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ACTG 101/101A

ACCOUNTING
PRINCIPLES/
FUNDAMENTALS
OF ACCOUNTING
TEXTBOOK: SIMPLIFIED ACCOUNTING FOR
BUSINESS (INTERNATIONAL EDITION)
AUTHORS: ZENAIDA VERA-CRUZ AND
MARIBEL VERA-CRUZ

TOPIC 3:
PROCESSING
TRANSACTIONS
OF A SERVICE
BUSINESS

Coverage
Financial Reports
Analyzing transactions to start a
business
Accounting Equation
Chart of Accounts
Journalizing or recording various
business transactions
Classifying and summarizing the
transactions through manual general
ledger and trial balance, respectively

FINANCIAL REPORTS
Income Statement shows how wealth is
produced by listing the revenues earned and
expenses incurred by the business
Statement of Owners Equity shows why the
net worth changed by listing the activities that
caused it to increase or decrease
Statement of Cash Flows shows what happened
to the cash by enumerating the activities of cash
received and cash used by the business
Statement of Financial Position shows how the
wealth of the business stands by enumerating
the assets, liabilities and net worth of the
4
business

FINANCIAL REPORTS - Example

Report form of
Statement of Financial
Position Elements are presented
in vertical order
Header:
Name of Company
Name of Statement
Date of Statement
Date starts with as of
SFP can be prepared
anytime even if
operation of the
business has not
started yet
Peso sign at start of
each column
Peso sign under each
single line
Double line at the end
of financial report
6

Header same as SFP


Can only be prepared after
the business has engaged in
its business activities

Header same as SFP


Net Income added to the
beginning capital then
withdrawals are
deducted to come up
with ending balance of
capital

Header same as SFP


Cash flow reporting from
operating activities can be
prepared by the direct and
indirect method
Direct method shows inflows
and outflows based on actual
cash transactions during the
period.
Cash ending balance should be
the same amount reflected in
the Statement of Financial
Position

Header same as SFP


Indirect method reporting of
Operating activities starts with
Net Income as reported in the
Income statement and
adjustments such as: a.
Changes during the period in
inventories, operating
receivables and payable; b.
Non-cash items such as
depreciation, provisions,
deferred taxes, unrealized
foreign currency gains and
losses, undistributed profits of
associates and minority
interests; c. All other items for
which the cash effects are
investing or financing
IAS 7 encourages reporting
cash flows from operating
activities using the direct
method

10

RELATIONSHIPS
AMONG
FINANCIAL
STATEMENTS
11

FINANCIAL STRUCTURE OF A BUSINESS

Based on the framework of


accounting, the financial position or
structure of a business entity is based
on three elements called assets,
liabilities, and owners equity while its
financial performance is based on two
elements called revenue and expense
13

FINANCIAL STRUCTURE OF A BUSINESS


Assets defined as things of value owned
by the business. They benefit the
business, are being used in operating the
business and are expected to have long
life. Assets initially come from investors
and secondarily from creditors
Liabilities defined as debts or obligations
of the business owing to outside parties
like the banks, financing companies and
suppliers of goods and services. These are
obligations expected to be paid in the
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future.

FINANCIAL STRUCTURE OF A BUSINESS


Owners Equity defined as the residual
right or interest of the owner in the
entitys assets; after the creditors and
suppliers claims are satisfied

15

BUSINESS TRANSACTIONS
Starting point in the accounting
process is an analysis of the
transactions of a business
It is any financial event that changes
the resources of a firm
Accountant must look at the effects of
each business transaction to decide
what information to record and where to
record it
To be able to analyze the transaction,16
the bookkeeper or accountant needs to

BUSINESS TRANSACTIONS
It is an exchange of values between
two parties in terms of money
Values exchanged are assumed to be
equal
Three features of a transaction:
There is an exchange of values
There are two parties
It is in terms of money

Must always have a dual effect: value


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received there is an equal value parted
Gave rise to the Bookkeeping System

BUSINESS TRANSACTIONS
Example 1: Doria Xerox Center paid
P500 cash for a calculator bought from
National Bookstore
Exchange of values: value received
calculator from National Bookstore and
value parted cash paid by Doria Xerox
Shop
Two parties: National Bookstore and
Doria Xerox Shop
Terms of money: P500
18

BUSINESS TRANSACTIONS
Example 2: Mr. Cruz paid P1,500 for
his haircut done at Davids Salon
Exchange of Values?
Two parties?
Terms of Money?
19

BUSINESS TRANSACTIONS
Example 3: Avon Cosmetics paid SGV
and Co. P150,000 for accounting
services.
Exchange of Values?
Two parties?
Terms of Money?
20

BUSINESS TRANSACTIONS
Transactions not considered financial in
nature cannot be recorded in the books
of the entity no exchange of values
Examples:
Soriano hired two tourist guides for an
hourly rate of P100 each
A lease contract was signed for the use of
an office space at a monthly rental of
P18,000
An order for medical supplies was placed
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with Good Health Trading amounting to
P5,000

ACCOUNT
a : a statement explaining one's conduct
b : a statement or exposition of reasons,
causes, or motives <no satisfactory
account of these phenomena>
c : a reason for an action : basis <on
that account I must refuse>
22

ACCOUNT
names assigned to transactions
involved in an exchange of values
Brief description of items that
represent the accounting elements
Devise used to record the changes
(increases or decreases) in the
accounting elements

23

ASSETS
Resources or things of value owned by
an enterprise
Resource controlled by the entity as a
result of past events and from which
future economic benefits are expected
to flow to the entity
The future economic benefit embodied
in an asset is the potential to contribute,
directly or indirectly, to the flow of cash
and cash equivalents to the entity
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Normally recorded as debit balance

ASSETS
Classified into
Current
Cash or cash equivalent not restricted for
current use
Expected to be realized or held for sale
or consumption in the normal course of
the enterprises operating cycle
Held primarily for trading purposes for
short term and expected to be realized
within 12 months of the SFP date

Non Current

25

ASSETS
Cash
any item on hand with monetary value
that a bank would accept for deposit
Includes coins and currencies,
personal checks, money orders,
travelers check, made payable to the
business and bank drafts
Also includes funds in the bank as
savings or current deposit
26

ASSETS
Accounts Receivable
Amounts collectible
Represents debtors oral promise to
pay certain amount to the business and
the right of the business to collect
certain amount in peso
Example would be receivables from
sale of goods and services
27

ASSETS
Notes Receivable
Promissory note received by the
business from its debtors and/or
customers
Promissory note is a written promise to
pay a certain amount on specified or
determinable date
Accrued Interest Receivable
Interest earned on notes receivable
but not yet received in cash
28

ASSETS
Inventories
Assets held for sale in the normal
operation of the business
Examples are merchandise inventory,
work in process inventory and raw
materials inventory
Office Supplies
Various supplies bought for use in the
office but are still unused
Examples are coupon bonds, ink,
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ballpen, and janitorial suppliers

ASSETS
Prepaid Expenses
Expenses paid in advance
Expenses not yet incurred or used

30

COMMONLY USED NON


CURRENT ASSETS
Land
Site owned by the business on which
the business building is constructed
Not subjected to depreciation
Building
Structure owned by the business used
in the operation of the business
31

COMMONLY USED NON


CURRENT ASSETS
Furniture and Fixture
Long-lived items used by the business
including store furnishings, such as
showcases, counters, containers, display
racks, as well as furniture used for office
purposes, such as desks, chairs, and
cabinets
Office Equipment
Computers, printers, fax machines,
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aircons and air fan units

COMMONLY USED NON


CURRENT ASSETS
Delivery Equipment
Cars and trucks used in delivering
goods and services

33

ASSET CONTRA-VALUATION ACCOUNTS


Allowance for Doubtful Accounts
Refers to an amount estimated uncollectible on
receivable in compliance with the principle of
conservatism
Contra account for related receivable
Other terms used: Allowance for Uncollectible
Accounts or Allowance for Bad Debts
Accumulated Depreciation
Aggregate period costs of using a depreciable
plant asset
Examples are accumulated depreciation of
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building, accumulated depreciation of
machinery

LIABILITY ACCOUNTS
Present obligation of the entity arising
from past events, the settlement of
which is expected to result in an outflow
from the entity of resources embodying
economic benefits
Obligations may be legally enforceable
as a consequence of a binding contract
or statutory requirement
Represent claims against the assets of
the business
35
Normally a credit balance

LIABILITY ACCOUNTS
Classified into
Current
Expected to be settled in the normal course
of the enterprises operating cycle
Due to be settled within 12 months of the
Statement of Financial Position date

Non Current Liabilities

36

LIABILITIES
Accounts Payable
Obligation or debts to creditors for
money borrowed or merchandise and
other assets bought on credit
Examples are obligations arising from
purchases on account
Notes Payable
Promissory note issued by the business
to its creditors for money borrowed or
merchandise and other assets bought 37
on
credit

LIABILITIES
Accrued Interest Payable
Interest incurred in the current period
but not yet paid
SSS Premium Payable
Amount of employee and employer
contribution to SSS which are not yet
remitted to SSS
Withholding Tax Payable
Amount of income tax withheld from
the salary of employees in behalf of BIR
38
that the employer has to remit to BIR on

EXAMPLES OF NON
CURRENT LIABILITIES
Loans Payable
Arises for amounts borrowed
Mortgage Payable
Supported by a chattel mortgage such
as land which is attached to the liability
and can be subject to attachment when
business fails to pay
39

OWNERS EQUITY ACCOUNTS


Residual amount after deducting
liabilities from assets
Comprises the capital contribution and
withdrawals by the owner
Increased by capital contribution of
owner and net income of the business
and decreased by the owners
withdrawals and losses of the business
40

OWNERS EQUITY ACCOUNTS


Terminologies used
Sole Proprietorship: Owners Capital
Partnership: Partners Capital
Corporation: Shareholders Equity
Normally credit balance
Drawing
Temporary account used to record
initially the amount taken by the owner
from the business. This is closed to the
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capital account of the owner at the end
of the accounting period

ACCOUNTING EQUATION
Would always have an equal left side
and right side
If all assets are claimable by the owner,
the accounting equation is simply:
ASSETS = OWNERS EQUITY
Example: Peter Soriano invested
P2,000,000 cash in a good business
ASSETS
=
OWNERS
EQUITY
Cash P2,000,000
Soriano, Capital 42
P2,000,000

ACCOUNTING EQUATION
If there is a claim from both the creditor
and owner, the accounting equation
becomes longer
ASSETS = LIABILITIES + OWNERS
EQUITY
Example: Assume that Soriano borrowed
cash of P1,000,000 from the bank for use
in the business
ASSETS
= LIABILITIES + OWNERS
EQUITY
43
Cash P3,000,000
P2,000,000

Loan Payable P1,000,000 Soriano, Capital

DEMONSTRATION PROBLEM
1
Assets were invested by the owner to set
up a travel business
March 1: May Gomez opened a tour and
travel agency by investing cash of
P50,000. She has three cars worth
P1,000,000 but decided to invest only
two of these cars worth P750,000
Analysis: The asset of the business will
increase in the form of cash P50,000 and
cars P750,000 with a corresponding
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increase in owners equity

DEMONSTRATION PROBLEM
1

45

DEMONSTRATION PROBLEM
1
Cash was borrowed for use by the
business
March 3: Gomez borrowed P100,000
cash from Metrobank for use in the
business.
Analysis: The assets of the business will
increase again in cash by P100,000 with
a corresponding increase in liability

46

DEMONSTRATION PROBLEM
1

47

DEMONSTRATION PROBLEM
1
Additional asset was purchased for cash
March 7: Bought tables and chairs from
Blims and paid cash of P45,000
Analysis: The assets of the business will
increase in the form of furniture and
decrease in the form of cash. Total
assets will still be the same since there48
was only a change in its form. Note that

DEMONSTRATION PROBLEM
1

49

DEMONSTRATION PROBLEM
1
Additional asset was purchased on
account
March 15: Various equipment were
purchased on account from National
Winners for P55,000
Analysis: The assets of the business will
increase in the form of equipment with a
corresponding increase in liabilities
50

DEMONSTRATION PROBLEM
1

51

DEMONSTRATION PROBLEM
1
Cash was withdrawn by the owner
March 18: Gomez made a cash
withdrawal of p5,000 for personal use
Analysis: The assets of the business will
decrease in the form of cash P5,000 with
a corresponding decrease in the owners
equity since owner recovered part of her
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investment by withdrawing cash

DEMONSTRATION PROBLEM
1

53

DEMONSTRATION PROBLEM
1
Cash was paid for liability of the business
March 20: The account due to National
Winners was paid in cash
Analysis: Assets of the business will
decrease with a corresponding decrease
in liabilities
54

DEMONSTRATION PROBLEM
1

55

DEMONSTRATION PROBLEM
1
Application of Accounting Principles
March 1: Business Entity Concept
March 7 & 15: Exchange Price or Cost
Concept
March 3, 7, 15 and 20: Objectivity
Principle

56

DEMONSTRATION PROBLEM
1

57

DEMONSTRATION PROBLEM
2
January 2: Copy Clear located in front of
Robinsons Manila started its operation on
January 2, 2015. The owner, Susan
Palacio, invested cash of P20,000 and
equipment of P48,000
Analysis:

58

DEMONSTRATION PROBLEM
2

59

DEMONSTRATION PROBLEM
2
January 5: Bought furniture and fixtures
worth P6,000 on account

Analysis:

60

DEMONSTRATION PROBLEM
2

61

DEMONSTRATION PROBLEM
2
January 7: Bought additional
photocopying machine for P20,000.
Terms: 50% down, balance on account
to be paid at the end of the month
Analysis:

62

DEMONSTRATION PROBLEM
2

63

DEMONSTRATION PROBLEM
2
January 8: Hired a helper on commission
basis, based on 10% of sales, to operate
the machine

Analysis:

64

DEMONSTRATION PROBLEM
2

65

DEMONSTRATION PROBLEM
2
January 10: Ms. Palacio withdrew P1,500
cash for personal use

Analysis:

66

DEMONSTRATION PROBLEM
2

67

DEMONSTRATION PROBLEM
2
January 15: Bought supplies costing
P3,000 and paid cash

Analysis:

68

DEMONSTRATION PROBLEM
2

69

DEMONSTRATION PROBLEM
2
January 22: The account of January 5 is
due. Ms. Palacio paid this from her
personal cash.

Analysis:

70

DEMONSTRATION PROBLEM
2

71

DEMONSTRATION PROBLEM
2
January 30: Ms. Palacio issued a
promissory note of the account of
January 7

Analysis:

72

DEMONSTRATION PROBLEM
2

73

DEMONSTRATION PROBLEM
2

74

BUSINESS ACTIVITIES
Business Transactions generally
classified into:
Financing: includes investment made
by owner, borrowed amounts from banks
and other entities, drawings made by
the owner and repayments to lenders
Investing: includes acquisition of
properties such as land, furniture,
machineries and equipment as well as
the eventual disposal of any of these on
replacement or retirement date
75

BUSINESS ACTIVITIES
Business Transactions generally
classified into:
Operating: relating to the earning
activities of the enterprise such as
selling of goods or services and
incurring of services or expenses

76

CHARACTERISTICS OF
FINANCIAL INFORMATION
Understandability: users should know how to read
and use financial reports. It requires that:
Terminologies used must be clear
Form and presentation orderly
Users have a reasonable knowledge of finance,
economics and accounting to be able to make a good
assessment and sound judgment

Relevance: prescribes the quality of information;


should give a clear picture of what happened to the
business; information contained in the reports
should make it possible for the users to predict what
will be the direction of the business in the years to
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come; gives users feedback of how much the
company earned

CHARACTERISTICS OF
FINANCIAL INFORMATION
Reliability: degree of confidence users
have on financial statements because they
believe in the truthfulness of the reports,
that these are free from material errors or
misstatements
Comparability: information becomes more
meaningful because users can identify
changes taking place in an entity, between
two or more periods so that users will be
able to determine the trend of the business;
this may also be applied between two or 78
more companies

EXPANDING THE EQUATION TO


SHOW THE OPERATING
RESULT OF THE BUSINESS
ASSETS = LIABILITIES + OWNERS
EQUITY
Increases due to
Investments &
Revenues
Decreases
due to
Withdrawals and
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Expenses

REVENUES
Represent inflow of cash or other assets
coming from a client or customer for
service rendered or for merchandise sold
Represent the earnings of the business
from sales of goods or service rendered
Affect financial position in that it
increases assets which in turn increases
owners equity or net worth
Have nominal credit balance
80

COMMON REVENUE ACCOUNTS


Sales account used to summarize
sale of good or a trade or
merchandising business; includes cash
sales and sales on account
Service income earnings derived
from service rendered by a servicing
business to its customers; may be cash
or on account
Professional fee earnings derived
from services rendered by a
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professional or professional servicing

COMMON REVENUE ACCOUNTS


Interest Income earnings representing
the time value of money derived from
promissory notes
Rent Income income earned from
allowing others to use the property or
facility of the business

82

COMMON REVENUE ACCOUNTS


Gain on Sale of Other Assets income
derived from the sales of assets used in
the business operation; there is gain on
sale if proceeds exceed cost of the
disposed asset. Examples: gain on sale
on equipment, gain on sale of
investments, gain on sale of land

83

EXPENSES
The consumption of assets or using
up of service to generate revenue
Costs incurred in conducting the
business activities
Have nominal debit balance

84

COMMON EXPENSE ACCOUNTS


Cost of Sales value of merchandise
sold
Supplies expense amount of supplies
consumed or used by the business
during the period
Sales and Wages expense amount
paid to services rendered by the
employees in the operation of the
business
Insurance expense amount of
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insurance policy incurred during the

COMMON EXPENSE ACCOUNTS


Transportation expense fare paid to
public utility vehicles
Taxes and Licenses expense cost of
local as well as national taxes that are
incurred and required to be paid in
connection with the conduct of the
business; examples are cost to acquire
mayors permit, registration cost of the
business, percentage tax on sales, etc
86

PROFIT OR LOSS
The difference between the total
income earned and the total expenses
incurred spells the success or failure of
the organization
If income is greater than expenses, the
result is an profit
If income is lesser than expenses, the
result is a loss
87

PROFIT OR LOSS
Effect in the accounting equation of a
profit
Revenues Costs & Expenses = Net
Income (Loss)
P15,000

P5,000
=
P10,000
Assets Increase
Increase
Cash P10,000
P10,000

Owners Equity
Net Income

88

DEMONSTRATION PROBLEM
1
Cash received for revenue earned
March 21: A tourist hired the services of
the agency for a tour in Baguio. Cash of
P15,000 was received from the tourist
Analysis: Increase asset cash P15,000
with a corresponding increase in Owners
equity for services rendered to the
tourist
89

DEMONSTRATION PROBLEM
1

90

DEMONSTRATION PROBLEM
1
Paid cash for expenses incurred
March 22: Cash was paid for following:
gas and oil, P500; repair of car, P1,000
Analysis: Decrease in asset cash by
P1,500 with a corresponding decrease in
owners equity for expenses incurred
91

DEMONSTRATION PROBLEM
1

92

DEMONSTRATION PROBLEM
1
Revenue rendered on account
March 24: Mr. Gray hired the services of
the agency for his visitors and promised
to pay P16,000 on March 31
Analysis: Increase in asset accounts
receivable by P16,000 with a
corresponding increase in owners equity
for the revenue earned
93

DEMONSTRATION PROBLEM
1

94

DEMONSTRATION PROBLEM
1
Paid cash for expense incurred
March 25: Paid telephone bill for P500

Analysis: Decrease in asset cash by


P500 with a corresponding decrease in
owners equity for utility expense
incurred
95

DEMONSTRATION PROBLEM
1

96

DEMONSTRATION PROBLEM
1
Revenue earned with a down payment,
balance on account
March 27: The Faculty Club of Angelicum
Academy hired the services of the
agency for a tour in Manila. A bill was
issued to them for P20,000, 50% of
which was collected
Analysis: Increase in asset cash P10,000
and accounts receivable P10,000 with a
corresponding increase in owners equity
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for revenue of P20,000

DEMONSTRATION PROBLEM
1

98

DEMONSTRATION PROBLEM
1
Customers account collected in cash
March 30: Mr. Gray paid on half of his
account in cash

Analysis: Increase in asset cash P8,000


which a corresponding decrease in
another asset accounts receivable. The
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accounting equation will remain the
same since there was only a change in

DEMONSTRATION PROBLEM
1

100

DEMONSTRATION PROBLEM
1
Paid cash for expenses incurred
March 31: Paid for rental of office space,
P10,000 and salaries of employees and
workers P9,000
Analysis: Decrease in asset cash
P19,000 with a corresponding decrease
in owners equity for expenses incurred
101

DEMONSTRATION PROBLEM
1

102

DEMONSTRATION PROBLEM
1

CHART OF ACCOUNTS
Chart of Accounts
Listing of all the accounts it uses to
record economic transactions
Number and nature of accounts
depend on the type of business
operation
Usually arranged in the financial
statement order with assets listed first,
followed by liabilities and lastly by
owners equity
104

CHART OF ACCOUNTS
Happy Tour and Travel
Chart of Accounts
Current Assets 101 to 104
101 Cash
102 Accounts Receivable
102.1
Allowance for Bad Accounts
103 Notes Receivable
104 Office Supplies
105

CHART OF ACCOUNTS
Happy Tour and Travel
Chart of Accounts
Plant and Equipment 2o1 to 203
201
Cars
201.1
Accumulated Depreciation - Cars
202
Equipment
202.1
Accumulated Depreciation - Equipment
203
Furniture & Fixtures
203.1
Accumulated Depreciation
Furniture & Fixtures
106

CHART OF ACCOUNTS
Happy Tour and Travel
Chart of Accounts
Current Liabilities 301 - 303
301 Accounts Payable
302 Loans Payable
303 Utilities Payable
Long Term Liabilities 401 to 402
401 Notes Payable
402 Mortgage Payable

107

CHART OF ACCOUNTS
Happy Tour and Travel
Chart of Accounts
Equity 501 to 502
501 Gomez, Capital
502 Gomez, Drawings
Revenues 601 to 603
601 Service Income
108

CHART OF ACCOUNTS
Happy Tour and Travel
Chart of Accounts
Expenses 701 to 706
701 Gas & Oil
702 Rent Expense
703 Repair Expense
704 Salaries Expense
705 Supplies Expense
706 Utilities Expenses
109

T-ACCOUNT
Account may be expressed in a T
device form
Debits are on the left hand while
credits are on the right hand side of
the letter t
Parts of a T-account
Cash
Debit
Credit

110

DEBITS AND CREDITS


Debit
Latin debitum which means a debtor or
borrower
Value received in a business
Left hand side of the equation
charge
Credit
Latin creditum which means creditor or
lender
Corresponding value parted with
Right hand side of the equation

NORMAL BALANCE OF
STATEMENT OF FINANCIAL
POSITION ACCOUNTS

112

NORMAL BALANCE OF
STATEMENT OF INCOME
STATEMENT ACCOUNTS

113

NINE TYPES OF EFFECTS OF


TRANSACTIONS
1. Increase in Asset = Increase in
Liability
2. Increase in Asset = Increase in
Owners Equity
3. Increase in one Asset = Decrease
in another Asset
4. Decrease in Asset = Decrease in
Liability
5. Decrease in Asset = Decrease in
Owners Equity

114

NINE TYPES OF EFFECTS OF


TRANSACTIONS
6. Increase in Liability = Decrease in
Owners Equity
7. Increase in Owners Equity =
Decrease in Liability
8. Increase in one Liability =
Decrease in another Liability
9. Increase in one Owners Equity =
Decrease in another Owners
115
Equity

RULES OF DEBIT AND CREDIT


Based on the normal balance of an
accounting element or account
Usual position of the account in the Taccount
Normal balance provides basis in
analyzing when to debit and credit an
account

116

RULE 1 - ASSETS
Debit

to increase the amount of


asset, Credit to decrease its amount

RULE 1 - ASSETS
To
1.
2.

illustrate:
January 5, Pearl Services bought P3,000
worth of supplies on account
Pearl used P2,500 worth of supplies
during the month

RULE 1 - ASSETS
Example:
1.

January 10, Pearl Services bought


P100,000 worth of equipment on
account

119

RULE 2 - LIABILITY
Credit

to increase the amount of


liability, Debit to decrease its amount

120

RULE 2 - LIABILITY
To
1.
2.

illustrate:
January 5, Pearl Services bought P3,000
worth of supplies on account
Pearl paid P1,800 for the said obligation

121

RULE 3 OWNERS EQUITY

Credit to increase the capital account. Debit to


decrease its amount

122

RULE 3 OWNERS EQUITY


To

illustrate:

January 1 - J. Pearl invested P90,000


cash into his business
2. June 1 J. Pearl withdrew P60,000
cash as permanent withdrawal from
the business
1.

123

RULE 4 REVENUE
Credit

to increase the revenue


account. Debit to decrease its
amount.

124

RULE 4 REVENUE
To
1.
2.

illustrate:
December 1 Pearl Service recorded
service income of P10,000 cash
December 31 Pearl determined that the
recorded service income on December 31
should not be 10,000. The correct amount
is P1,000. Pearl reduced the service
income by P9,000

125

RULE 5 EXPENSE
Debit

to increase the expense


account. Credit to decrease its
amount.

126

RULE 5 EXPENSE
To
1.
2.

illustrate:
December 15 Pearl Service paid P12,000
for rent expense
December 31 Pearl discovered that the
correct amount of rent expense is P1,200
instead of P12,000. Pearl reduced the rent
expense account by P10,800

127

Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet
Asset

= Liability

Income Statement
+ Equity

Revenue

- Expense

Debit

Credit

128

THE DEBIT AND CREDIT


RULES
1. Determine the types of accounts the
transactions affect-asset, liability,
revenue, expense or draw account.
2. Determine if the transaction
increases or decreases the account's
balance.
3. Apply the debit and credit rules
based on the type of account and
whether the balance of the account
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will increase or decrease.

SIMPLE DEBIT/CREDIT RULE


All Accounts thatNormally Have a
Debit BalanceareIncreased with
a Debitby placing the amount in
theLeft Columnof the account
andDecreased with a Creditby
placing the amount in theRight
Columnof the account.

Assets
Draws
Expenses

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SIMPLE DEBIT/CREDIT RULE


All Accounts thatNormally have a
Credit BalanceareIncreased with
a Creditby placing the amount in
theRight Columnof the account
andDecreased with a Debitby
placing the amount in theLeft
Columnof the account.

Liabilities
Owner's Equity ( Capital )
Revenue

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