Analysing Business Transactions PDF

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A summary of analyzing accounting transactions...

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Analysing Business Transactions 1. Obtaining investments from owners- the first resource any new business needs is cash and other assets to operate the business. Investment transactions always involve a credit (increase) to capital and a debit (increase) to asset (whatever is invested). Let’s assume A will contribute P30, 000 of his personal funds to start the business. Accounting equation: Asset= Liabilities + Equity Cash 30,000= A, Capital 30,000 Journal entry Cash 30,000 A, Capital 30,000 To record initial investment 2. Borrowings from bank- When a business needs more cash, it may borrow the money from a bank. The agency lends money to the business and expects the loan to be repaid with interest. Debit cash (increase in asset) and credit payable (increase in liability) for the amount of loan obtained. Assume A Travel Agency obtains a P20, 000 loan from BDO for his business. Accounting equation: Asset= Liabilities + Equity Cash 20,000= Loans payable 20,000 Journal entryCash 20,000 Loans Payable 20,000 To record loan obtained 3. Purchase of asset- Once financing is complete, the business can purchase the resources necessary to run the business, such as building, equipment, supplies, etc. The business can either buy these resources with cash or borrow the money from suppliers and bank. Debit the asset acquired (increase in asset) and credit cash (decrease in asset) if it was purchased for cash or accounts payable (increase in liabilities) if the same is acquired on credit. Assume A Travel Agency buys chairs and tables, a c computer and a cash register, all for P40, 000 in cash. Accounting equation: Asset= Equipment 40,000 Cash (40,000)

Liabilities

+

Equity

NB: Prepayments fall under this type of transaction (acquisition of asset for cash). Journal entry Equipment 40,000 Cash 40,000 To record acquisition of equipment in cash Assume A Travel Agency buys chairs and tables, a c computer and a cash register, all for P40,000 on credit. Accounting equation: Asset= Liabilities + Equipment 40,000= Accounts Payable 40,000

Equity

Journal entry Equipment 40,000 Accounts Payable 40,000 To record acquisition of equipment on credit 4. Earning revenues- Revenue is earned when goods have been delivered or when services have been rendered to the customer, regardless of whether or not cash was received, for it maybe that goods were delivered or services rendered on credit. Debit cash if cash was received or accounts receivable (increase in asset) if customer wishes to pay later and credit service revenue (increase in equity). Assume the business rendered services to customers for P10, 000 cash and P20, 000 on account. Accounting equation: Asset = Liabilities + Equity Cash 10,000= Service revenue 30,000 Accounts receivable 20,000 Journal entry Cash 10,000 Accounts Receivable 20,000 Service Revenue 30,000 To record service revenue NB: When cash is received from customer but goods are not yet delivered or services are not yet rendered, no revenue is earned, rather there is liability (unearned service revenue) on the part of the business to deliver the goods or to render the service on a later date in view of the advance payment of the customer. Assume P2, 000 was received by A Travel Agency for services to be rendered the following month.

Accounting equation: Asset Cash P2, 000

= =

Liabilities Unearned service revenue P2, 000

+

Equity

Journal entry Cash 2,000 Unearned service revenue 2,000 To record receipt of cash for services not yet rendered 5. Incurring expenses- Businesses incur many types of expenses to generate the revenue. Debit expense account (decrease in equity) and credit cash (decrease in asset) if expense was paid or accounts payable (increase in liability) if expense is not yet paid. Let’s assume A Travel Agency incurs the following expenses during the first month of operations, paying for everything in cash: P2, 000 for rent, P2, 000 for wages to employees; and on account P600 for utilities, P300 for insurance, and P100 for advertising. Accounting equation: Asset Cash (P4, 000)

=

Liabilities Accounts Payable P1,000

+ Equity Rent expense (P2,000) Wages expense (P2, 000) Utilities expense (P600) Insurance expense (P300) Advertising expense (P100)

Journal entry Rent expense 2, 000 Wages expense 2, 000 Utilities expense 600 Insurance expense 300 Advertising expense 100 Cash 4,000 Accounts Payable 1,000 To record various expenses 6. Distribute profits to owners/Withdrawals- The business can use any profits it earns to buy more assets, pay creditors, or distribute profits to the owners. It may also be that the owner would want to withdraw some assets or cash which he/she has invested in the business. Let’s assume the business distributes P1, 000 to A at the end of the first month of operations. Withdrawing a portion of profits is how A “pays” herself or “draws” from the business each month.

Accounting equation: Asset Cash (1,000)

=

Journal entry A, Drawing 1,000 Cash 1,000 To record distribution of profit to A

Liabilities

+ Equity A, Drawing (1,000)...