on account. Del Mundo Graphics Design has
incurred an expense in the amount of P8,000 by availing of Warlito Blanche’s
Services. There was no payment during the month. This advertising expense
resulted to a decrease in owner’s equity and an increase in Liability—accounts
payable.

Mar 31 Del Mundo paid his assistant designer salary of P15,000 for the
month.
Del Mundo Graphics Design
Financial Transaction Worksheet
For the Month of March 2020

A = L + OE

Date Cash + Accounts + Computer + Computer = Accounts + Del Mundo,

Receivable Supplies Equipment Payable Capital

Mar 1 350,000 + + + = + 350,000

5 -145,000 + + + 145,000 = +
9 + + 25,000 + = 25,000 +
11 88,000 + + + = + 88,000
16 - 18,000 + + + = + - 18,000
17 + 35,000 + + = + 35,000
19 - 17,000 + + + = - 17,000 +
20 25,000 + - 25,000 + + = +
21 - 20,000 + + + = + - 20,000
27 + + + = 8,000 + - 8,000
31 - 15,000 + + + = + - 15,000
Bal 248,000 + 10,000 + 25,000 + 145,000 = 16,000 + 412,000
428,000 = 428,000

This transaction resulted to a reduction to both cash and owner’s equity. By

providing his services to Del Mundo for the month, the assistant designer has
created for the business an expense—salaries expense.

Use of T-Accounts

35
 Analyzing and recording transactions using the accounting equation is
useful in conveying a basic understanding of how transactions affect the
business. However, it is not an efficient approach once the number of
accounts involved increases. Double entry system provides a formal system of
classification and recording business transactions.

Illustration. The rules of debit and credit will be applied to the Del Mundo
Graphics Design illustration for comparison. Three transactions will be added
to the example. Before being recorded, a transaction must be analysed to
determine which accounts must be increased or decreased. After this has been
determined, the rules of debit and credit are applied to effect the
appropriate increased and decreases to the accounts.

Mar 1 Del Mundo started his new business by depositing P350,000 in a bank
account in the name of Del Mundo Graphics Design at BPI Surigao
Branch.

Cash Del Mundo, Capital

Debit (+) Credit (-) Debit (-) Credit (+)

3-1 350,000 3-1 350,000

This transaction increased both the asset—cash and owner’s equity—Del Mundo
Capital. According to the rules of debit and credit, an increase in asset is
recorded as debit while an increase in owner’s equity is recorded as credit;
thus, the entry is to debit cash and to credit Del Mundo, Capital. The
transaction dates are placed on the left side of the amount for reference
purposes.

Mar 2 Computer equipment is acquired by issuing a P50,000 note payable to

Maribeth Buenviaje Office Systems. The note is due in six months.

Computer Equipment Notes Payable

Debit (+) Credit (-) Debit (-) Credit (+)

3-2 50,000 3-2 50,000

The transaction increased the asset—computer equipment and the liability—notes

payable. Computer Equipment must be debited and notes payable must be
credited.

Mar 3 Del Mundo paid P15,000 to RF Refozar Suites for rent on the office
Studio for the months of March, April and May.

36
 Cash Prepaid Rent

Debit (+) Credit (-) Debit (+) Credit (-)

3-1 350,000 3-3 15,000 3-3 15,000

The business paid in advance the rental for the space where the business is
located. The account for the advance rental should be recorded as a debit to
Prepaid Rent which is classified as an asset and a credit to cash for the same
amount.

Mar 4 Received advance payment of P18,000 from Marco Polo Surigao Hotel
For Web site updating for the next three months.

Cash Unearned Revenues

Debit (+) Credit (-) Debit (-) Credit (+)

3-1 350,000 3-3 15,000 3-4 18,000

3-4 18,000

In this transaction, the business received in advance payment for services to

be rendered for the next three months. The actual cash received is recorded
as debit to cash since cash is increased by the transaction, while the other
account affected is a liability account—unearned revenues, a credit entry.

Mar 5 Computer equipment costing P145,000 is acquired on cash basis. The

Effect of the transaction on the basic equation is:

Cash Computer Equipment

Debit (+) Credit (-) Debit (+) Credit (-)

3-1 350,000 3-3 15,000 3-2 50,000

3-4 18,000 3-5 145,000 3-5 145,000

The value received in this transaction is the computer account and is

increased by the transaction—debit entry, while the value parted with is cash,
a credit entry since cash is decreased because it was used to purchase the
computer.

Mar 9 Computer supplies in the amount of P25,000 are purchased on account.

37
 Computer Supplies Accounts Payable

Debit (+) Credit (-) Debit (-) Credit (+)

3-9 25,000 3-9 25,000

Computer supplies is classified in the chart of accounts as an asset,

increases in asset is recorded as a debit entry, while in exchange of the
asset is a promise to pay which is a liability—recorded as credit to accounts
payable.

Mar 11 Del Mundo Graphics Design collected P88,000 in cash for designing
interactive web sites for two exporters based inside Ortigas
Ecozone.

Cash Design Revenues

Debit (+) Credit (-) Debit (-) Credit (+)

3-1 350,000 3-3 15,000 3-11 88,000

3-4 18,000 3-5 145,000
3-11 88,000

The transaction increases the asset—cash and increased the income account—
design revenues. Assets are increase by debits, income are increased by
debits, income are increased by credits; hence, a debit of P88,000 to cash and
a credit of P88,000 to design revenues is made. Increase in income increases
owner’s equity.

Mar 16 Del Mundo paid P18,000 to Ceradoy Bills Express, a one-stop bills
payment service company, for the semi-monthly utilities.

Cash Utilities Expense

Debit (+) Credit (-) Debit (+) Credit (-)

3-1 350,000 3-3 15,000 3-16 18,000

3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000

Expenses are increased by debits and assets are decreased by credits;

therefore, utilities expense is debited and cash is credited for P18,000.
Increases in expenses decreases owner’s equity.

Mar 17 The entity has service agreements with several Netpreneurs to

Maintain and update their web sites weekly. Del Mundo billed
38
 these clients P35,000 for services already rendered during the
month.
Accounts Receivable Design Revenues

Debit (+) Credit (-) Debit (-) Credit (+)

3-17 35,000 3-11 88,000

3-17 35,000

Assets are increased by debits, income are increased by credits. Increases in

income increases owner’s equity. A debit of P35,000 to accounts receivable
and a credit of P35,000 to the income account—design revenues is recorded.

Mar 19 Del Mundo made a partial payment of P17,000 for the March 9
transaction.

Cash Accounts Payable

Debit (+) Credit (-) Debit (-) Credit (+)

3-1 350,000 3-3 15,000 3-19 17,000 3-9 25,000

3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-19 17,000

Assets are decreased by credits while liabilities are decreased by debits.

The transaction is recorded by debiting accounts payable and crediting cash
for P17,000 respectively.

Mar 20 Checks totalling P25,000 were received from clients for billings
Dated March 17.

Cash Accounts Receivable

Debit (+) Credit (-) Debit (+) Credit (-)

3-1 350,000 3-3 15,000 3-17 35,000 3-20 25,000

3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-20 25,000 3-19 17,000

In connection with March 17 transaction which debited Accounts Receivable for

services rendered but was not yet paid after the service was made. Here, that
account is partially paid for P25,000, which means the accounts receivable
account should be decreased by crediting the said account—the value parted
with. The value received is the face value of the cash account used to pay
the account of the customers.

Mar 21 Del Mundo withdrew P20,000 from the business for his personal
use.
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 Cas h Del Mundo, Withdrawals

Debit (+) Credit (-) Debit (+) Credit (-)

3-1 350,000 3-3 15,000 3-21 20,000

3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-20 25,000 3-19 17,000
3-21 20,000

Withdrawals are reductions to owner’s equity but are not expenses of the
business entity. It is personal transaction of the owner that is exactly the
opposite of investment. This transaction increased the withdrawals account
but reduced cash. Debits increases the withdrawal account and credits
decreases cash account.

Mar 27 Warlito Blanche Publishing submitted a bill to Del Mundo for

P8,000 worth of newspaper advertisements for the month. Del Mundo
will pay this bill next month.

Accounts Payable Advertising Expens e

Debit (-) Credit (+) Debit (+) Credit (-)

3-19 17,000 3-9 25,000 3-27 8,000

3-27 8,000

This transaction increased the expense account—advertising expense and

increased the liability account—accounts payable. Expenses are increased by
debit entries while liabilities are increased by credit entries.

Mar 31 Del Mundo paid his assistant designer salary of P15,000 for the
month.

Cas h Advertis ing Expens e

Debit (+) Credit (-) Debit (+) Credit (-)

3-1 350,000 3-3 15,000 3-31 15,000

3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-20 25,000 3-19 17,000
3-21 20,000
3-31 15,000

Expenses are increased by debits and assets are decreased by credits. Hence,
salaries expense is debited and cash is credited for P15,000. Increased in
salaries expenses decreased owner’s equity.

IV. Topic Summary

40
  An accounting event is an economic occurrence that causes changes in an
enterprise’s assets, liabilities, and/or equity.
 A transaction is a particular kind of event that involves the transfer
of something of value between two entities.
 Every financial transaction can be analyzed or expressed in terms of its
effects on the accounting equation. The financial transactions will be
analyzed by means of a financial transaction worksheet which is a form
used to analyze increases and decreases in the assets, liabilities or
owner’s equity of a business entity.
 Analyzing and recording transactions using the accounting equation is
useful in conveying a basic understanding of how transactions affect the
business.

V. References

Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st Edition.
Manila: Domdane Publishers and Made Easy Books.
Ballada, Win and Susan Ballada. (2019). Accounting Fundamentals Made East 2019
Issue- 5th Edition.Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
Ferrer, Rodiel C. and Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy,
Business and Management Part 1. Baguio City: Bandolin Enterprise.

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