MODULE 2
THE ACCOUNTING PROCESS:
ANALYZING BUSINESS TRANSACTIONS
Intended Learning Outcomes
After the end of this module, you should be able to:
1. identify the phases of accounting process;
2. define business transactions and its sources;
3. define double-entry system
4. describe the accounting equation; and
5. analyze business transactions.
Phases of the Accounting Process
There are four basic phases of accounting: recording, classifying, summarizing and interpreting
financial data. Communication may not be formally considered one of the accounting phases, but it is a
crucial step as well. All accounting information should be communicated properly to the appropriate parties
after analyzing.
1. Recording. It is a basic phase of accounting that is also known as bookkeeping. In this phase, all
financial transactions are recorded in a systematical and chronological manner in the appropriate
records. Accounting recorders are the documents and books involved in preparing financial
statements.
2. Classifying. It involves sorting and grouping similar items under the designated name, category or
account. This phase uses systematic analysis of recorded data in which all transactions are grouped
in one place.
3. Summarizing. It involves summarizing the data after each accounting period, such as a month,
quarter or year. This is the process involves preparation of financial statements.
4. Interpreting. It is concerned with analyzing financial reports, and is a critical tool for decisionmaking. This final function interprets the recorded data in a manner which allows end-users to make
meaningful judgments regarding the financial conditions of a business or personal account, as well
as the profitability of business operations.
Business Transactions and Its Sources
A business transaction is an event that has some effects on the resources of a firm (Hernane, 2008). It
is also an economic occurrence that causes changes in an enterprise’s asset’s liabilities and/or equity. It
normally involves exchange of values. If this transaction is between an outsider and the business, these are
known as external transactions While if it happens only within the business, these are known as internal
transactions.
Source documents are the evidences of a transaction that contains the details of a transaction. Examples
of these source documents are receipts, invoices, checks, vouchers, promissory notes and memorandum
(credit or debit). Each source document connotes a business transaction and this triggers the start of the
accounting process.
The business transaction must always have a dual effect and that is for every value received, there is an
equal value parted. Accounting is based on double-entry bookkeeping, which means that accountants record
the dual effect of a business transaction. Let us try to understand it first by looking into the accounting
equation.
The Accounting Equation
Financial statements tell us how a business is performing. They are the end product of the account
process. But how do we arrive at the items and amounts that make up the financial statements? The basic
tool of accounting is the accounting equation. This equation represents resources controlled by the business,
the present obligation of the business and the residual interest of the owners in the assets. It states that assets
must always equal to the liabilities and capital.
Assets = Liabilities + Capital
The left side of the equation shows the assets and the right side shows who provides the funds needed
by the business. This explains why increases and decreases in assets are recorded in the opposite manner as
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liabilities and capital are recorded. 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 equation.
Analyzing the Business Transaction
Once a source document which connotes a business transaction was received, an accountant needs to
analyze what are the affected items of this transaction. In acquiring an asset, a business mat give another
asset or incur a liability requiring payment later or both. A liability is decreased by paying cash or by
assuming another liability, requiring payment later or both. Capital increases because of investment and net
income. Withdrawal of cash or other assets by the owner for his personal use decreases the capital.
Every transaction is analyzed with respect to its effects on the assets, liabilities and capital of the
business. Please observe that every transaction affects two or more items in the accounting equation and
the equation remain in balance after each transaction. If the equation does not balance, you know an error
has been made.
To illustrate, assume the following transaction:
On November 1, 2017, Oscar Bergonia started his graphic design shop named Oscar Graphical Design.
Nov. 1 – Oscar invested cash of P200,000 to start his business.
Assets
=
Liabilities
+
Cash
P200,000
Capital
Oscar, Capital
P200,000
The financial transaction is analyzed as follows:
❖ An entity separate and distinct from Oscar’ personal financial affairs is created.
❖ An economic resource- cash of P200,000 is invested in the business entity. The source of this asset
is the contribution made by the owner, which represents the capital. The capital account is Oscar,
Capital.
❖ The dual nature of the transaction is the cash is invested and capital created. The effect on the
accounting equation are as follows: increase in asset- cash from zero to P200,000 and increase in
capital from zero to P200,000.
❖ At this point, the entity has no liabilities, and assets is equal capital.
Nov. 3 – Purchased computer equipment for P65,000.
Balance
Nov. 5
Balance
Assets
Cash
Equipment
P200,000
(65,000)
65,000
P135,000
P65,000
=
Liabilities
+
Capital
Oscar, Capital
P200,000
P200,000
This transaction did not change the total asset but it did change the composition of the assets- it decreased
one asset (cash) and increased another asset (equipment) by P65,000. Note that the sums of the balances on
both sides of the equation are equal. This equality must always exist.
Nov. 9 – Computer supplies in the amount of P25,000 are purchased on account.
Balance
Nov. 9
Balance
Cash
P135,000
P135,000
Assets
Supplies
P25,000
P25,000
=
Equipment
P65,000
P65,000
Liabilities
+
Accounts Payable
P25,000
P25,000
Capital
Oscar, Capital
P200,000
P200,000
Assets don’t have to be purchased in cash. It can also be purchased on credit. Acquiring the supplies with
the promise to pay the amount due later is called buying on account. This transaction increases both the
assets and the liabilities of the business. The asset affected is supplies and the liability created is an accounts
payable.
Nov. 12 – Collected P12,000 in cash for services performed.
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Cash
P135,000
12,000
P147,000
Balance
Nov. 12
Balance
Assets
Supplies
P25,000
=
Equipment
P65,000
Liabilities
Accounts Payable
P25000
P25,000
P65,000
P25,000
+
Capital
Oscar, Capital
P200,000
12,000
P212,000
The business earned a service income. Oscar 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 capital.
Income increases capital. This transaction caused the business grow.
Nov. 15 – Oscar paid P8,000 to 7/11 Bills Express, for the semi-monthly utilities.
Cash
P147,000
(8,000)
P139,000
Balance
Nov. 15
Balance
Assets
Supplies
P25,000
=
Equipment
P65,000
Liabilities
Accounts Payable
P25,000
P25,000
P65,000
P25,000
+
Capital
Oscar, Capital
P212,000
(8,000)
P204,000
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 expense for the month of November. It represented an outflow
of resources and a reduction of capital.
Nov. 19 – Oscar made a partial payment of P15,000 for the Nov. 9 purchase on account.
Balance
Nov. 19
Balance
Cash
P139,000
(15,000)
P124,000
Assets
Supplies
P25,000
Equipment
P65,000
=
P25,000
P65,000
Liabilities
+
Accounts Payable
P25,000
(15,000)
P10,000
Capital
Oscar, Capital
P204,000
P204,000
This transaction is a payment on account. The effect on the accounting equation is a decrease in asset (cash)
and a decrease in liability (accounts payable). The payment of cash on account has no effect on the supplies
because the payment does not increase or decrease the supplies available to the business.
Nov. 21 – The company has service agreement with a several people to maintain and update their websites
weekly. Oscar billed these clients P45,000 for services already rendered during the month.
Balance
Nov. 21
Balance
Cash
P124,000
P124,000
Assets
=
Liabilities
+
Accounts
Receivable Supplies Equipment
Accounts Payable
P25,000
P65,000
P10,000
P45,000
P45,000
P25,000
P65,000
P10,000
Capital
Oscar,
Capital
P204,000
45,000
P249,000
The business has performed services to clients so income should already be recognized. Oscar is entitled to
receive payment for these but the clients did not pay immediately. Performing services creates an economic
resource, the client’s promise to pay the amount which is called accounts receivable. This transaction
resulted to an increase in asset and an increase in capital of P45,000.
Nov. 24 – Amount of P29,000 were received from clients for billings dated Nov. 21.
Balance
Nov. 24
Balance
Module 2
Cash
P124,000
29,000
P153,000
Assets
=
Accounts
Receivable
Supplies Equipment
P45,000
P25,000 P65,000
(29,000)
P16,000
P25,000 P65,000
Liabilities
Accounts
Payable
P10,000
P10,000
+
Capital
Oscar,
Capital
P249,000
P249,000
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Last, Nov. 21 Oscar billed clients for services already rendered. On Nov. 24, the business has collected
P29,000 from them. The asset (cash) is increased by P29,000. The business should not record the income
on Nov. 29 since it has already recorded the income last Nov. 21. Total assets are unchanged. The business
merely reduced one asset (accounts receivable) and increased another asset (cash).
Nov. 26 – Oscar paid his assistant designer salaries of P16,000 for the month.
Balance
Nov. 26
Balance
Cash
P153,000
(16,000)
P137,000
Assets
=
Accounts
Receivable Supplies Equipment
P16,000
P25,000 P65,000
P16,000
P25,000
Liabilities
Accounts
Payable
P10,000
P65,000
+
Capital
Oscar,
Capital
P249,000
(16,000)
P233,000
P10,000
This transaction resulted to a reduction in capital as well as in cash. By providing his services to Oscar for
the month, the assistant designer has created for the business an expense- salaries expense.
Nov. 29 – Oscar withdrew P15,000 from the business for his personal use.
Balance
Nov. 29
Balance
Cash
P137,000
(15,000)
P122,000
Assets
=
Accounts
Receivable
Supplies Equipment
P16,000
P25,000 P65,000
P16,000
P25,000
P65,000
Liabilities
Accounts
Payable
P10,000
+
P10,000
Capital
Oscar,
Capital
P233,000
(15,000)
P218,000
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. On Nov. 1, Oscar invested P200,000; both cash and capital increased.
The transaction was an investment by the owner and not an income-generating activity. Oscar simply
transferred funds from his personal account to the business. A cash withdrawal is exactly opposite. The
P15,000 cash withdrawal transaction resulted to a reduction in both cash and capital.
To summarize the effects of the transactions, below is the tabular analysis that can also be used in
analyzing stage:
Assets = Liabilities + Capital
Date
2017
Nov.
1
3
9
12
15
19
21
24
26
29
Total
Cash
Accounts
Receivable
Supplies
P200,000
(65,000)
Equipment
Oscar,
Capital
P200,000
Remarks
Investment
P65,000
P25,000
P25,000
12,000
(8,000)
(15,000)
29,000
(16,000)
(15,000)
P122,000
Accounts
Payable
12,000
(8,000)
Revenue
Expense
45,000
Revenue
(15,000)
P45,000
(29,000)
P16,000
P25,000
P65,000
P10,000
(16,000)
Expense
(15,000) Withdrawal
P218,000
--- END OF DISCUSSION ---
/NABergonia2018
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EXERCISES
Exercise 1
For each transaction, tell whether the assets, liabilities and capital will increase (I), decrease (D) or is not
affected (NE).
Business Transactions
1. The owner invests personal cash in the business.
2. The owner withdraws business assets for personal use.
3. The company receives cash from a bank loan.
4. The company repays the bank that had lent money.
5. The company purchases equipment with its cash.
6. The owner contributes her personal truck to the business.
7. The company purchases supplies on credit.
8. The company purchases land by paying half in cash and signing
a note.
9. The owner withdraws cash for personal use.
10. The company repays the suppliers.
A
L
C
Exercise 2
Describe the transactions based on the tabular analysis. Write your answers on the space provided.
Date
Assets
Cash
Supplies
Equipment
1
150,000
2 (20,000)
20,000
3 (112,500)
4
5,000
5 (15,000)
6
(3,000)
7
(8,000)
1. ____________________________________
2. ____________________________________
3. ____________________________________
4. ____________________________________
Liabilities
Capital
150,000
(112,50)
5,000
(15,000)
(3,000)
(8,000)
5. ________________________________
6. ________________________________
7. ________________________________
Exercise 3
Determine the missing amounts on each of the following items.
Assets
Liabilities
Capital
1.
P279,000
P56,400
?
2.
P213,600
?
P111,600
3.
?
P52,200
P154,800
4.
P871,200
P136,800
?
5.
P655,200
?
P462,600
6.
?
P56,400
P285,000
Exercise 4
Use the accounting equation to answer each of the following questions.
1. At the beginning of the year, the assets of Momshie Monica Services were P360,000 and its capital
was P200,000. During the year, the assets increased by P120,000 and liabilities increased by
P20,000. What is the capital at the end of the year?
2. At the beginning of the year, Lolo Ryan Calling Station had liabilities of P100,000 and the owner’s
equity of P96,000. If the asset increased by P40,000 and liabilities decreased by P30,000, what was
the owner’s equity at the end of the year?
3. The liability of Louie Madilim Company is equal to one-third of the total assets, and the owner’s
equity is P240,000. What is the amount of the liability?
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Exercise 5
Jerome Garcia started a new business and completed these transactions during August:
1 Garcia invested P48,000 cash in the business.
1 Rented office space and paid P800 cash for the August rent.
3 Purchased exploration equipment for P22,000 by paying P12,000 cash and agreeing to pay the balance
in 3 months.
5 Purchased office supplies by paying P1,500 cash.
6 Completed exploration work and immediately collected P420 cash for the work.
8 Purchased P1,350 of office equipment on credit.
15 Completed exploration work on credit in the amount of P8,000.
18 Purchased P700 of office supplies on credit.
20 Paid cash for the office equipment purchased on August 8.
24 Billed a client P2,400 for work completed; the balance is due in 30 days.
28 Received P5,000 cash for the work completed on August 15.
30 Paid the assistant’s salary of P1,100 cash for this month.
30 Paid P340 cash for this month’s utility bill.
30 Garcia withdrew P1,050 cash from the business for personal use.
Instruction: Complete the table.
Accounts
Date
Cash Receivable
Office
Supplies
Office
Equipment
Exploration
Equipment
Accounts
Payable
Garcia,
Capital
Total
Exercise 6
Identify the foregoing transactions by identifying each as either one of the following: owner’s investment
(OI), owner’s withdrawal (OW), income (I), expense (E) or not an owner’s equity transaction (NO).
1. Received cash for rendering services
2. Withdrew cash for personal expenses.
3. Received cash from a customer who have been rendered service on account.
4. Transferred personal assets to the business.
5. Paid a service station for gasoline for a business service vehicle.
6. Performed a service and received a promise of payment.
7. Paid cash to acquire equipment.
8. Paid cash to an employee for services rendered.
9. Bought supplies for cash.
10. Paid loans to the bank.
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