actg_101-101a_topic_3_processing_transactions_of_a_service_business.pptx

ACTG 101/101AACCOUNTING 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

CoverageFinancial ReportsAnalyzing transactions to start a business

Accounting EquationChart of AccountsJournalizing or recording various business transactions

Classifying and summarizing the transactions through manual general ledger and trial balance, respectively

FINANCIAL REPORTSIncome Statement – shows how wealth is produced by listing the revenues earned and expenses incurred by the business

Statement of Owner’s 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 business

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FINANCIAL REPORTS - Example

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AssetsCurrent Assets

Cash P 566,500 Accounts Receivable 50,000

Notes Receivable 150,000 P 766,500 Non Current Asset

Equipment 60,000 Total Assets P 826,500

Liabilities and Owner's EquityCurrent Liabilities

Accounts Payable P 500 Notes Payable 36,000 SSS Payable 20,000 Withholding Tax Payable 30,000 P 86,500

Owner's EquityRox, Capital, December 31, 2010 740,000

Total Liabilities and Owner's Equity 826,500

ROX RENTAL SERVICEStatement of Financial Position

As of December 31, 2010

Header:Name of CompanyName of StatementDate of Statement

Report form of Statement of Financial Position - Elements are presented in vertical order

Peso sign at start of each columnPeso sign under each single lineDouble line at the end of financial report

Date starts with “as of” SFP can be prepared anytime even if operation of the business has not started yet

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RevenuesService Income P 500,000 Rent Income 50,000

Interest Income 1,000 P 551,000

Operating ExpensesSalary Expense P 300,000 Supplies Expense 500 Interest Expense 500 P 301,000

Net Income 250,000

ROX RENTAL SERVICEIncome Statement

For the Year Ended December 31, 2010Header – same as SFP

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

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Rox, Capital, January 1, 2010 P 500,000 Add: Income 250,000 Total P 750,000 Less: Rox, Drawing 10,000 Rox, Capital, December31, 2010 P 740,000

ROX RENTAL SERVICEStatement of Owner's Equity

For the Year Ended December 31, 2010

Header – same as SFP

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

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Operating Activities:Collections from:

Cash services P 200,000 Notes receivable 100,000 Rent Income 50,000 Interest Income 1,000

Payments of:Salary (250,000) Interest Expense (500)

Net Cash from Operations P 100,500

Financing Activities:Owner's Contribution P 500,000 Owner's withdrawal (10,000) Net Cash from financing P 490,000

Investing ActivityPurchase of Equipment P (24,000) Net cash from investing P (24,000)

Net increase in cash 566,500 Add: Cash, beginning - Cash, December 31, 2010 P 566,500

ROX Rental ServicesStatement of Cash Flows

For the Year Ended December 31, 2010Header – 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

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Net Income P 250,000 Add (deduct) adjustments:Increase in accts receivable (50,000) Increase in notes receivable (150,000) Increase in accts. Payable 500 Increase in SSS payable 20,000 Increase in w/tax payable 30,000 P 100,500






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 financingIAS 7 encourages reporting cash flows from operating activities using the direct method

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RELATIONSHIPS AMONG FINANCIAL STATEMENTS

AssetsCurrent Assets

Cash P 566,500 Accounts Receivable 50,000

Notes Receivable 150,000 P 766,500 Non Current Asset

Equipment 60,000 Total Assets P 826,500

Liabilities and Owner's EquityCurrent Liabilities

Accounts Payable P 500 Notes Payable 36,000 SSS Payable 20,000 Withholding Tax Payable 30,000 P 86,500

Owner's EquityRox, Capital, December 31, 2010 740,000

Total Liabilities and Owner's Equity 826,500

ROX RENTAL SERVICEStatement of Financial Position

As of December 31, 2010

RevenuesService Income P 500,000 Rent Income 50,000

Interest Income 1,000 P 551,000

Operating ExpensesSalary Expense P 300,000 Supplies Expense 500 Interest Expense 500 P 301,000

Net Income 250,000

ROX RENTAL SERVICEIncome Statement


Rox, Capital, January 1, 2010 P 500,000 Add: Income 250,000 Total P 750,000 Less: Rox, Drawing 10,000 Rox, Capital, December31, 2010 P 740,000

ROX RENTAL SERVICEStatenent of Owner's Equity



Cash services P 200,000 Notes receivable 100,000 Rent Income 50,000 Interest Income 1,000

Payments of:Salary (250,000) Interest Expense (500)

Net Cash from Operations P 100,500






FINANCIAL STRUCTURE OF A BUSINESSBased 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

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FINANCIAL STRUCTURE OF A BUSINESSAssets 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 future.

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FINANCIAL STRUCTURE OF A BUSINESSOwner’s Equity defined as the residual right or interest of the owner in the entity’s assets; after the creditors’ and suppliers’ claims are satisfied

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BUSINESS TRANSACTIONSStarting 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, the bookkeeper or accountant needs to look at the source documents – source of completed transactions

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BUSINESS TRANSACTIONSIt 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 valuesThere are two partiesIt is in terms of money

Must always have a dual effect: value received there is an equal value parted

Gave rise to the Bookkeeping System called Double Entry Bookkeeping

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BUSINESS TRANSACTIONSExample 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 TRANSACTIONSExample 2: Mr. Cruz paid P1,500 for his haircut done at David’s Salon

Exchange of Values?

Two parties?

Terms of Money?19

BUSINESS TRANSACTIONSExample 3: Avon Cosmetics paid SGV and Co. P150,000 for accounting services.

Exchange of Values?

Two parties?

Terms of Money?20

BUSINESS TRANSACTIONSTransactions 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 with Good Health Trading amounting to P5,000

Amy, the secretary, was promoted as purchasing officer for a monthly salary of P30,000

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ACCOUNTa : 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>

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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

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ASSETSResources 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

Normally recorded as debit balance 24

ASSETSClassified intoCurrentCash or cash equivalent not restricted for current use

Expected to be realized or held for sale or consumption in the normal course of the enterprise’s operating cycle

Held primarily for trading purposes for short term and expected to be realized within 12 months of the SFP date

Non Current25

COMMONLY USED CURRENT ASSETSCashany item on hand with monetary value that a bank would accept for deposit

Includes coins and currencies, personal checks, money orders, traveler’s check, made payable to the business and bank drafts

Also includes funds in the bank as savings or current deposit

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COMMONLY USED CURRENT ASSETSAccounts ReceivableAmounts collectibleRepresents debtor’s 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

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COMMONLY USED CURRENT ASSETSNotes ReceivablePromissory 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 ReceivableInterest earned on notes receivable but not yet received in cash

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COMMONLY USED CURRENT ASSETSInventoriesAssets held for sale in the normal operation of the business

Examples are merchandise inventory, work in process inventory and raw materials inventory

Office SuppliesVarious supplies bought for use in the office but are still unused

Examples are coupon bonds, ink, ballpen, and janitorial suppliers

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COMMONLY USED CURRENT ASSETSPrepaid ExpensesExpenses paid in advanceExpenses not yet incurred or used

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COMMONLY USED NON CURRENT ASSETSLandSite owned by the business on which the business building is constructed

Not subjected to depreciationBuildingStructure owned by the business used in the operation of the business

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COMMONLY USED NON CURRENT ASSETSFurniture and FixtureLong-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 EquipmentComputers, printers, fax machines, aircons and air fan units 32

COMMONLY USED NON CURRENT ASSETSDelivery EquipmentCars and trucks used in delivering goods and services

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ASSET CONTRA-VALUATION ACCOUNTSAllowance for Doubtful AccountsRefers to an amount estimated uncollectible on receivable in compliance with the principle of conservatism

Contra account for related receivableOther terms used: Allowance for Uncollectible Accounts or Allowance for Bad Debts

Accumulated DepreciationAggregate period costs of using a depreciable plant asset

Examples are accumulated depreciation of building, accumulated depreciation of machinery34

LIABILITY ACCOUNTSPresent 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

Normally a credit balance35

LIABILITY ACCOUNTSClassified into Current Expected to be settled in the normal course of the enterprise’s operating cycle

Due to be settled within 12 months of the Statement of Financial Position date

Non Current Liabilities

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EXAMPLES OF CURRENT LIABILITIESAccounts PayableObligation or debts to creditors for money borrowed or merchandise and other assets bought on credit

Examples are obligations arising from purchases on account

Notes PayablePromissory note issued by the business to its creditors for money borrowed or merchandise and other assets bought on credit

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EXAMPLES OF CURRENT LIABILITIESAccrued Interest PayableInterest incurred in the current period but not yet paid

SSS Premium PayableAmount of employee and employer contribution to SSS which are not yet remitted to SSS

Withholding Tax PayableAmount of income tax withheld from the salary of employees in behalf of BIR that the employer has to remit to BIR on the specified due date

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EXAMPLES OF NON CURRENT LIABILITIESLoans PayableArises for amounts borrowed

Mortgage PayableSupported by a chattel mortgage such as land which is attached to the liability and can be subject to attachment when business fails to pay

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OWNER’S EQUITY ACCOUNTSResidual 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 owner’s withdrawals and losses of the business

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OWNER’S EQUITY ACCOUNTSTerminologies usedSole Proprietorship: Owner’s CapitalPartnership: Partners’ CapitalCorporation: Shareholders’ Equity

Normally credit balanceDrawingTemporary account used to record initially the amount taken by the owner from the business. This is closed to the capital account of the owner at the end of the accounting period

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ACCOUNTING EQUATIONWould always have an equal left side and right side

If all assets are claimable by the owner, the accounting equation is simply:

ASSETS = OWNER’S EQUITYExample: Peter Soriano invested P2,000,000 cash in a good business ASSETS = OWNER’S EQUITY Cash P2,000,000 Soriano, Capital P2,000,000Means the business has assets in cash amounting to P2,000,000 and that Soriano can claim this

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ACCOUNTING EQUATIONIf there is a claim from both the creditor and owner, the accounting equation becomes longer

ASSETS = LIABILITIES + OWNER’S EQUITYExample: Assume that Soriano borrowed cash of P1,000,000 from the bank for use in the business ASSETS = LIABILITIES + OWNER’S EQUITY Cash P3,000,000 Loan Payable P1,000,000 Soriano, Capital P2,000,000This means that assets in cash increased by P3,000,000 but Soriano cannot have a claim on the entire P3,000,000 because the creditor has a right over P1,000,000 of the assets

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DEMONSTRATION PROBLEM 1Assets were invested by the owner to set up a travel business

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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 P750,000Analysis: The asset of the business will increase in the form of cash P50,000 and cars P750,000 with a corresponding increase in owner’s equity

DEMONSTRATION PROBLEM 1

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=Cash P 50,000 Gomez, Capital P 800,000 Cars 750,000

P 800,000 P 800,000

ASSETS OWNER'S EQUITY

DEMONSTRATION PROBLEM 1Cash was borrowed for use by the business

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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


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= +Cash P 150,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000

P 900,000 100,000 P 800,000

ASSETS OWNER'S EQUITYLIABILITIES

DEMONSTRATION PROBLEM 1Additional asset was purchased for cash

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March 7: Bought tables and chairs from Blim’s 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 there was only a change in its form. Note that totals will remain the same for all elements


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= +Cash P 105,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Furniture 45,000

P 900,000 100,000 P 800,000

ASSETS LIABILITIES OWNER'S EQUITY

DEMONSTRATION PROBLEM 1Additional asset was purchased on account

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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


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= +Cash P 105,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Accounts Payable 55,000 Furniture 45,000 Equipment 55,000

P 955,000 155,000 P 800,000


DEMONSTRATION PROBLEM 1Cash was withdrawn by the owner

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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 owner’s equity since owner recovered part of her investment by withdrawing cash


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= +Cash P 100,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Accounts Payable 55,000 Gomez, Drawing (5,000) Furniture 45,000 Equipment 55,000

P 950,000 155,000 P 795,000


DEMONSTRATION PROBLEM 1Cash was paid for liability of the business

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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


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= +Cash P 45,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Gomez, Drawing (5,000) Furniture 45,000 Equipment 55,000

P 895,000 100,000 P 795,000


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

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Date = +

March Cash Cars Equipment FurnitureLoans

PayableAccounts Payable

Gomez, Capital

Gomez, Drawing

1 50,000 750,000 800,000 3 100,000 100,000

Balances 150,000 750,000 100,000 800,000 7 (45,000) 45,000

Balances 105,000 750,000 45,000 100,000 800,000 15 55,000 55,000

Balances 105,000 750,000 55,000 45,000 100,000 55,000 800,000 18 (5,000) (5,000)

Balances 100,000 750,000 55,000 45,000 100,000 55,000 800,000 (5,000) 20 (55,000) (55,000)

Balances 45,000 750,000 55,000 45,000 100,000 - 800,000 (5,000) 895,000 = 100,000 + 795,000

LIABILITIESASSETS OWNER'S EQUITY


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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 P48,000Analysis:


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=Cash P 20,000 Palacio, Capital P 68,000 Equipment 48,000

P 68,000 P 68,000

ASSETS OWNER'S EQUITY


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

Analysis:


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= +Cash P 20,000 Accounts Payable P 6,000 Palacio, Capital P 68,000 Equipment 48,000 Furniture 6,000

P 74,000 6,000 P 68,000



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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:


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= +Cash P 10,000 Accounts Payable P 16,000 Palacio, Capital P 68,000 Equipment 68,000 Furniture 6,000

P 84,000 16,000 P 68,000



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

Analysis:


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

Analysis:


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= +Cash P 8,500 Accounts Payable P 16,000 Palacio, Capital P 68,000 Equipment 68,000 Palacio, Drawing (1,500) Furniture 6,000

P 82,500 16,000 P 66,500



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

Analysis:


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= +Cash P 5,500 Accounts Payable P 16,000 Palacio, Capital P 68,000 Supplies 3,000 Palacio, Drawing (1,500) Equipment 68,000 Furniture 6,000

P 82,500 16,000 P 66,500



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

Analysis:


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= +Cash P 5,500 Accounts Payable P 10,000 Palacio, Capital P 74,000 Supplies 3,000 Palacio, Drawing (1,500) Equipment 68,000 Furniture 6,000

P 82,500 10,000 P 72,500



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

Analysis:


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= +Cash P 5,500 Accounts Payable P - Palacio, Capital P 74,000 Supplies 3,000 Notes Payable 10,000 Palacio, Drawing (1,500) Equipment 68,000 Furniture 6,000

P 82,500 10,000 P 72,500



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Date = +

January Cash SuppliesFurniture &Fixture Equipment

Accounts Payable

Notes Payable

Palacio, Capital

Palacio, Drawing

2 20,000 48,000 68,000 5 6,000 6,000

Balances 20,000 - 6,000 48,000 6,000 68,000 7 (10,000) 20,000 10,000

Balances 10,000 - 6,000 68,000 16,000 68,000 10 (1,500) (1,500)

Balances 8,500 - 6,000 68,000 16,000 - 68,000 (1,500) 15 (3,000) 3,000

Balances 5,500 3,000 6,000 68,000 16,000 - 68,000 (1,500) 22 (6,000) 6,000

Balances 5,500 3,000 6,000 68,000 10,000 - 74,000 (1,500) 30

Balances 5,500 3,000 6,000 68,000 10,000 - 74,000 (1,500) 82,500 = 10,000 + 72,500


BUSINESS ACTIVITIESBusiness 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 ACTIVITIESBusiness 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

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QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATIONUnderstandability: users should know how to read and use financial reports. It requires that:Terminologies used must be clearForm and presentation orderlyUsers 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 come; gives users feedback of how much the company earned

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QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATIONReliability: 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 more companies

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EXPANDING THE EQUATION TO SHOW THE OPERATING RESULT OF THE BUSINESS

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ASSETS = LIABILITIES + OWNER’S EQUITY

Increases due to

Investments & Revenues Decreases due to

Withdrawals and Expenses

REVENUESRepresent 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 owner’s equity or net worth

Have nominal credit balance80

COMMON REVENUE ACCOUNTSSales – 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 professional or professional servicing firm

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COMMON REVENUE ACCOUNTSInterest 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

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COMMON REVENUE ACCOUNTSGain 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

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EXPENSESThe consumption of assets or using up of service to generate revenue

Costs incurred in conducting the business activities

Have nominal debit balance

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COMMON EXPENSE ACCOUNTSCost 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 insurance policy incurred during the current period; examples are premiums on building insurance, life insurance, plant insurance

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COMMON EXPENSE ACCOUNTSTransportation 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 mayor’s permit, registration cost of the business, percentage tax on sales, etc

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PROFIT OR LOSSThe 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

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PROFIT OR LOSSEffect in the accounting equation of a profit

Revenues – Costs & Expenses = Net Income (Loss)P15,000 – P5,000 = P10,000 Assets Increase = Owner’s Equity IncreaseCash P10,000 Net Income P10,000

Medical Fees less

Expenses P15,000

P5,000

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DEMONSTRATION PROBLEM 1Cash received for revenue earned

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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 Owner’s equity for services rendered to the tourist


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= LIABILITIES +

Cash P 15,000 Service Income P 15,000

Increase in ASSETS Increase in OWNER'S EQUITY

DEMONSTRATION PROBLEM 1Paid cash for expenses incurred

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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 owner’s equity for expenses incurred


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= LIABILITIES +

Cash P 1,500 Repair Expense P 1,000 Gas & Oil Expense 500

Decrease in ASSETS Decrease in OWNER'S EQUITY

DEMONSTRATION PROBLEM 1Revenue rendered on account

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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 owner’s equity for the revenue earned


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= LIABILITIES +

Accounts Receivable P 16,000 Service Income P 16,000


DEMONSTRATION PROBLEM 1Paid cash for expense incurred

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March 25: Paid telephone bill for P500

Analysis: Decrease in asset cash by P500 with a corresponding decrease in owner’s equity for utility expense incurred


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= LIABILITIES +

Cash P 500 Utilities Expense P 500


DEMONSTRATION PROBLEM 1Revenue earned with a down payment, balance on account

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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 collectedAnalysis: Increase in asset cash P10,000 and accounts receivable P10,000 with a corresponding increase in owner’s equity for revenue of P20,000


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= LIABILITIES +Cash P 10,000 Accounts Receivable 10,000 Service Income P 20,000


DEMONSTRATION PROBLEM 1Customer’s account collected in cash

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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 accounting equation will remain the same since there was only a change in the form of the asset


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= LIABILITIES +

Cash P 8,000 Accounts Receivable (8,000)

Increase and Decrease in ASSETS Increase in OWNER'S EQUITY

DEMONSTRATION PROBLEM 1Paid cash for expenses incurred

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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 owner’s equity for expenses incurred


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= LIABILITIES +

Cash P 19,000 Rent Expense P 10,000 Salary Expense 9,000



Date = LIABILITIES + OWNER'S EQUITY

March CashAccounts

Receivable Cars Equipment FurnitureLoans

Payable Gomez, CapitalBalances 45,000 750,000 55,000 45,000 100,000 800,000

(5,000) Gomez, Drawing21 15,000 15,000 Service Income22 (1,500) (500) Gas & Oil Expense

(1,000) Repair Expense24 16,000 16,000 Service Income25 (500) (500) Utilities Expense27 10,000 10,000 20,000 Service Income30 8,000 (8,000) 31 (19,000) (10,000) Rent Expense

(9,000) Salaries Expense

Total 57,000 18,000 750,000 55,000 45,000 100,000 825,000

925,000 = 925,000

ASSETSExplanation of

Changes in Owner's Equity

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CHART OF ACCOUNTSChart of AccountsListing 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 owner’s equity

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CHART OF ACCOUNTSHappy Tour and Travel

Chart of Accounts

Current Assets – 101 to 104101 Cash102 Accounts Receivable102.1 Allowance for Bad

Accounts103 Notes Receivable104 Office Supplies

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Chart of Accounts

Plant and Equipment – 2o1 to 203201 Cars201.1 Accumulated Depreciation - Cars202 Equipment202.1 Accumulated Depreciation -

Equipment203 Furniture & Fixtures203.1 Accumulated Depreciation – Furniture & Fixtures

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Chart of Accounts

Current Liabilities – 301 - 303301 Accounts Payable302 Loans Payable303 Utilities Payable

Long Term Liabilities – 401 to 402401 Notes Payable402 Mortgage Payable

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Chart of Accounts

Equity – 501 to 502501 Gomez, Capital502 Gomez, Drawings

Revenues – 601 to 603601 Service Income

109


Chart of Accounts

Expenses – 701 to 706701 Gas & Oil702 Rent Expense703 Repair Expense704 Salaries Expense705 Supplies Expense706 Utilities Expenses

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T-ACCOUNTAccount 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

DEBITS AND CREDITSDebitLatin debitum which means a debtor or borrower

Value received in a businessLeft hand side of the equation“charge”

CreditLatin creditum which means creditor or lender

Corresponding value parted withRight hand side of the equation

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NORMAL BALANCE OF STATEMENT OF FINANCIAL

POSITION ACCOUNTSDebit = Credit

Assets Liabilities and Owner's Equity

=

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NORMAL BALANCE OF STATEMENT OF INCOME STATEMENT ACCOUNTS

Debit = Credit

Expense Revenues =

NINE TYPES OF EFFECTS OF TRANSACTIONS

1. Increase in Asset = Increase in Liability

2. Increase in Asset = Increase in Owner’s Equity

3. Increase in one Asset = Decrease in another Asset

4. Decrease in Asset = Decrease in Liability

5. Decrease in Asset = Decrease in Owner’s Equity

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NINE TYPES OF EFFECTS OF TRANSACTIONS

6. Increase in Liability = Decrease in Owner’s Equity

7. Increase in Owner’s Equity = Decrease in Liability

8. Increase in one Liability = Decrease in another Liability

9. Increase in one Owner’s Equity = Decrease in another Owner’s Equity 115

RULES OF DEBIT AND CREDITBased on the normal balance of an accounting element or account

Usual position of the account in the T-account

Normal balance provides basis in analyzing when to debit and credit an account

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RULE 1 - ASSETS

Increases Decreases

Asset AccountDebit Credit

Debit to increase the amount of asset, Credit to decrease its amount

RULE 1 - ASSETSTo illustrate:

1. January 5, Pearl Services bought P3,000 worth of supplies on account

2. Pearl used P2,500 worth of supplies during the month

1/5 3,000.00 1/30 2,500.00 1/30 500.00

Unused SuppliesDebit Credit

RULE 1 - ASSETS

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Example:1. January 10, Pearl Services bought

P100,000 worth of equipment on account

1/10 100,000.00 1/30 100,000.00

EquipmentDebit Credit

1/10 100,000.00

Accounts PayableDebit Credit

RULE 2 - LIABILITY

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Decreases Increases

Liability AccountDebit Credit

Credit to increase the amount of liability, Debit to decrease its amount

RULE 2 - LIABILITY

121

To illustrate:1. January 5, Pearl Services bought P3,000

worth of supplies on account 2. Pearl paid P1,800 for the said obligation

1/18 1,800.00 1/5 3,000.00 1/30 1,200.00

Accounts PayableDebit Credit

RULE 3 – OWNER’S EQUITY

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Decreases Increases

Owner's Equity AccountDebit Credit

Credit to increase the capital account. Debit to decrease its amount

RULE 3 – OWNER’S EQUITY

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To illustrate:1. January 1 - J. Pearl invested P90,000

cash into his business2. June 1 – J. Pearl withdrew P60,000

cash as permanent withdrawal from the business

6/1 60,000.00 1/1 90,000.00 1/30 30,000.00

J. Pearl, CapitalDebit Credit

RULE 4 – REVENUE

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Decreases Increases

Revenue AccountDebit Credit

Credit to increase the revenue account. Debit to decrease its amount.

RULE 4 – REVENUE

125

To illustrate:1. December 1 – Pearl Service recorded

service income of P10,000 cash 2. 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

12/31 9,000.00 12/1 10,000.00 1/30 1,000.00

Revenue AccountDebit Credit

RULE 5 – EXPENSE

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Increases Decreases

Expense AccountDebit Credit

Debit to increase the expense account. Credit to decrease its amount.

RULE 5 – EXPENSE

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To illustrate:1. December 15 – Pearl Service paid P12,000

for rent expense2. 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

12/15 12,000.00 12/31 10,800.00 12/31 1,200.00

Rent ExpenseDebit Credit

Balance Sheet Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit

Debits and Credits Summary

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HOW TO USE AND APPLY 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 will increase or decrease. 129

SIMPLE DEBIT/CREDIT RULEAll Accounts that Normally Have a Debit Balance are Increased with a Debit by placing the amount in the Left Column of the account and Decreased with a Credit by placing the amount in the Right Column of the account.AssetsDrawsExpenses 130

SIMPLE DEBIT/CREDIT RULEAll Accounts that Normally have a Credit Balance are Increased with a Credit by placing the amount in the Right Column of the account and Decreased with a Debit by placing the amount in the Left Column of the account.LiabilitiesOwner's Equity ( Capital )Revenue 131

actg_101-101a_topic_3_processing_transactions_of_a_service_business.pptx

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