Module 4

Analyzing Business Transactions

Analyzing Business Transactions

In analyzing business transactions based on the source documents,

preparers of financial information answers the following:
1. What accounting element or elements are affected?
2. What are their effects to the affected accounting element/s?
3. What appropriate account title will describe the debit and credit?
4. How much is the amount to be recorded?

T-Account
For discussion purposes, we use an account shaped as the letter “T.”
This is called the “T-account.” It is not used in actual accounting practice
but is useful in understanding business transactions.

T-Account
Debit Credit
The left hand side of a T-account is The right hand side of a T-account is
called the debit. This actually called the credit. This actually
represents the value received by the represents the value parted with by
business. the business.

Assets = Liabilities + Capital

Based on the accounting equation, Based on the accounting equation,
assets are on the left side of the T- liabilities and capital are on the left
account. In the recording phase, side of the T-account. In recording,
recorded on the debit side are: recorded on the credit side are:

Increases in: Increases in:

Assets Liabilities
Expenses Capital
Drawing Revenues
Decreases in: Decreases in:
Liabilities Assets
Capital Expenses
Revenues Drawing

Notes:
a. In every business transaction, there must always be a debit and a
credit. Some transactions may also require two or more accounts in
the debit or credit.
b. The increase side of each account is called their “normal balance.” If
they are decreased, they will be recorded on the other side, the credit
side. For example, assets like cash, accounts receivables, equipment

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 are normally in the debit side. But if these are decreased, they are
recorded on the credit side.
c. Recall the expanded accounting equation. Revenues increase the
capital therefore if revenues increased, they are recorded on the credit
side same with capital. But expenses and owner’s withdrawal
decreases the capital account, therefore they are recorded on the debit
side.

Summaries of the Effects of Business Transactions

Transactions Assets Liabilities Capital

1. Initial or additional investment of the
+ +
owner of any asset.
2. Investment of the owner of any asset
+ + +
but with attached liability.
3. Purchase of any asset in cash. +, -
4. Purchase of any asset in cash and
balance on open account (accounts
+, - +
payable) or issuance of note (notes
payable) for the balance.
5. Issuance of note to settle open account. +, -
6. Payment of open account or note
- -
issued.
7. Payment of note issued with interest. - - -
8. Payment of any expense. - -
9. Payment of any expense and balance on
- + -
account.
10. Incurrence of unpaid expense. + -
11. Income earned in cash or on
+ +
account.
12. Full or partial collection of
+, -
customer’s account.
13. Partial collection of customer’s
account and receipt of customer’s note +, +, -
for the balance.
14. Full collection of note with interest. +, - +
15. Owner’s withdrawal of any asset. - -
16. Consumption of supplies. - -

Account Titles Affected by Business Transactions

Transactions Assets Liabilities Capital

1. Initial or additional
+ Owner’s
investment of the owner of + Cash
Capital
cash.
2. Investment of the owner of + Mortgage + Owner’s
+ Land
land but with attached Payable Capital

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 liability.
3. Purchase of supplies in + Supplies
cash. - Cash
4. Purchase of equipment in
cash and balance on open
+ Equipment + Accounts
account (accounts payable)
- Cash Payable
or issuance of note (notes
payable) for the balance.
5. Issuance of note to settle + Notes
open account. Payable
- Accounts
Payable
6. Payment of open account or - Accounts
- Cash
note issued. Payable
7. Payment of note issued with - Notes - Interest
- Cash
interest. Payable Expense
8. Payment of advertising - Advertising
- Cash
expense. Expense
9. Payment of salaries expense + Salaries - Salaries
- Cash
and balance on account. Payable Expense
10. Incurrence of unpaid + Utilities - Utilities
utilities expense. Payable Expense
11. Income earned in cash or + Cash /
+ Service
on account. Accounts
Income
Receivable
12. Full or partial collection + Cash
of customer’s account. - Accounts
Receivable
13. Partial collection of + Cash
customer’s account and + Notes
receipt of customer’s note Receivable
for the balance. - Accounts
Receivable
14. Full collection of note + Cash
+ Interest
with interest. - Notes
Income
Receivable
15. Owner’s withdrawal of - Owner’s
- Cash
cash. Withdrawal
16. Consumption of supplies. - Supplies
- Supplies
Expense

Debits and Credits in Business Transactions

Transactions Debit Credit

1. Initial or additional Increase in Asset: Increase in Capital:
investment of the owner of Cash or any other Jay-R, Capital

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 any asset. asset
2. Investment of the owner of Increase in
any asset but with attached Liabilities:
Increase in Asset:
liability. Mortgage Payable or
Land or any other
any other liability
asset
Increase in Capital:
Jay-R, Capital
3. Purchase of any asset in Increase in Asset:
Decrease in Asset:
cash. Supplies or any
Cash
other asset
4. Purchase of any asset in Increase in
cash and balance on open Liabilities: Accounts
Increase in Asset:
account (accounts payable) Payable or Notes
Equipment or any
or issuance of note (notes Payable
other asset
payable) for the balance. Decrease in Asset:
Cash
5. Issuance of note to settle Decrease in Increase in
open account. Liabilities: Accounts Liabilities: Notes
Payable Payable
6. Payment of open account or Decrease in
note issued. Liabilities: Accounts Decrease in Asset:
Payable or Notes Cash
Payable
7. Payment of note issued with Decrease of
interest. Liabilities: Notes
Payable Decrease in Asset:
Increase in Cash
Expenses: Interest
Expense
8. Payment of any expense. Increase in
Expenses:
Decrease in Asset:
Advertising Expense
Cash
or any other
expense
9. Payment of any expense and Decrease in Asset:
balance on account. Increase in Cash
Expenses: Salaries Increase in
Expense or any Liabilities: Salaries
other expense Payable or any other
liability
10. Incurrence of unpaid Increase in Increase in
expense. Expenses: Utilities Liabilities:
Expense or any Utilities Payable or
other expense any other liability
11. Income earned in cash or Increase in Asset:
Increase in Income:
on account. Cash or Accounts
Service Income
Receivable
12. Full or partial collection Increase in Asset: Decrease in Asset:
of customer’s account. Cash Accounts Receivable

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13. Partial collection of Increase in Asset:
customer’s account and Cash Decrease in Asset:
receipt of customer’s note Increase in Asset: Accounts Receivable
for the balance. Notes Receivable
14. Full collection of note Decrease in Asset:
with interest. Increase in Asset: Notes Receivable
Cash Increase in Income:
Interest Income
15. Owner’s withdrawal of Increase in Decrease in Asset:
any asset. Drawing: Cash or any other
Jay-R, Drawing asset
16. Consumption of supplies. Increase in
Decrease in Asset:
Expenses: Supplies
Supplies
Expense

Comprehensive Example
Jede Esther opened up a laundry shop to cater the needs of those
under COVID-19 home quarantine in March 2020. A summary of her
transactions for the month appears as follows:

Transaction Analysis
Transaction 1: Jede Esther invested P80,000 to open up the business.
a. What accounting element or elements are affected? Assets and Capital
b. What are their effects to the affected accounting element/s?
Assets Increase and Capital Increase
c. What appropriate account title will describe the debit and credit?
Debit: Cash; Credit: Esther, Capital
d. How much is the amount to be recorded? P80,000

Transaction 2: Paid business registration fees and other requirements

amounting to P2,000.
a. What accounting element or elements are affected?
Expenses and Assets
b. What are their effects to the affected accounting element/s?
Expenses Increase and Assets Decrease
c. What appropriate account title will describe the debit and credit?
Debit: Taxes and Licenses Expense; Credit: Cash
d. How much is the amount to be recorded? P2,000

Transaction 3: Purchased washing machines, P20,000, in cash.

a. What accounting element or elements are affected? Assets
b. What are their effects to the affected accounting element/s?
Assets Increase and Decrease
c. What appropriate account title will describe the debit and credit?
Debit: Equipment; Credit: Cash
d. How much is the amount to be recorded? P20,000

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Transaction 4: Bought supplies, P4,000, and office furniture, P10,000, on
account.
a. What accounting element or elements are affected?
Assets and Liabilities
b. What are their effects to the affected accounting element/s?
Assets Increase and Liabilities Increase
c. What appropriate account title will describe the debit and credit?
Debit: Supplies, Furniture and Fixtures; Credit: Accounts Payable
d. How much is the amount to be recorded? P4,000, P10,000, and
P14,000, respectively

Transaction 5: Rendered services to those from Brgy. Gohang and earned

P15,000 in cash.
a. What accounting element or elements are affected? Assets and Income
b. What are their effects to the affected accounting element/s?
Assets Increase and Income Increases
c. What appropriate account title will describe the debit and credit?
Debit: Cash; Credit: Service Income
d. How much is the amount to be recorded? P15,000

Transaction 6: Paid ½ of the account in #4 and issued a note for the balance.
a. What accounting element or elements are affected?
Assets and Liabilities
b. What are their effects to the affected accounting element/s?
Liabilities Decrease, Assets Decrease, Liabilities Increase
c. What appropriate account title will describe the debit and credit?
Debit: Accounts Payable; Credit: Cash, Notes Payable
d. How much is the amount to be recorded? P14,000, P7,000 and
P7,000, respectively

Transaction 7: Paid salaries of employee, P5,000.

a. What accounting element or elements are affected?
Expenses and Assets
b. What are their effects to the affected accounting element/s?
Expenses Increase and Assets Decrease
c. What appropriate account title will describe the debit and credit?
Debit: Salaries Expense; Credit: Cash
d. How much is the amount to be recorded? P5,000

Transaction 8: Rendered services to customers on account from Brgy. San

Fernando, P13,000.
a. What accounting element or elements are affected? Assets and Income
b. What are their effects to the affected accounting element/s?
Assets Increase and Income Increases
c. What appropriate account title will describe the debit and credit?
Debit: Accounts Receivable; Credit: Service Income
d. How much is the amount to be recorded? P13,000

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Transaction 9: Received IFELCO bills of P4,500.
a. What accounting element or elements are affected?
Expenses and Liabilities
b. What are their effects to the affected accounting element/s?
Expenses Increase and Liabilities Increase
c. What appropriate account title will describe the debit and credit?
Debit: Utilities Expense; Credit: Utilities Payable
d. How much is the amount to be recorded? P4,500

Transaction 10: Paid rent expense for the month, P2,000.

a. What accounting element or elements are affected?
Expenses and Assets
b. What are their effects to the affected accounting element/s?
Expenses Increase and Assets Decrease
c. What appropriate account title will describe the debit and credit?
Debit: Rent Expense; Credit: Cash
d. How much is the amount to be recorded? P2,000

Transaction 11: Brgy. Uhaj residents availed of the laundry services giving a
promissory note, P11,000.
a. What accounting element or elements are affected?
Assets and Income
b. What are their effects to the affected accounting element/s?
Assets Increase and Income Increase
c. What appropriate account title will describe the debit and credit?
Debit: Notes Receivable; Credit: Service Income
d. How much is the amount to be recorded? P11,000

Transaction 12: Jede Esther used P10,000 of business cash for family use.
e. What accounting element or elements are affected?
Drawing and Assets
f. What are their effects to the affected accounting element/s?
Drawing Increases and Assets Decrease
g. What appropriate account title will describe the debit and credit?
Debit: Esther, Drawing; Credit: Cash
h. How much is the amount to be recorded? P10,000