MODULE 2: ANALYZING BUSINESS TRANSACTIONS

Overview:
In this module, you will be able to understand the business transactions and how Accounting
plays an important role in managing a successful business. Financial Statements are prepared to
help the users – decision makers and parties with interests in the business to make right and
adequate decisions regarding the operations of the business, track the business development
and growth, solve operational and financial problems, and make forecasts. A reliable and high-
quality financial statements must be presented to the users to achieve a reliable and high-quality
decisions. In order to accomplish a reliable and high-quality financial statements, it is very
important to make the first step – analyzing business transactions through source documents,
precisely as what a popular saying says, “Do It Right The First Time.” After understanding the
business transactions, you should be able to know its effect to the Elements of Financial
Statement and to the Accounting Equation.

Module Objectives:
After successful completion of this module, you should be able to:

1. Know the Accounting Information System, its Components, and Importance

2. Understand and Analyze Business Transactions, the Concept of Increase or Decrease in
an Account, and its Effects to the Elements of Financial Statements
3. Familiarize the Accounting Equation and Analyze the Effect of Business Transactions to
the Accounting Equation

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Course Materials:

Discussion

I. Accounting Information System

Accounting information system is the combination of personnel, records, procedures that a
business uses to provide financial data. We computerize to do the accounting faster and make it
more reliable Specialization combines similar transactions to speed the process.

Features of an Effective Accounting System

Control
•Managers must control operations, or the company will lose focus. Internal controls
safeguard assets and eliminate waste.

Compatibility
•A compatible system is one that works smoothly with the company's personnel and
organizational structure.

Flexibility
•A well-designed system is flexible if it accommodates changes in the organization.
Since the organization changes over time, it develop new products, sell off
unprofitable operations and acquire new ones.

Good cost/benefit relationship

•Managers want a system that gives the most benefit at least cost.

Components of a Computerized System

1. Hardware – is the electronic equipment that includes computers, disk drives, monitors,
printers and the network that connects them. Most systems require a network to link
different computers sharing the same information. With the networked system, the server
stores the program and the data.

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 2. Software – is the set of programs
that drive the computer. Accounting
software reads, edits (alter), and stores
transaction data. lt also generates the report
managers use to run the business. Many
software packages operate independently.
Small businesses may use software for
employee payrolls. Other parts of the
accounting system may not be automated.
For large enterprises, accounting software is integrated to the company's database, or
computerized storehouse of information.

3. Company personnel – good

personnel are critical to success.
Employees must be both competent
and honest.

Manual And Computer-Based Systems: A Comparison

The concepts and procedures involve in the operation of manual and computer-based accounting
systems are essentially the same. The differences are largely a question of whether specific
procedures require human attention or whether they can be performed automatically by a
machine.

Computers can be programmed to perform mechanical tasks with great speed and accuracy. For
example, they can be programmed to read data, to perform mathematical computations, and to
rearrange data to any desired format. However, computers cannot think. Therefore, they are not
able to analyze business transactions. Without human guidance, computers cannot determine
which events should be recorded in accounting records or which account should be debited or
credited to properly record an event.

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 Manual Computer-based

data are entered

data are entered in through a keyboard,
the form of an optical scanner or
handwritten journals any other input
device

use of journal - use of database - a

detailed account warehouse of
record; book of information stored
original entry within a computer

eliminate the need of

copying and
repetitive procedure
rearranging
information

II. Business Transactions

Business transaction – is an event that has some effect on the resources of a firm or on the
source of the firm's assets. It is also an activity that involves a change of values. Normally, a
transaction involves a value received and a value parted with. When the transaction is between
a business and an outsider, it is called an external transaction. An example of it is a purchase
of office supplies from National Bookstore. Transactions that happen within the business that do
not involve outsiders are called internal transactions. An example of it is office supplies being
used daily in the operations of the business.

The evidence of a transaction that describes the essential facts of the transaction is the source
document. Examples of source documents are receipts of cash paid or received, checks written
or received, bills sent to customer for services performed or bills received from supplier for items

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purchased, cash register tapes. sales tickets, notes given or received. Each source document
initiates the process of recording a transaction.

Analyzing Business Transactions

In order to generate financial reports which will be used for making decisions, business
transactions have to be analyzed, recorded and summarized. In analyzing transactions, the
suggested procedures are as follows:

a. Determine the particular accounts affected or involved in the transaction. There are always
two or more accounts involved in every transaction.
b. Determine the effect of the transaction on the accounts involved in terms of increase or
decrease.

The accounts affected or involved and the effects of the transaction on the said accounts are
illustrated as follows:

1. Mr. John Lloyd Ruiz started his own business by investing P 500,000 cash.
Analysis of the above transaction:

Accounts affected Effect

Cash - Increase
J. Ruiz, Capital - Increase

The business received cash so the account cash will increase. The amount received by the
business represent investment by the owner, so the other account affected is John Lloyd Ruiz,
Capital which will also increase.

Note: Transactions are to be analyzed from the point of view of the business.

2. Purchased for cash office supplies worth P 5,000.

Analysis of the above transaction:

Accounts affected Effect

Office Supplies - Increase

Cash - Decrease

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Since office supplies were purchased by the firm, its office supplies will increase. The payment of
cash will have an effect of decreasing cash.

3. Return office supplies because of defects receiving a cash refund.

Analysis of the above transaction:

Accounts affected Effect

Office Supplies - Decrease

Cash - Increase

The return of office supplies will result to decrease in the office supplies of the company. The cash
refund received will increase the account cash.

4. Purchased office equipment on account.

Analysis of the above transaction:

Accounts affected Effect

Office Equipment - Increase

Accounts Payable - Increase

The purchase of office equipment will have an effect of increasing the account office equipment.
Since the office equipment was purchased on account (on credit/without actual cash payment),
the liability account, Accounts Payable will also increase.

5. Issued check in payment for the office equipment previously purchased on account.
Analysis of the above transaction:

Accounts affected Effect

Accounts Payable - Decrease

Cash - Decrease

The liability, Accounts Payable was paid so it will decrease. Likewise, the account Cash will also
decrease.

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 6. Paid office rental for the month.
Analysis of the above transaction:
Accounts affected Effect

Rent Expense - Increase

Cash - Decrease

The payment was for office rental, so it is to be charged to the account Rent Expense. Every time
an expense is paid, the particular expense account increases while the account cash decreases.

7. Mr. John Lloyd, the owner withdrew cash from the business for his personal use.
Analysis of the above transaction:

Accounts affected Effect

J. Ruiz, Drawing - Increase

Cash - Decrease

In a proprietorship form of business organization, the owner is usually the one managing the firm
using all his/her efforts, time and resources in running the business. There are instances, where
in the owner withdraws cash and or non-cash asset like merchandise from the business for
personal use. Such withdrawals are charged to the owner's drawing account. Since cash was
taken from the business, cash will decrease.

8. Received cash payments from clients for services rendered to them by the
business.
Analysis of the above transaction:

Accounts affected Effect

Cash - Increase
Service Revenue - Increase

A service business earned its revenue/income from rendering services to customers or clients.
Once services have been rendered whether for cash or on account, revenue is considered earned
or realized. Thus, revenue increases.

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 9. Rendered services to clients on account.
Analysis of the above transaction:

Accounts affected Effect

Accounts Receivable - Increase

Service Revenue - Increase

The company will have a receivable from the clients to whom services were rendered on account.
Hence, the Accounts Receivable of the company will increase.

10. Collected a receivable from a client.

Analysis of the above transaction:

Accounts affected Effect

Cash - Increase
Accounts Receivable - Decrease

Since cash is received by the company cash will increase. The collection of receivable decreases
the company's receivable account.

The analysis of business transactions are summarized as follows:

Business transactions Accounts affected Effect

1. Receipt of cash investment from the owner. Cash Increase

Owner’s Capital Increase

2. Purchase of office supplies for cash. Office Supplies Increase

Cash Decrease

3. Return of defective office supplies previously Cash Increase

purchased for cash. Office Supplies Decrease

4. Purchased office equipment on account. Office Equipment Increase

Accounts Payable Increase

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5. Payment for the equipment previously purchased Accounts Payable Decrease
on account. Cash Decrease

6. Payment of office rental. Rent Expense Increase

Cash Decrease

7. Withdrawals of cash from the business by Owner’s Drawing Increase

the owner. Cash Decrease

8. Cash receipts from customers for services rendered. Cash Increase

Service Revenue Increase

9. Services rendered to customers on account. Accounts Receivable Increase

Service Revenue Increase

10. Cash receipts from customers on account. Cash Increase

Accounts Receivable Decrease

III. The Accounting Equation

Business transactions are analyzed, recorded, classified and summarized to be able to determine
the financial position and the result of operation of a business. Analysis of business transactions
can be done through the accounting equation.

The accounting equation is:

Assets = Liabilities + Owner's Equity (Capital)

The left side of the equation shows the assets while the right side show who provide the funds or
resources needed by the business. The amount and the composition of the assets, liabilities, and
owner's equity change as the business engages in economic activities. However, the equality of
the accounting equation holds.

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Equity means the rights to properties. There are two equities: the equity of the creditors which
refers to liabilities and the equity of the owner or owners referring to capital. In the accounting
equation, liabilities is placed ahead of owner's equity because creditors have preferential rights
on the assets of the business. Take note that Revenue (increase in Owner’s Equity) and Expenses
(decrease in Owner’s Equity) account are also accounted and closed in Owner’s Equity.

Alternative ways of expressing the equation are:

Assets - Liabilities = Owner's Equity (Capital)

Assets - Owner's Equity (Capital) = Liabilities

Assume that Cruz Enterprise has total assets amounting to P 2,000,000 and liabilities totaling P
600,000, so owner's equity must be P 1,400,000. (P 2,000,000 - P 600,000 = P 1,400,000).

ILLUSTRATIONS:

Let us examine the effects on the accounting equation of some business transactions of
Regenerating Clinic for the month of January.

The company's chart of accounts (a list of all accounts – account title of the business and their
corresponding account numbers) follows:

Assets Liabilities Capital

Cash Accounts Payable Wan, Capital

Accounts Receivable Notes Payable Wan, Drawing
Supplies Utilities Payable
Prepaid Insurance
Revenue Expenses

Professional Fees Salaries Expense

Rent Expense
Utilities Expense
Supplies Expense
Advertising Expense
Miscellaneous Expense

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January 1 Dr. A.H. Wan, a cosmetic doctor opened the Regenerating Clinic on January 1,
2020, with a cash investment of P 100,000 and supplies amounting to P 20,000.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Jan. 1 100,000 20,000 120,000
In the above transaction, assets will increase by P 120,000 with a corresponding increase in
capital of the same amount. The equality of the accounting equation is maintained.

January 2 Dr. Wan purchased for cash supplies worth P 5,000 from Lin Medical Supplies.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Jan. 1 100,000 20,000 120,000
Jan. 2 5,000
(5,000)
Balance 95,000 25,000 120,000
In the preceding transaction, only the asset side of the equation is affected. Supplies increase
while cash decreases resulting to zero effect on both sides of the equation.

January 4 Bought P 55,000 worth of cosmetic equipment on account from Bridges, Inc.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 95,000 25,000 120,000
Jan. 4 55,000 55,000
Balance 95,000 25,000 55,000 55,000 120,000
The purchase of Equipment on account will both increase the business asset and its liability. The
accounting equation remains equal.

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January 6 Rendered professional services to clients and received a check amounting to P
13,500.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 95,000 25,000 55,000 55,000 120,000
Jan. 6 13,500 13,500
Balance 108,500 25,000 55,000 55,000 133,500
The asset of the business will increase by P 13,500. The earning of income by a company will
have the effect of increasing capital.

January 8 Paid MERALCO and NAWASA bill received amounting to P 8,790.

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 108,500 25,000 55,000 55,000 133,500
Jan. 8 (8,790) (8,790)
Balance 99,710 25,000 55,000 55,000 124,710
Cash and capital decrease due to utilities expense incurred. An increase in expense causes
capital to decrease.

January 10 Issued check payable to a Beauty Secrets Magazine for advertising, P 2,100.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 99,710 25,000 55,000 55,000 124,710
Jan. 10 (2,100) (2,100)
Balance 97,610 25,000 55,000 55,000 122,610

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January 12 Returned defective supplies worth P 820 to Lin Medical Supplies.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 97,610 25,000 55,000 55,000 122,610
Jan. 12 820 (820)
Balance 98,430 24,180 55,000 55,000 122,610

January 14 Sent invoices to clients amounting to P 32,100 for services rendered on account.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 98,430 24,180 55,000 55,000 122,610
Jan. 14 32,100 32,100
Balance 98,430 32,100 24,180 55,000 55,000 154,710
The increase in the asset accounts receivable is compensated with an increase in capital for the
same amount.

January 15 Paid salaries of employees, P 15,200

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 98,430 32,100 24,180 55,000 55,000 154,710
Jan. 15 (15,200) (15,200)
Balance 83,230 32,100 24,180 55,000 55,000 139,510
January 16 The owner withdrew P 3,500 for personal use.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 83,230 32,100 24,180 55,000 55,000 139,510
Jan. 16 (3,500) (3,500)
Balance 79,730 32,100 24,180 55,000 55,000 136,010

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Another account resulting to a decrease in capital is owner’s withdrawal.

January 18 Paid miscellaneous expenses amounting to P 545.

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 79,730 32,100 24,180 55,000 55,000 136,010
Jan. 18 (545) (545)
Balance 79,185 32,100 24,180 55,000 55,000 135,465
This transaction has the same effect on accounts as in January 16 transaction.

January 20 Paid half of the liability from Bridges, Inc.

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 79,185 32,100 24,180 55,000 55,000 135,465
Jan. 20 (27,500) (27,500)
Balance 51,685 32,100 24,180 55,000 27,500 135,465

January 22 Purchased various equipment from Reyes Lab & Equipment amounting to
P 105,000 with a down payment of P 20,000 and the balance on account issuing
a promissory note.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 51,685 32,100 24,180 55,000 27,500 135,465
Jan. 22 (20,000) 105,000 85,000
Balance 31,685 32,100 24,180 160,000 27,500 85,000 135,465
Both sides of the equation increase by the net increase of P 85,000 (P 105,000 – P 20,000),
likewise total liabilities increased for the same amount of P 85,000.

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January 24 Rendered various services to clients on account, P 20,900.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 31,685 32,100 24,180 160,000 27,500 85,000 135,465
Jan. 24 20,900 20,900
Balance 31,685 53,000 24,180 160,000 27,500 85,000 156,365
Aside from investments made, capital also increases from revenue earned for cash or on credit.
In this case, revenue is rendered on account thus increasing Accounts Receivable and Capital.

January 26 Collected from credit customers for January 14 transaction.

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 31,685 53,000 24,180 160,000 27,500 85,000 156,365
Jan. 26 32,100 (32,100)
Balance 63,785 20,900 24,180 160,000 27,500 85,000 156,365
With the above transaction, the equality of the accounting equation holds because the increase
in cash is compensated with a corresponding decrease in accounts receivable.

January 27 Returned defective equipment worth P 3,000 purchased from Reyes Laboratories
to be deducted from the account balance.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 63,785 20,900 24,180 160,000 27,500 85,000 156,365
Jan. 27 (3,000) (3,000)
Balance 63,785 20,900 24,180 157,000 27,500 82,000 156,365
A return of defective equipment caused both the equipment and notes payable to decrease.

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January 29 Paid rent for the month, P 7,100.
ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 63,785 20,900 24,180 157,000 27,500 85,000 156,365
Jan. 29 (7,100) (7,100)
Balance 56,685 20,900 24,180 157,000 27,500 82,000 149,265

January 30 Paid Reyes Lab & Equipment P 26,500.

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 56,685 20,900 24,180 157,000 27,500 82,000 149,265
Jan. 30 (26,500) (26,500)
Balance 30,185 20,900 24,180 157,000 27,500 55,500 149,265
Payment of a note payable causes cash and note payable to decrease by P 26,500.

January 31 Supplies consumed during the period, P 18,030.

ASSETS = LIABILITIES + CAPITAL
Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balance 30,185 20,900 24,180 157,000 27,500 55,500 149,265
Jan. 31 (18,030) (18,030)
Balance 30,185 20,900 6,150 157,000 27,500 55,500 131,235
The supplies amounting to P 18,030 were used and recognized as expense.

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A summary of the tabular analysis of the effects of business transactions on the accounting
equation is provided below:

ASSETS = LIABILITIES + CAPITAL

Date Cash + Accounts + Supplies + Equipment = Accounts + Notes + Wan, Capital Notation
Jan Receivable Payable Payable

2 100,000 20,000 120,000

3 (5,000) 5,000
4 55,000 55,000
6 13,500 13,500 Professional Fees
8 (8,790) (8,790) Utilities Expense
10 (2,100) (2,100) Advertising Exp.
12 820 (820)
14 32,100 32,100 Professional Fee
15 (15,200) (15,200) Salaries Exp.
16 (3,500) (3,500) Drawing
18 (545) (545) Miscellaneous Exp.
20 (27,500) (27,500)
22 (20,000) 105,000 85,000
24 20,900 20,900 Professional Fees
26 32,100 (32,100)
28 (3,000) (3,000)
29 (7,100) (7,100) Rent Expense
30 (26,500) (26,500)
31 (18,030) (18,030) Supplies Expense
30,185 20,900 6,150 157,000 = 27,500 55,500 131,235

Total Assets = (P 30,185 + P 20,900 + P 6,150 + P 157,000) = P 214,235

Total Liabilities and Capital = (P 27,500 + P 55,500 + P 131,235) = P 214,235

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Based on the tabular analysis, the financial statements for the month ended January 31, 2020
will be as follows:

Regenerating Clinic
Statement of Comprehensive Income
For the month ended January 31, 2020

Professional Fees P 66,500.00

Less: Operating Expenses
Supplies Expense P 18,030.00
Salaries Expense 15,200.00
Utilities Expense 8,790.00
Rent Expense 7,100.00
Advertising Expense 2,100.00
Miscellaneous Expense 545.00
Total Operating Expenses 51,765.00
Net Income P 14,735.00

The Statement of Comprehensive Income (Income Statement) is prepared first to determine

the net income or net loss to be reflected in the Statement of Owner's Equity or the Capital
Statement. In the above statement, the operation resulted to a net income because the total
revenues exceed total expenses. If total expenses exceed the total revenues, a net loss resulted
thus the final figure should be enclosed by parenthesis to show a negative figure. If possible,
expenses should be arranged from biggest to smallest amounts except for Miscellaneous
Expense which is listed last regardless of the amounts involved. Magnitude of amounts is often
disregarded when accounts are arranged as to how they are shown in the general ledger. The
previous treatment is shown above.

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 Regenerating Clinic
Statement of Owner’s Equity
For the month ended January 31, 2020

Wan, Capital, January 1, 2020 0.00

Add: Investment P 120,000.00
Net Income 14,735.00
Total P 134,735.00
Less: Withdrawals 3,500.00
Wan, Capital, January 31, 2020 P 131,235.00

The Statement of Owner's Equity shown above has no beginning capital because it is a newly
opened business. Previously-opened companies will have beginning balances forwarded from
the ending balance of the preceding period.

Regenerating Clinic
Statement of Financial Position
January 31, 2020

Assets
Cash P 30,185.00 Accounts Payable P 27,500.00
Accounts Receivable 20,900.00 Notes Payable 55,500.00
Supplies 6,150.00 Total Liabilities P 83,000.00
Equipment 157,000.00 Wan, Capital 131,235.00
Total Assets P 214,235.00 Total Liabilities & P 214,235.00
Capital

The Statement of Financial Position (Balance Sheet) shown above is in the account form.
Take note that the total assets should be shown in the same line as with the total liabilities and
capital when using this format. Another format, the report form, shows the liabilities and capital
sections below the asset section. This form will be shown in Module 5.

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 Regenerating Clinic
Statement of Cash Flows
For the month ended January 31, 2020

Cash flows from operating activities:

Cash received from cash customers P 13,500.00
Cash collection from credit customers 32,100.00
Cash paid for expenses (see schedule) (33,735.00)
Cash paid for supplies (4,180.00)
Net Cash provided by operating activities P 7,685.00
Cash flows from investing activities:
Cash paid for equipment (74,000.00)
Cash flows from financing activities:
Cash investment by the owner P 100,000.00
Cash withdrawal by the owner (3,500.00)
Net Cash provided by financing activities 96,500.00
Increase in Cash P 30,185.00
Cash Balance, January 1, 2020 0.00
Cash Balance, January 31, 2020 P 30,185.00

Schedule – Payment for Expenses

Salaries P 15,200.00
Rent 7,100.00
Utilities 8,790.00
Advertising 2,100.00
Miscellaneous 545.00
Total P 33,735.00

Note: The ending balance in the Statement of Cash Flows should have the same amount as the
Cash balance shown in the general ledger and the Statement of Financial Position.

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A Statement of Cash Flows shows the proper presentation of the three types of business
activities: operating, investing and financing activities during the month.

Operating activities involves the production or purchase of merchandise and the sale of goods
or services to customers. It also includes the expenditures related in administering the business.
It generally relates to the calculation of net income.

Investing activities are the transactions that involve making and collecting loans or that involve
purchasing and selling plant assets, other productive assets, and investments. Usually, investing
activities involve the purchase or sale of assets that are classified on the balance sheet as plant
and equipment, intangible assets or long-term investments. However, the purchase and sale of
short-term investments other than cash equivalents are also investing activities. If a company
loans money to other parties, the cash receipts from collecting the loans are classified as investing
activities. However, collections of interest are not investing activities, they are reported as
operating activities.

Financing activities are company's transactions with its owner/s and long-term creditors. It also
includes borrowing of cash on a short-term basis. However, cash payments to settle credit
purchase of merchandise, whether on account or by note, are operating activities. Payments of
interest expense are also operating activities.

The following shows examples of these three activities:

Cash flows from operating activities:

Cash Inflows Cash Outflows

• Cash sales to customers • Payment to employees for salaries
• Cash collections from credit and wages
customers • Payments to suppliers of goods and
• Receipts of cash dividend from stock services
investment • Payments to government agencies for
• Receipts of interest payments taxes, fines and penalties
• Refunds from suppliers • Interest payments, net of amounts
• Cash collected from a lawsuit capitalized
• Contributions to charities
• Cash refunds to customers

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 Cash flows from investing activities:

Cash Inflows Cash Outflows

• Proceeds from selling of productive • Payments to purchase property, plant
assets (e.g. land, building) and equipment or other productive
• Proceeds from the sale (discounting) assets (excluding merchandise
of Ioans made by the enterprise inventory)
• Proceeds from collecting the principal • Payments in the form of loans made
amount of loans to other parties
• Proceeds from selling the investments • Payments to acquire entity securities
in equity securities of other of other companies
companies • Payments to acquire debt securities of
• Proceeds from selling investments in other entities, except cash equivalents
the debt securities of other entities, • Payments in the form of loans made
except cash equivalents to other parties

Cash flows from financing activities:

Cash Inflows Cash Outflows

• Proceeds from the issuance of equity • Payments of dividends and other
securities (e.g. ordinary and distribution to owners
preference shares). • Payments to purchase treasury stocks
• Proceeds from the issuance of bonds • Repayments of cash loans
and notes payable • Payments of the principal amounts
• Proceeds from other short or long involve in long-term, credit
term borrowing transactions arrangements

Each category of cash flow activity includes both cash receipts (positive amounts) and cash
payments (negative amounts) which is indicated by parenthesis. Generally, cash inflows or
receipts increase the amount of cash balance, whereas, cash outflows or disbursements
decrease the amount of cash as of the balance sheet date.

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Activities/Assessments:

Self-Assessment

I. Differentiate the manual and computer-based accounting system by giving three (3)
advantages and three (3) disadvantages of using manual vs. computer-based accounting
system.

II. Explain and elaborate the Accounting Equation.

Practical

III. Encircle the letter of your answer.

1. The economic resources that a business owns and expects to be useful to the enterprise
are called
a. assets
b. liabilities
c. receivables
d. owner's equity

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2. The purchase of office supplies (or any other asset) on account will
a. increase in an asset and increase in owner's equity
b. increase one asset and decrease another asset
c. increase an asset and increase a liability
d. increase an asset and decrease a liability

3. The performance of service for a customer or client and immediate receipt of cash will
a. increase one asset and decrease another asset
b. increase in an asset and increase in owner's equity
c. decrease an asset and decrease a liability
d. increase an asset and increase a liability

4. The payment of an accounts payable (or any other liability) will

a. decrease an asset and decrease owner's equity
b. increase one asset and decrease another asset
c. decrease an asset and decrease a liability
d. increase an asset and increase a liability

5. Omega is famous for fashion wristwatches and leather goods. At the end of a recent year,
Omega's total assets add up to P 19,050,000 and owner's equity was P 13,200,000. How
much did Omega owe creditors?
a. cannot be determined from the data given
b. P 13,200,000
c. P 19,050,000
d. P 5,850,000

6. Assume that Omega sold watches for P 25,000 to a department store on account. How
would this transaction affect Omega's accounting equation?
a. Increase in both assets and liabilities by P 25,000
b. Increase both assets and owner's equity by P 25,000
c. Increase both liabilities and owner's equity by P 25,000
d. No effect on the accounting equation

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7. Refer on Omega's sale of watches on the preceding question. Which part of the
accounting equation does the sale on account affect?
a. Accounts Receivable and Accounts Payable
b. Accounts Receivable and Owner, Capital
c. Accounts Payable and Owner, Capital
d. Accounts Payable and Cash

8. Assume Omega paid expenses totaling P 17,500. How does this transaction affect
Omega's accounting equation?
a. Decreases both assets and owner's equity
b. Decreases assets and increases liabilities
c. Increases both assets and owner's equity
d. Increases assets and decreases liabilities.

9. Consider all the effects of transactions 6 and 8 on Omega. What is Omega's net income
or net loss?
a. Net loss of P 17.500
b. Net income of P 25,000
c. Net income of P 7,500
d. Cannot be determined from the data given

10. Sunrise Company has P 90,000 in revenues, P 198,000 in expenses, P 54,000 owner's
investment, P 13,500 owner's withdrawals, and P 67,500 in liabilities paid off. Owner's
equity changed by:
a. P108,000 increase
b. P135,000 decrease
c. P67,500 decrease
d. no change

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IV. Describe each transaction as to:

a. Increase in one asset, decrease in another asset

b. Increase in an asset, increase in liability
c. Increase in an asset, increase in capital
d. Decrease in an asset decrease in liability
e. Decrease in an asset, decrease in capital
f. Increase in liability, decrease in capital

_____ 1. The owner invests cash to the business.

_____ 2. Received cash for providing services to clients.
_____ 3. Paid employees’ salaries.
_____ 4. Issued check for equipment purchased for cash
_____ 5. The owner of the firm took assets out of the business personal use.
_____ 6. Performed services to clients on account.
_____ 7. Received payment from clients previously billed for services rendered on account.
_____ 8. Purchased supplies on account.
_____ 9. Issued check in payment for supplies purchased on account.
_____ 10. Billed customers for services rendered on account.
_____ 11. Paid Meralco bill for the light and power consumed for the month.
_____ 12. Received a bill from PLDT but payment is to be made next month.
_____ 13. The owner invested additional cash to the business.
_____ 14. Rendered services to clients receiving a promissory note.
_____ 15. The owner withdrew cash for personal use.

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V. For each transaction below, state in column 1 the accounts affected. In column 2, the
classification of the account (asset, liability, capital, revenue or expense) and column 3,
the effect of the transaction on the account (increase or decrease). The first transaction
has been done for you.

The following are transactions of Ms. Lea Carey, an interior decorator, in her first month of
business operation:

June
2 Invested P 500,000 cash in the business.
3 Purchased for cash a used car for P 200,000 for use in the business.
9 Purchased supplies on account P 5,000.
11 Billed customers for services performed, P 15,000.
12 Received a check from a customer for services rendered for cash, P 10,000.
15 Paid P 2,000 cash for advertising the start of her business
16 The owner invests additional P 100,000 cash in the business.
17 Purchased office equipment worth P 50,000. Issued a promissory note, payable next
week.
18 Issued check in payment for supplies purchased on June 9.
20 Received P 5,000 cash from customers billed on June 11.
21 Purchased additional office supplies for cash, P 5,000.
22 Issued check in payment for the promissory note issued on June 17.
23 Paid creditor on account, P 3,000.
28 Withdrew P 5,000 cash for personal use.
30 Paid salaries of assistant, P 12,000.

Date Column 1 Column 2 Column 3

Accounts Affected Account Classification Effect (Increase/Decrease)
June 2 Cash Asset Increase
Lea Carey, Capital Capital Decrease
3

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11

12

15

16

17

18

20

21

22

23

28

30

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VI. Answer the following questions by applying the Accounting Equation.

1. The assets of Zealand Company amount to P 950,000, and the owner’s equity of
P 560,000. What is the amount of liabilities? _______________

2. The liabilities and owner's equity of Greenland Company amount to P 5,980,000 and
P 3,200,000 respectively. How much is the company's assets? _______________

3. Luigi Company has owner's equity of P 7,940,000 and total assets of P 10,670,000. How
much is the creditor's equity? _______________

4. The liabilities of Spicy Company are equal to one-third of the total assets. The owner's
equity is P 2,400,000. What is the amount of liabilities? _______________

5. At the beginning of the year, Sweet Company's assets amount to P 11,000,000 and
owner's equity amounting to P 5,000,000. During this year, assets increased by
P 3,000,000, while liabilities decreased by P 500,000. How much is the owner's equity at
the end of the year? _______________

6. Mel Jayson is the owner of MJ Laundry. At the end of its accounting period, December
31, 2020, the business has total assets of P 4,162,500 and liabilities of P 1,710,000 How
much is Mel Jayson, Capital as of December 31, 2020? _______________

7. At the beginning of the year 2020, Smart Company has total assets of P 3,560,000 and
total liabilities of P 980,000. During the year 2020, assets decreased by P 600,000 while
liabilities increased by P 850,000. How much is the owner's equity at December 31, 2020?
_______________

8. At the end of the year 2020, PLDT company has total assets of P 5,450,000 and total
liabilities of P 1,980,000. During the year 2020, assets increased by P 750,000 while
liabilities increased by P 300,000. What is the amount of Capital at the beginning of 2020?
_______________

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VII. Determine the missing amounts by using the Accounting Equation.
(Assets = Liabilities + Capital);
(Beginning Balance + Changes in a year = Ending Balance)

Financial Statement information about four companies are as follows:

Mars Venus Saturn Jupiter

Company Company Company Company
Beginning Balances
January 1, 2020:
Assets P 150,000 P 180,000 P P 300,000
Liabilities 100,000 150,000
Owner’s Equity 120,000 110,000 180,000
Ending Balances
December 31, 2020
Assets 240,000 360,000
Liabilities 110,000 124,000 160,000
Owner’s Equity 90,000 220,000 280,000
Owner’s Equity Changes in year:
Additional Investment 16,000 20,000 30,000
Drawings 20,000 24,000 20,000
Total Revenues 700,000 800,000 1,000,000
Total Expenses 670,000 770,000 720,000

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