4 FAR100 Analysis of Transaction.pdf

ANALYZING BUSINESS TRANSACTIONS and THE RULES OF DEBIT AND CREDIT FAR100 Financial Accounting and Reporting Fundamentals of Accounting Ross Catherine P. Lero, CPA  DEFINITION OF ACCOUNTING Accounting...

ANALYZING BUSINESS TRANSACTIONS and THE RULES OF DEBIT AND CREDIT FAR100 Financial Accounting and Reporting Fundamentals of Accounting Ross Catherine P. Lero, CPA  DEFINITION OF ACCOUNTING Accounting American AICPA Committee on Standards Council Accounting Association Accounting Terminology Accounting is a service Accounting is a process of Accounting is an art of activity whose function is identifying, measuring and recording, classifying, to provide quantitative communciating economic sumamrizing in a significant information, primarily information to permit manner and in terms of financial in nature, about informed judgements and money, transactions, and economic entities that is decisions by users of the events which are, in part at intended to be useful in information. least, of a financial character, making conomic decisions. and interpreting ther esults thereof. Accounting Defined From the three definitions, the most important points are as follows: v Accounting is about quantitative information v The information is financial in character v The information is useful in decision making  PHASES OF ACCOUNTING Recording Classifying Summarizing Interpreting Routine and mechanical Sorting and grouping Completion of financial Analyzing, interpreting process of writing down similar and interrelated statements and other and communicating the transactions in the transactions and events accounting contents of the financial books of accounts in a (Posting) requirements. statements to chronological manner interested parties as a (Journalizing) Trial balance basis for them to make Worksheet decisions. Identifying Closing and Analyzing reversing entries Measuring  BOOKKEEPING vs. ACCOUNTING Bookkeeping Accounting The process of systematically Requires complete and accurate recording the business transactions bookkeeping records necessary in chronological manner. to analyze and interpret Systematic – it follows procedures financial reports. and principles Chronological – transactions are recorded in order of date of occurrence. Despite the difference in function, bookkeeping and accounting are useless without the other. BUSINESS TRANSACTIONS AND EVENTS An event or transactions is accountable if it affects the assets, liabilities, and equity of a specific entity. Business Transactions v External Transactions v Internal Transactions For every value received, another value is given away as exchange. These values are measured in pesos and are presumed to be equal. Value Received = Value Parted With Debit = Credit Business transactions are analyzed from the point of view of the business. “Always consider yourself as the business when analyzing transactions.”  If I give you an eraser, and Analysis of Business you will give me a piece of Transactions chalk in return as an exchange, what is your value received and value parted with? Value received = eraser Value parted = piece of chalk Debit, eraser and Credit, piece of chalk  If I give you a ballpen, and Analysis of Business you will give me a piece of Transactions paper in return as an exchange, what is your value received and value parted with? Value received = ballpen Value parted = piece of paper Debit, ballpen and Credit, piece of paper  Analysis of Business Bought a car for cash, Php 850,000 Transactions 1. Who bought the car? The business Identifying 2. What is the value received? Car 3. What is the value parted with? Analyzing Money 4. What is the peso equivalent of this exchange? Php 850,000 Measuring Debit, value received – car, Php 850,000 Credit, value parted with – money, Php 850,000 Journalizing  Analysis of Business Sold a car for cash, Php 600,000 Transactions 1. Who sold the car? The business Identifying 2. What is the value received? Money 3. What is the value parted with? Analyzing Car 4. What is the peso equivalent of this exchange? Php 600,000 Measuring Debit, value received – money, Php 600,000 Credit, value parted with – car, Php 600,000 Journalizing  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 1 is a delivery car (Delivery Bought a delivery car Equipment). The value parted with is is also an ASSET which is Cash. for cash, Php 600,000 Therefore, we say Debit, Asset-Delivery Equipment Php 600,000 Credit, Asset-Cash Php 600,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 2 is Cash. The value parted with is also Sold an old computer an ASSET which is computer (Office Equipment). for cash, Php 20,000 Therefore, we say Debit, Asset-Cash Php 20,000 Credit, Asset-Office Equipment Php 20,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 3 is Laundry Supplies. The value parted Bought laundry supplies with is a LIABILITY which is our “oral on credit from SM City- promise to pay” (Accounts Payable). Davao, Php 35,000 Therefore, we say Debit, Asset-Laundry Supplies Php 35,000 Credit, Liability-Accounts Payable Php 35,000  Analysis of Transactions Illustrations Analysis: The value received is a LIABILITY Transaction 4 which is “the oral promise to pay” Paid our account with SM we got back (Accounts Payable). The City-Davao, Php 35,000 value parted with is an ASSET which is Cash. Therefore, we say Debit, Liability-Accounts Payable Php 35,000 Credit, Asset-Cash Php 35,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 5 is an office table (Furniture & Bought an office table on Fixture). The value parted with is a account from IKEA, Php LIABILITY which is our “written 25,000 and a promissory promise to pay” (Notes Payable). note was issued. Therefore, we say Debit, Asset-Furniture & Fixture Php 35,000 Credit, Liability-Notes Payable Php 35,000  Analysis of Transactions Illustrations Analysis: The value received is a LIABILITY Transaction 6 which is “written promise to pay” we Paid our account with got back (Notes Payable). The value IKEA, Php 25,000, and get parted with is an ASSET which is the promissory note we Cash. issued. Therefore, we say Debit, Liability-Notes Payable Php 25,000 Credit, Asset-Cash Php 25,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 7 is Cash. The value parted with is an Received cash of Php INCOME which is our “services 15,000 for services rendered”. rendered to a customer. Therefore, we say Debit, Asset-Cash Php 15,000 Credit, Income-Service Income Php 15,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 8 is the “customer’s oral promise to Rendered services to a pay” (Accounts Receivable). The customer, Php 12,000. The value parted with is an INCOME customer made an oral which is our “services rendered”. promise to pay. Therefore, we say Debit, Asset-Accounts Receivable Php 12,000 Credit, Income-Service Income Php 12,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 9 is Cash. The value parted with is also Collected customer’s an ASSET which is the cancellation of account from the previous the “customer’s oral promise to pay” transaction. Php 12,000. (Accounts Receivable). Therefore, we say Debit, Asset-Cash Php 12,000 Credit, Asset-Accounts Receivable Php 12,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 10 is the “customer’s written promise Rendered services to a to pay and the business’s right to customer, Php 16,000. The collect” (Notes Receivable). The customer made a written value parted with is an INCOME promise to pay. which is our “services rendered”. Therefore, we say Debit, Asset-Notes Receivable Php 16,000 Credit, Income-Service Income Php 16,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 11 is Cash. The value parted with is also Collected customer’s an ASSET which is the cancellation of promissory note from the the “customer’s written promise to previous transaction. Php pay and the business’s right to 16,000. collect” (Notes Receivable). Therefore, we say Debit, Asset-Cash Php 16,000 Credit, Asset-Notes Receivable Php 16,000  Analysis of Transactions Illustrations Analysis: The value received is an ASSET which Transaction 12 is Cash. The value parted with is an Mr. T Gutierrez invests OWNER’S EQUITY which is an cash of Php 1,000,000 in “implied interest” of the owner Mr. the business. Gutierrez to safeguard the amount he puts into the business. Therefore, we say Debit, Asset-Cash Php 1,000,000 Credit, Owner’sEquity-T. Gutierrez,capital Php 1,000,000  Analysis of Transactions Illustrations Analysis: The value received is the “reduction Transaction 13 of the proprietor’s capital” which we Mr. T Gutierrez withdraws call DRAWING. The value parted cash of Php 25,000 from with is an ASSET which is Cash. the business for his personal use. *Drawing is a factor that will decrease Owner’s Equity Therefore, we say Debit, Drawing-T. Gutierrez,capital Php 25,000 Credit, Asset-Cash Php 25,000  Analysis of Transactions Illustrations Analysis: The value received is an EXPENSE Transaction 14 which is “the benefits we received Paid salaries to employees from services given by our for the month, Php 20,000 employees” (Salaries Expense). The value parted with is an ASSET which is Cash. Therefore, we say Debit, Expense-Salaries Expense Php 20,000 Credit, Asset-Cash Php 20,000  Activity – ½ crosswise Determine the value received (DEBIT) and value parted with (CREDIT) of each transaction below taken from J. Roa’s books of accounts and indicate the account classification as to Asset, Liability, Owner’s Equity, Revenue, or Expenses. Feb 1 Made cash investments to the business 3 Rendered services to customers on account 5 Borrowed money from a bank with a note issued 10 Withdrew cash from the business to pay for business permits 16 Invested a computer set to the business 17 Collected customer’s account from Feb 3 18 Received cash for services rendered 22 Bought supplies using cash 29 Paid the promissory note issued 30 Paid salaries to employees  Activity – ½ crosswise Date Value Received Account Value Parted With Account or DEBIT Classification or CREDIT Classification Feb 1 CASH ASSET = J. ROA, CAPITAL OWNER’S Made cash investments to the business EQUITY 3 Accounts Receivable Rendered services to=customersService Asset on account Income Revenue 5 Cash BorrowedAsset money from =a bank withNotes a notePayable issued Liability 10 Withdrew cashExpense Taxes & Licenses from the business = to pay for business Cash permits Asset 16 Office Equipment Invested a computer Asset = set to theJ.business Roa, Capital Owner’s Equity 17 Cash Collected customer’s Asset = account from Feb Accounts 3 Receivable Asset 18 Cash Received Assetcash for=services rendered Service Income Revenue 22 Office Supplies Bought supplies Asset = using cash Cash Asset 29 Notes Payable Paid the promissory Liability = note issuedCash Asset 30 Salaries Expense Paid salaries=to employees Cash Expense Asset THE T-ACCOUNT The effect of changes in assets, liabilities, and owner’s equity are summarized in an accounting device called account. An account is divided into two sides: Ø The left-hand side is called the debit side which shows the value received; and Ø The right-hand side is called the credit side which shows the value parted with. THE T-ACCOUNT This device is commonly called a T-ACCOUNT because it resembles a capital “T”. The account title is written above the T-account as is below: ACCOUNT TITLE Left-hand Side or Right-hand Side or Debit side Credit side Is for Is for Value Received Value Parted With  CASH Dr. Cr. Php 25,000 Php 10,000 20,000 5,000 Debit total Php 45,000 Php 15,000 Credit total The Cash account has a debit total of Php 45,000 and a credit total of Php 15,000. ACCOUNT BALANCES The difference between debit total and credit total of an account is called an account balance. Ø If debit total > credit total - DEBIT BALANCE Ø If credit total > debit total - CREDIT BALANCE Ø If debit total = credit total – IN-BALANCE or CLOSED ACCOUNT  CASH Dr. Cr. Php 25,000 Php 10,000 10,000 5,000 Debit total Php 35,000 Php 15,000 Credit total Debit balance Php 20,000 The Cash account has a debit balance of Php 20,000  ACCOUNTS PAYABLE Dr. Cr. Php 15,000 Php 40,000 20,000 10,000 Debit total Php 35,000 Php 50,000 Credit total Php 15,000 Credit balance The Accounts Payable account has a credit balance of Php 15,000  ACCOUNTS RECEIVABLE Dr. Cr. Php 12,000 Php 12,000 4,000 4,000 Debit total Php 16,000 Php 16,000 Credit total The Accounts Receivable account has a “zero” balance or the Accounts Receivable accounts is “closed” The Theory of Debit and Credit The term debit came from the latin word debere and is abbreviated as Dr. The term credit came from the latin word credere and is abbreviated as Cr.  Theory of Debit and DEBIT = CREDIT Credit The amount entered on the debit side of an item’s account will always have a corresponding amount entered on the credit side of another account. Therefore, debits shall always be equal to the credits.  Theory of Debit and ASSETS = LIABILITIES + OWNER’S EQUITY Credit Debit = Credit ASSETS - the normal balance is Debit LIABILITIES - the normal balance is Credit OWNER’S EQUITY - the normal balance is Credit THE RULES OF DEBIT AND CREDIT The normal balance refers to the increase side of the accounts which may either be debit or credit ASSETS Debit side Credit side NORMAL BALANCE DECREASE SIDE or INCREASE SIDE Therefore, we DEBIT to increase an Asset, and we CREDIT to decrease an Asset.  LIABILITIES Debit side Credit side DECREASE SIDE NORMAL BALANCE or INCREASE SIDE Therefore, we CREDIT to increase a Liability, and we DEBIT to decrease a Liability.  OWNER’S EQUITY Debit side Credit side DECREASE SIDE NORMAL BALANCE or INCREASE SIDE Therefore, we CREDIT to increase an Owner’s Equity, and we DEBIT to decrease an Owner’s Equity. Owner’s Equity Factors that will increase Owner’s Factors that will decrease Equity Owner’s Equity v Investments by the Owner v Withdrawal by Owner v Revenues v Expenses DRAWING ACCOUNT – reduction of an Owner’s Equity account arising from cash or property withdrawal of an owner. This is a contra-equity account that will eventually decrease the Owner’s equity account.  DRAWING ACCOUNT Debit side Credit side NORMAL BALANCE DECREASE SIDE or INCREASE SIDE Therefore, we DEBIT to increase a Drawing account, and we CREDIT to decrease a Drawing account.  INCOME or REVENUE Debit side Credit side DECREASE SIDE NORMAL BALANCE or INCREASE SIDE Therefore, we CREDIT to increase Income, and we DEBIT to decrease Income.  EXPENSES Debit side Credit side NORMAL BALANCE DECREASE SIDE or INCREASE SIDE Therefore, we DEBIT to increase Expenses, and we CREDIT to decrease Expenses. NORMAL BALANCES - Summary Element Normal Balance Asset Debit Liability Credit Owner’s Equity Credit Drawing Debit Income or Revenue Credit Expenses Debit  Illustration ASSETS are represented by Cash in Bank and Office Supplies Inventory accounts LIABILITY is represented Accounts Payable OWNER’S EQUITY is represented by B. Pozon, capital DRAWING is represented by B. Pozon, drawing REVENUE is represented by Professional Income EXPENSE is represented by Salaries Expense  Illustration Transaction 1 Mr. Bartolome Pozon, CPA opened a bank account with RCBC in the amount of Php 100,000 to start his accounting practice. Analysis Debit, Cash in bank of Php 100,000; and Credit, B. Pozon, capital of Php 100,000 Rule Debit, increase in Asset and Credit, increase in Owner’s Equity CASH IN BANK B. POZON, CAPITAL Debit side Credit side Debit side Credit side 1) Php 100,000 1) Php 100,000  Illustration Transaction 2 Bought office supplies on account for Php 3,000 Analysis Debit, Office Supplies Inventory of Php 3,000; and Credit, Accounts Payable of Php 3,000 Rule Debit, increase in Asset and Credit, increase in Liability OFFICE SUPPLIES INVENTORY ACCOUNTS PAYABLE Debit side Credit side Debit side Credit side 2) Php 3,000 2) Php 3,000  Illustration Transaction 3 Received cash of Php 10,000 for auditing services rendered to clients. Analysis Debit, Cash in bank of Php 10,000; and Credit, Professional income of Php 10,000 Rule Debit, increase in Asset and Credit, increase in Revenue CASH IN BANK PROFESSIONAL INCOME Debit side Credit side Debit side Credit side 1) Php 100,000 3) Php 10,000 3) 10,000  Illustration Transaction 4 Mr. Pozon withdrew cash of Php 5,000 from the business for personal use. Analysis Debit, B. Pozon, drawing of Php 5,000; and Credit, Cash in bank of Php 5,000 Rule Debit, increase in Drawing account and Credit, decrease in Asset B. POZON, DRAWING CASH IN BANK Debit side Credit side Debit side Credit side 4) Php 5,000 1) Php 100,000 4) Php 5,000 3) 10,000  Illustration Transaction 5 Paid salaries to audit staff, Php 4,000 Analysis Debit, Salaries Expense of Php 4,000; and Credit, Cash in bank of Php 4,000 Rule Debit, increase in Expenses and Credit, decrease in Asset SALARIES EXPENSE CASH IN BANK Debit side Credit side Debit side Credit side 5) Php 4,000 1) Php 100,000 4) Php 5,000 3) 10,000 5) 4,000  Illustration Transaction 6 Partial payment to accounts payable to suppliers, Php 1,000 Analysis Debit, Accounts Payable of Php 1,000; and Credit, Cash in bank of Php 1,000 Rule Debit, decrease in Liability and Credit, decrease in Asset ACCOUNTS PAYABLE CASH IN BANK Debit side Credit side Debit side Credit side 6) Php 1,000 2) Php 3,000 1) Php 100,000 4) Php 5,000 3) 10,000 5) 4,000 6) 1,000  Illustration – T-account balances CASH IN BANK B. POZON, CAPITAL Debit side Credit side Debit side Credit side 1) Php 100,000 4) Php 5,000 1) Php 100,000 3) 10,000 5) 4,000 6) 1,000 ACCOUNTS PAYABLE Php 110,000 Php 10,000 Debit side Credit side 6) Php 1,000 2) Php 3,000 Php 100,000 Php 2,000 OFFICE SUPPLIES INVENTORY B. POZON, DRAWING Debit side Credit side Debit side Credit side 2) Php 3,000 4) Php 5,000 PROFESSIONAL INCOME SALARIES EXPENSE Debit side Credit side Debit side Credit side 3) Php 10,000 5) Php 4,000  Illustration – Account Balances Account Titles Debit Credit Cash in Bank – (Asset) Php 100,000 Office Supplies Inventory – (Asset) 3,000 Accounts Payable – (Liability) Php 2,000 B. Pozon, capital – (Owner’s equity) 100,000 B. Pozon, drawing - (Drawing) 5,000 Professional Income – (Revenue) 10,000 Salaries Expense – (Expense) 4,000 Total Php 112,000 Php 112,000 Illustration – Temporary Accounts Professional Income Php 10,000 Less: Salaries Expense 4,000 Net Income (Loss) Php 6,000 B. Pozon, capital - beginning Php 100,000 Add: Net Income 6,000 Total Php 106,000 Less: B. Pozon, drawing 5,000 B. Pozon, capital – ending Php 101,000  Illustration – Permanent Accounts Cash in Bank Php 100,000 Accounts Payable Php 2,000 Office Supplies Inventory 3,000 B. Pozon, capital 101,000 Total Liabilities and Total Assets Php 103,000 Owner’s Equity Php 103,000