Analyzing Business Transactions

Business Transaction - an event that has some effect on the resources of a firm or on the source
of the firm’s assets.

- An activity that involves a change of values.

- Normally, it involves a value received and a value parted with.

Two types of business transaction

External Transactions – transactions between a business and an outsider

Example: Purchase of office supplies from National Book Store

Internal Transactions – transactions that happen within the business that do not involve
outsiders

Example: Office suppliers being used daily in the operation of the business.

Source Document – the evidence of a transaction that describes the essential facts of the
transaction

Example: Receipt of cash paid or received

Checks written or received

Bills sent to customer for services performed

Bills received from supplier for items purchased

Cash register tapes

Sales Tickets

Notes given or received

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.

ASSETS = LIABILITIES + OWNER’S EQUITY

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 The left side of the equation shows the assets while the right side shows 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.

Equity – right to properties

Two types of Equity

Equity of the creditors – liabilities

Equity of the owner or owner’s equity – capital

The liabilities are placed ahead of the owner’s equity because creditors have preferential
rights on the assets of the business.

Alternative ways of expressing the equations are:

Assets – Liabilities = Owner’s Equity

Assets - Owner’s Equity = Liabilities

Assume that Cruz Enterprise has total assets amounting to ₱2,000,000 and liabilities
totaling ₱600,000, so owner’s equity must be ₱1,400,000 (₱2,000,000 - ₱600,000 = ₱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 is as follows:

Assets Liabilities Capital Revenue Expenses

Cash Accounts Wan, Capital Professional Fees Salaries Expense
Payable
Accounts Notes Payable Wan, Drawing Rent Expense
Receivable
Supplies Utilities Payable Utilities Expense
Prepaid Supplies Expense
Insurance
Advertising
Expense
Miscellaneous
Expense

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Jan. 1 – Dr. A.H. Wan, a cosmetic doctor opened the Regenerating Clinic on January 1, 2011,
with a cash investment of ₱100,000 and supplies amounting to ₱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 ₱120,000 with a corresponding increase
in capital of the same amount. The equality of the accounting equation is maintained.

Jan.2 – Dr. Wan purchased for cash suppliers worth ₱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
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 the both sides of the equation.

Jan. 4 – Bought ₱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
Balances 95,000 25,000 120,000

Jan 4 55,000 55,000

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.

Jan. 6 – Rendered professional services to clients and received a check amounting to ₱13,500.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 95,000 25,000 55,000 55,000 120,000

Jan 6 13,500 13,500

108,500 25,000 55,000 55,000 133,500
The asset of the business will increase by ₱13,500. The earning of income by a company
will have the effect of increasing capital.

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Jan. 8 – Paid Meralco and Nawasa` bill received amounting to ₱8,790.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 108,500 25,000 55,000 55,000 133,500

Jan 8 (8,790) (8,790)

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.

Jan. 10 – Issued check payable to a Beauty Secrets Magazine for advertising, ₱2,100.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 99,710 25,000 55,000 55,000 124,710

Jan 10 (2,100) (2,100)

97,610 25,000 55,000 55,000 122,610

Jan. 12 – Returned defective supplies worth ₱820 to Lin Medical Supplies.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 97,610 25,000 55,000 55,000 122,610

Jan 12 820 (820)

98,430 24,180 55,000 55,000 122,610

Jan. 14 – Sent invoices to clients amounting to ₱32,100 for services rendered on account.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
98,430 24,180 55,000 55,000 122,610

Jan 14 32,100 32,100

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.

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Jan. 15 – Paid salaries of employees, ₱15,200.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 98,430 32,100 24,180 55,000 55,000 154,710

Jan 15 (15,200) (15,200)

83,230 32,100 24,180 55,000 55,000 139,510

Jan. 16 – The owner withdrew ₱3,500.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 83,230 32,100 24,180 55,000 55,000 139,510

Jan 16 (3,500) (3,500)

79,730 32,100 24,180 55,000 55,000 136,010
Another account resulting to a decrease in capital is owner’s withdrawal.

Jan. 18 – Paid miscellaneous expenses amounting to ₱545.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 79,730 32,100 24,180 55,000 55,000 136,010

Jan 18 (545) (545)

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.

Jan. 20 – Paid half of the liability from Bridges, Inc.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 79,185 32,100 24,180 55,000 55,000 135,465

Jan 20 (27,500) (27,500)

51,685 32,100 24,180 55,000 27,500 135,465

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Jan. 22 – Purchased various equipment from Reyes Lab & Equipment amounting to ₱105,000
with a down payment of ₱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
Balances 51,685 32,100 24,180 55,000 27,500 135,465

Jan 22 (20,000) 105,000 85,000

31,685 32,100 24,180 160,000 27,500 85,000 135,465
Both sides of the equation increase by the net increase in assets of ₱85,000 (₱105,000-₱20,000).

Jan. 24 – Rendered various services to clients on account, ₱20,900.

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 31,685 32,100 24,180 160,000 27,500 85,000 135,465
`
Jan 24 20,900 20,900
31,685 53,000 24,180 160,000 27,500 85,000 156,365
Aside from investments made, capital also increase from revenue earned for cash or on credit. In
this case, revenue is rendered on account thus increasing Accounts Receivable and Capital.

Jan. 26 – Collected from credit customer for January 14 transaction

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 31,685 53,000 24,180 160,000 27,500 85,000 156,365
`
Jan 26 32,100 (32,100)
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

Jan. 27 – Returned defective equipment worth ₱3,000 purchased from Reyes Laboratories to be
deducted from the accounted balance

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 63,785 20,900 24,180 160,000 27,500 85,000 156,365
`
Jan 27 (3,000) (3,000)
63,785 20,900 24,180 157,000 27,500 82,000 156,365

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A return of defective equipment cause both equipment and notes payable to decrease.

Jan. 29 – Paid rent for the month, ₱7,100

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 63,785 20,900 24,180 157,000 27,500 82,000 156,365
`
Jan 29 (7100) (7,100)
56,685 20,900 24,180 157,000 27,500 82,000 149,265

Jan. 30 – Paid Reyes Lab & Equipment, ₱26,500

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 56,685 20,900 24,180 157,000 27,500 82,000 149,265
`
Jan 30 (26,500) (26,500)
30,185 20,900 24,180 157,000 27,500 55,500 149,265
Payment of a note payable causes cash and notes payable to decrease by ₱26,500

Jan. 31 – Supplies consumed during the period

ASSETS = LIABILITIES + CAPITAL

Date Cash Accounts Supplies Equipment Accounts Notes Wan,
Receivable Payable Payable Capital
Balances 30,185 20,900 24,180 157,000 27,500 55,500 149,265
`
Jan 31 (18,030) (18,030)
30,185 20,900 6,150 157,000 27,500 55,500 149,265

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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, Notation
Receivable Payable Payable Capital
Jan 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
Expense
12 820 (820)
14 32,100 32,100 Professional
Fees
15 (15,200) (15,200) Salaries
Expense
16 (3,500) (3,500) Drawing
18 (545) (545) Miscellaneo
us Expense
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