Marinduque State College

School of Accountancy, Business and Management

2020

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

MODULE REMINDERS

Here are five reminders before using this module:

1. ​Make sure that you

are in your best mood
or condition when you
study, otherwise,
you’ll only waste your
time and energy​. New
knowledge can be easily
absorbed by your brain if
you are in the mood.

2. ​Don’t fool yourself

that you would
understand all the
terms in this module​.
Go to Playstore and
download Merriam
Webster and/or
English-Tagalog
Dictionary. If you prefer
the smell of the paper of
the dictionary, go buy a
real one. Nothing beats
the smell of a real book!
 3. ​Accounting is sacred. Please assess yourself. Are you worthy? Do you deserve
accounting? ​If your answer is yes, aral na aba! If your answer is no, I will give you time, may
topic tayo sa accounting about adjustment! I will assume andun ka na agad sa topic na yun at
hindi ka na makaalis! Congratulations sa mga naka-gets!

4. ​Manage your time​. If there’s one thing I know that is equally given to all of us, that would be
time. Rich or poor, young or old, we only have 24 hours in a day so make sure that you spend it
wisely. One reason that makes accounting so hard is the lack of time studying it. You have so
many enrolled subjects, make sure to attend them properly.

5. ​Be self-reliant​. I have one question for you, please answer it honestly. Do you want to be a
Certified Public Accountant? If your answer is yes, I beg you, starting today, embed in your DNA
self-reliance! Make it a habit not to rely on others especially during quiz and major exams. It’s
okay to ask for what you don’t know but only for the purpose of learning not to secure a
passing grade.

SUGGESTED LINKS
https://youtu.be/X-ruBf73rLA
https://youtu.be/PvOSMtrXqHg
https://youtu.be/QrJJPfxcKmQ

https://youtu.be/QrJJPfxcKm
Q
https://youtu.be/763KppiXKCg

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​2 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
 School of Business and Management
Bachelor of Science in Accountancy

MODULE 1
THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
LEARNING OBJECTIVES:
After studying this module, you should be able to:

1. Define the elements of financial statements.

2. Describe the account (the simple T-Account) and its uses.
3. Understand what is meant by the accounting equation and prove the validity of the “mirror
image” concept.
4. Understand what is meant by double-entry system.
5. Explain how the double-entry system follows the rules of the accounting equation.
6. Define debits and credits.
7. Summarize the rules of debit and credit as applied to balance sheet and income statement
accounts.
8. Describe the nature of the typical account titles used in recording transactions. 9. Analyze
and state the effects of business transactions on an entity’s assets, liabilities and owner’s
equity and record these effects in accounting equation form using the financial transaction
worksheet and the T-Accounts.

ELEMENTS OF FINANCIAL STATEMENTS

Financial Position
In simple terms, assets are valuable resources owned by the entity. Per Framework, ​asset ​is a
resource controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise in a number of ways. The parts of the definition of
an asset can be explained further:
 ∙ ​“Controlled by the enterprise” ​– Control is the ability to obtain the economic benefits and to
restrict the access of others (e.g. an entity being the sole user of its plant and equipment, or by
selling idle assets).
∙ ​“Past events” ​– The event must be past before an asset can arise. For example, equipment will
only become an asset when there is the right to demand delivery or access to the asset’s
potential. Dependent on the terms of the contract, this may be on acceptance of the order or
on delivery.
∙ ​“Future economic benefits” ​– These are evidenced by the prospective receipt of cash. This could
be cash itself, an account receivable or any item which may be sold. Although, for example, a
factory may not be sold (on a going concern basis) for it houses the manufacturing facility for
the goods. When these goods are sold, the economic benefit resulting from the use of the
factory is realized as cash.

For example, an asset may

be:
∙ ​Used singly or in combination with other assets in the production of goods or services to be sold
by the enterprise;
∙ ​Exchanged for other assets;
∙ ​Used to settle a liability; or
∙ ​Distributed to the owners of the enterprise.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​3 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Assets include cash, cash equivalents, notes receivable, accounts receivable, inventories, prepaid
expenses, property, plant and equipment, investments, intangible assets and other assets.
Liabilities are obligations of the entity to outside parties who have furnished resources. Per
Framework, ​liability ​is a present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources embodying economic
benefits. The parts of the definition of a liability can be explained further:
∙ ​“Obligations” ​– These
may be legal or not. For
example, the year-end tax
 liability relates to the year’s (i.e. past) events but in law this liability does not arise until it is
assessed some time later.
∙ ​“Transfer economic benefits” ​– This could not be a transfer of cash, or other property, the
provision of a service or the refraining from activities which would otherwise be profitable. ​∙ ​“Past
transactions or events” ​– refer to discussion in assets.
∙ ​“Complementary nature of assets and liabilities” ​– As should be evident from the above, assets
and liabilities are seen as mirror images of each other.

Settlement of a present obligation may occur in a number of ways, for example,

by: ​∙ ​Payment of cash;
∙ ​Transfer of other assets;
∙ ​Provision of services;
∙ ​Replacement of that obligation with another obligation; or
∙ ​Conversion of the obligation to equity.

Liabilities include notes payable, accounts payable, accrued liabilities, unearned revenues, mortgage
payable, bonds payable and other debts of the enterprise.

Equity ​is the residual interest in the assets of the enterprise after deducting all its liabilities. Equity
may pertain to any of the following depending on the form of business organization: ​∙ ​In a sole
proprietorship, there is only one owner’s equity account because there is only one owner.
∙ ​In a partnership, an owner’s equity account exists for each partner.
∙ ​In a corporation, owner’s equity or stockholders’ equity consist of share capital, retained
earnings and reserves representing appropriations of retained earnings among others.

Performance
Income ​is increase in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.
The definition of income encompasses both revenue and gains. Revenue arises in the course of the
ordinary activities of an enterprise and is referred to by a variety of different names including sales,

fees, interest, dividends, royalties, and rent.

Gains r​ epresent other items that meet the definition of income and may, or may not, arise on the
course of the ordinary activities of an enterprise. Gain’s represent increases in economic benefits and
as such are no different in nature from revenue. Hence, they are not regarded as constituting a
separate element.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​4 ​of ​25
 Republic of the Philippines
M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Expenses ​are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
The definition of expenses encompasses losses as well as those expenses that arise in the course of
the ordinary activities of the enterprise. There are various classes of expenses but they are generally
classified as cost of services rendered or goods sold, distribution or selling expenses, administrative
expenses or other
operating
expenses.
Losses ​represent
other items that
meet the
definition of
expense and may
or may not, arise
in the course of
the ordinary
activities of an
enterprise. Losses
represent
decreases in
economic benefits
and as such are
no different in
nature from other
expenses. Hence,
they are not
regarded as
separate element
in this framework.

THE ACCOUNT
The basic summary device of accounting is the ​account​. A separate account is maintained for each
element that appears in the balance sheet (assets, liabilities and equity) and in the income statement
(income and expenses). Thus, an account may be defined as a detailed record of the increases,
decreases and balance of each element that appears in an entity’s financial statements. The simplest
form of the account is known as the “T” account because of its similarity to the letter “T”. The account
has three parts as shown:

Account Title

Left side or Right side or

Debit ​side ​Credit ​side
THE ACCOUNTING EQUATION
Financial statements tell us how a business is performing. They are the final products of the
accounting process. But how do we arrive at the items and amounts that make up the financial
statements? The most basic tool of accounting is the ​accounting equation​. This equation presents the
resources controlled by the enterprise, the present obligations of the enterprise and the residual
interest in the assets. It states that assets must ​always ​equal liabilities and owner’s equity. The basic
accounting model is:
Assets = Liabilities + Owner’s Equity

Note that the assets are on the left side of the equation opposite the liabilities and owner’s equity.
This explains why increases and decreases in assets are recorded in the opposite manner (“mirror
image”) as liabilities and owner’s equity are recorded. The equation also explains why liabilities and
owner’s equity follow the same rules of debit and credit.

The logic of debiting and crediting is related to the accounting equation. Transactions may require
additions to both sides (left and right sides), subtractions from both sides (left and right sides), or an
addition ​and s​ ubtraction on the same side (left or right side), but in all cases the equality must be
maintained as shown below:

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​5 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Assets ​Liabilities​Owner’s
Equity

=+
DEBITS AND CREDITS – THE DOUBLE-ENTRY
SYSTEM
Accounting is based on a double-entry system which means that the dual effects of a business
transaction are recorded. A debit side entry must have a corresponding credit side entry. For every
transaction, there must be one or more accounts debited and one or more accounts credited. Each
transaction affects at least two accounts. The total debits for a transaction must always equal the total
credits.
An account is ​debited ​when an amount is entered on the ​left ​side of the account and ​credited ​when
an amount is entered on the ​right ​side. The abbreviations for debit and credit are Dr. (from the Latin
debere)​ and Cr. (from the Latin ​credere​), respectively.
The account type determines how increases or decreases in it are recorded. Increases in assets are
recorded as debits (on the left side of the account) while decreases in assets are recorded as credits
(on the right side). Conversely, increases in liabilities and owner’s equity are recorded by credits and
decreases are entered as debits.
The rules of debit and credit for income and expense accounts are based on the relationship of these
accounts to owner’s equity. Hence, increases in income are recorded as credits and decreases as
debits. Increases in expenses are recorded as debits and deceases as credits. These are the ​rules of
debit and credit​. The following summarizes the rules:

Balance Sheet Accounts

Assets Liabilities and Owner’s Equity
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance I​ ncome Statement Accounts

Debit for Credit for

decrease in owner’s increases in owner’s
​ xpenses
equity E equity I​ ncome
Debit
(+)
Increases

Credi (-) Debit

t Decreases (-)
 Decreases Credit (+) Increases

Normal Balance Normal Balance

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​6 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Accounts
Debit Credit
Increases in ACCOUNT
Assets Increases in
Expenses Liabilities
Owner’s Capital Income
Decrease in
Liabilities Decrease in
Owner’s Capital Assets
Income Expenses

NORMAL BALANCE OF AN

The normal
balance of any
account refers to
the side of the
account–debit or
credit–where
increases are
recorded. Asset,
owner’s
withdrawal and
expense accounts
normally have
debit balances;
liability, owner’s
equity and income
accounts normally
have credit
balances. The result occurs because increases in an account are usually greater than or equal to
decreases.
Increases Recorded by Normal Balance
​
Account Category Debit Credit Debit Credit Assets
​ ✔✔
Liabilities ​
✔ ✔ ​Owner’s Equity:
 Owner’s Capital ​ ​
✔ ✔ Withdrawals
​ ✔✔
Income ​ ​
✔ ✔ Expenses
​ ✔✔

ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an enterprise’s assets,
liabilities, and/or equity. Events may be internal actions, such as the use of equipment for the
production of good or services. It can also be an external event such as the purchase of raw materials
from a supplier.
A transaction is a particular kind of event that involves the transfer of something of value between two
entities. Examples of transactions include acquiring assets from owner(s), borrowing funds from
creditors, and purchasing or selling goods and services.

TYPES AND EFFECTS OF TRANSACTIONS

It will be beneficial in the long-term to be able to understand a classification approach that emphasizes
the effects of accounting events rather than the recording procedures involved. This approach is quite
pioneering. Although business entities engage in numerous transactions, all transactions can be

classified into one of four types, namely:

1. ​Source of Assets (SA). ​An asset account increases and a corresponding claims (liabilities or
owner’s equity) account increases. Examples: (1) Purchase of supplies on account; (2) Sold
goods on cash on delivery basis.
2. ​Exchange of Assets (EA). ​One asset account increases and another asset account decreases.
Example: Acquired equipment for cash.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​7 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

3. ​Use of Assets (UA). ​An asset account decreases and a corresponding claims (liabilities or equity)
account decreases. Example: (1) Settled accounts payable; (2) Paid salaries of employees.
4. ​Exchange of Claims (EC). ​One claims (liabilities or owner’s equity) account increases and another
claims (liabilities or owner’s equity) account decreases. Example: Received utilities bill but did
not pay.
 Every accountable
event has a dual
but self-balancing
effect on the
accounting
equation.
Recognizing these
events will not in
any manner affect
the equality of the
basic accounting
model. The four
types of
transactions
above may be
further expanded
into nine types of
effects as follows:
1. Increase in Assets =
Increase in Liabilities (SA)
2. Increase in Assets =
Increase in Owner’s Equity
(SA)
3. Increase in one Asset =
Decrease in another Asser
(EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner’s Equity (UA)
6. Increase in Liabilities – Decrease in Owner’s Equity (EC)
7. Increase in Owner’s Equity = Decrease in Liabilities (EC)
8. Increase in one Liability = Decrease in another Liability (EC)
9. Increase in one Owner’s Equity = Decrease in another Owner’s Equity (EC)

TYPICAL ACCOUNT TITLES USED

STATEMENT OF FINANCIAL POSITION

Assets
Assets are should be classified only into two: current assets and non-current assets. Per revised
Philippine Accounting Standards (PAS) No. 1, an entity shall classify assets as current when: a. it
expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; b. it holds
the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve months after the reporting period; or d. the asset is
cash or a cash equivalent (as defined in PAS No. 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period.

All other assets should be classified as non-current assets. Operating cycle is the time between the
acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s
normal operating cycle is not clearly identifiable, it is assumed to be twelve months.

Current Assets
Cash​. Cash is any medium of exchange that a bank will accept for deposit at face value. It includes
coins, currency, checks, money orders, bank deposits and drafts.
Cash Equivalents. ​Per PAS No. 7, these are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk if changes in value.
Notes Receivable. ​A note receivable is a written pledge that the customer will pay the business a fixed
amount of money on a certain date.
Accounts Receivable. ​These are claims against customers arising from sale of services or goods on
credit. This type of receivable offers less security than a promissory note.
Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​8 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Inventories. ​Per PAS No. 2, these are assets which are (a) held for sale in the ordinary course of
business; (b) in the process of production for such sale; (c) in the form of materials or supplies to be
consumed in the production process or in the rendering of services.
Prepaid Expenses. ​These are expenses paid for by the business in advance. It is an asset because the
business avoids having to pay cash in the future for a specific expense. These include insurance and
rent. These prepaid items represent future economic benefits–assets–until the time these start to
contribute to the
earning process;
these, then,
become expenses.
Non-current Assets
Property, Plant
and Equipment.
Per PAS No. 16,
these are tangible
assets that are
held by an
enterprise for use
in the production
or supply of goods
or services, or for
rental to others,
or for
administrative
purposes and
which are expected to be used during more than one period. Included are such items as land, building,
machinery and equipment, furniture and fixtures, motor vehicles and equipment.
Accumulated Depreciation. ​It is a contra account that contains the sum of the periodic depreciation
charges, the balance in this account is deducted from the cost of the related asset–equipment or
buildings–to obtain book value.
Intangible Assets. ​Per PAS No. 38, these are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes. These include goodwill, patents, copyrights, licenses, franchises, trademarks,
brand names, secret processes, subscription list and non-competition agreements.
Liabilities
Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify a liability as current
when:
a. it expects to settle the liability in its normal operating cycle;
b. it holds the liability primarily for the purpose of trading;
c. the liability is due to be settled within twelve months after the reporting period; or d. the entity
does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period.

All other liabilities should be classified as non-current liabilities.

Current Liabilities
Accounts Payable. ​This account represents the revers relationship of the accounts receivable. By
accepting the goods or services, the buyer agrees to pay for them in the near future.
Notes Payable. ​A note payable is like a note receivable but in a reverse sense. In the case of a note
payable, the business entity is the maker of the note; that is, the business entity is the party who
promises to pay the other party a specified amount of money on a specified future date.
Accrued Liabilities. ​Amounts owed to others for unpaid expenses. This account includes salaries
payable, utilities payable, interest payable and taxes payable.

Unearned Revenues. ​When the business entity receives payment before providing its customers with
goods or services, the amounts received are recorded in the unearned revenue account (liability
method). When the goods or services are provided to the customer, the unearned revenue is reduced
and income is recognized.
Current portion of Long-Term Debt. ​These are portions of mortgage notes, bonds and other long-term
indebtedness which are to be paid within one year from the balance sheet date.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​9 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
 School of Business and Management
Bachelor of Science in Accountancy

Non-current Liabilities
Mortgage Payable. ​This account records long-term debt of the business entity for which the business
entity for has pledged certain assets as security to the creditor. In the event that the debt payments
are not made, the creditor can foreclose or cause the mortgaged asset to be sold to enable the entity
to settle the claim.
Bonds Payable.
Business
organizations
often obtain
substantial sums
of money from
lenders to finance
the acquisition of
equipment and
other needed
assets, they obtain
these funds by
issuing bonds.
The bond is a
contract between
the issuer and the
lender specifying
the terms of
repayment and
the interest to be
charged.
Owner’s Equity
Capital ​(from the
Latin ​capitalis,​
meaning
“property”). This
is used to record the original and additional investments of the owner of the business entity. It is
increased by the amount of profit earned during the year or is decreased by a loss. Cash or other
assets that the owner may withdraw from the business ultimately reduce it. This account title bears
the name of the owner.
Withdrawals. ​When the owner of a business entity withdraws cash or other assets, such are recorded
in the drawing or withdrawal account rather than directly reducing the owner’s equity account.
Income Summary. ​It is a temporary account used at the end of the accounting period to close income
and expenses, this account shows the profit or loss for the period before closing to the capital account.

INCOME STATEMENT
Income
Service Income. ​Revenue earned by performing services for a customer or client; for example,
accounting services by a CPA firm, laundry services by a laundry shop.
Sales. ​Revenues earned as a result of sale of merchandise; for example, sale of building materials by a
construction supplies firm.

Expenses
Cost of Sales. ​The cost incurred to purchase or to produce the products sold to customers during the
period; also called cost of goods sold.
Salaries or Wages Expense. ​Includes all payments as a result of an employer-employee relationship
such as salaries or wages, 13​th ​month pay, cost of living allowances and other related benefits.
Telecommunications, Electricity, Fuel and Water Expenses. ​Expenses related to use of
telecommunications facilities, consumption of electricity, fuel and water.
Rent Expense. ​Expense for space, equipment or other asset rentals.
Supplies Expense. ​Expense of using supplies (e.g. office supplies) in the conduct of daily business.

Insurance Expense. ​Portion of premiums paid on insurance coverage (e.g. on motor vehicle, health,
life, fire, typhoon or flood) which has expired.
Depreciation Expense. ​The portion of the cost of a tangible asset (e.g. buildings and equipment)
allocated or charged as expense during an accounting period.
Uncollectible Accounts Expense. ​The amount of receivables estimated to be doubtful of collection and
charged as expense during an accounting period.
Interest Expense. ​An expense related to use of borrowed funds.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​10 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

ACCOUNTING FOR BUSINESS TRANSACTIONS

Accountants observe many events that they identify and measure in financial terms. A ​business
transaction ​is the occurrence of an event or a condition that affects financial position and can be
reliably recorded.

Financial Transaction Worksheet

Every financial
transaction can be
analyzed or
expressed in
terms of its effects
on the accounting
equation. The
financial
transactions will be analyzed by means of a financial transaction worksheet which is a form used to
analyze increases and decreases in the assets, liabilities or owner’s equity of a business entity.
Illustration. ​Galiciano Del Mundo decided to establish a sole proprietorship business and named it as
Del Mundo Graphics Design. Del Mundo is a graphic designer who has extensive experience in
drawing, layout, typography, lettering, diagramming and photography. He possesses the talent to
visually communicate to a target audience with the right combination of words, images and ideas.
Del Mundo Graphics Design can do the layout and production design of newspapers, magazines,
corporate reports, journals and other publications. The entity can create promotional displays;
marketing brochures for services and products; packaging design for products; and distinctive logos for
business. He also enters into agreements with clients for the progressive development and
maintenance of their web sites. His initial revenue stream comes from web designing. The owner,
Galiciano Del Mundo, makes the business decisions. The assets of the company belong to Del Mundo
and all obligations of the business are his responsibility. Any income that the entity earns belongs
solely to Del Mundo.
When a specific asset, liability or owner’s equity item is created by a financial transaction, it is listed in
the financial transaction worksheet using the appropriate accounts. The worksheet that follows shows
the first transaction of the Del Mundo Graphics Design. The dates are enclosed in parentheses. During
March 2015, the first month of operations, various financial transactions took place. These
transactions are described and analyzed as follows:

Mar. 1 ​Del Mundo started his new business by depositing P350,000 in a bank account in the name of
Del Mundo Graphics Design at BPI Poblacion Branch.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2015
Assets ​= ​Liabilities + Owner’s Equity

Cash ​= ​Del Mundo,

Capital
(1)​ P350,000 ​.​ ​=​ ​P350,000

The financial transaction is analyzed as follows:

∙ ​An entity separate and distinct from Del Mundo’s personal financial affairs is created. ​∙ ​An
economic resource – cash of P350,000 is invested in the business entity. The source of this asset is
the contribution made by the owner, which represents owner’s equity. The owner’s equity
account is Del Mundo, Capital

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​11 ​of ​25
 Republic of the Philippines
M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

∙ ​The dual nature of the transaction is that cash is invested and owner’s equity created. The effects
on the accounting equation are as follows: increase in asset – cash from zero to P350,000 and
increase in owner’s equity from zero to P350,000.
∙ ​At this point, the entity has no liabilities, and assets equal owner’s equity.

Mar. 5 ​Computer equipment costing P145,000 is acquired on cash basis. The effect of the transaction
on the basic equation is:
Assets ​= ​Liabilities + Owner’s Equity
= ​Del Mundo, Capital
Cash ​+ ​Computer Equipment

Bal. P350,000 =
(5)​ (145,000) ​. ​P145,000 ​= _​__________ ​ Bal.​ P205,000 ​. ​P145,000 ​=​ P350,000​ ​ P350,000 ​=
P350,000

This transaction did not change the total assets but it did change the composition of the assets–it
decreased one asset–cash and increased another asset–computer equipment by P145,000. Note that
the sums of the balances on both sides of the equation are equal. This equality must always exist.

Mar. 9 ​Computer supplies in the amount of P25,000 are purchased on account. ​Assets ​=
Liabilities + Owner’s Equity
Supplies Equipment + ​Del Mundo, Capital
Cash ​+ ​Computer + ​Computer = ​Accounts Payable
 Bal. P205,000 P145,000 = P350,000 ​(9) ​_​_________ ​P25,000 ​. ​_​_________​ =​ ​P25,000 ​.
_​__________​ Bal.​ P205,000 ​. ​+ ​. ​P25,000 ​. ​+​ P145,000 ​=​ P25,000 ​.​ ​+​ P350,000​ ​ P375,000 ​=
P375,000 ​.

Assets don’t have to be purchased in cash. It can also be purchased on credit. Acquiring the computer
supplies with a promise to pay the amount due later is called buying on account. This transaction
increases both the assets and the liabilities of the business. The asset affected is computer supplies
and the liability created is an accounts payable.

Mar. 11 ​Del Mundo Graphics Design collected P88,000 in cash for designing interactive web sites for
two exporters based inside the Ortigas Ecozone.
Assets ​= ​Liabilities + Owner’s Equity
Supplies Equipment + ​Del Mundo, Capital
Cash ​+ ​Computer + ​
C omputer = ​
A ccounts Payable
Bal. P205,000 ​. ​P25,000 .​ ​P145,000 = P25,000 .​ ​P350,000 ​(11)​ 88,000 .​ ​ ​_​_____ ____​ _​_________​ =
_​ ________ ​88,000 ​ ​Bal.​ P293,000 .​ ​+ ​. ​P25,000 .​ ​+​ P145,000 ​. ​=​ P25,000 .​ ​+​ P438,000 ​ ​ P463,000 ​.

= ​P463,000 ​.

The entity earned service income by designing web sites for clients. Del Mundo rendered his
professional services and collected revenues in cash. The effect on the accounting equation is an
increase in the asset–cash and an increase in owner’s equity. Income increases owner’s equity. This

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​12 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

transaction caused the business to grow, as shown by the increase in total assets from P375,000 to
P463,000.
Mar. 16 ​Del Mundo paid P18,000 to Ceradoy Bills Express, a one-stop bills payment service company,
for the semi-monthly utilities.

Assets ​= ​Liabilities + Owner’s Equity

Supplies Equipment + ​Del Mundo, Capital
Cash ​+ ​Computer + ​Computer = ​Accounts Payable
Bal.
P293,000 ​.
 P25,000 ​. ​P145,000 = P25,000 ​. ​P438,000 ​(11)​ (18,000) ​.​ ​_​_____ ____​ _​____ ____​ = _​ ________
(18,000) ​ ​Bal.​ P275,000 ​. ​+ ​. ​P25,000 ​. ​+​ P145,000 ​. ​=​ P25,000 ​. ​+​ P420,000 ​ ​ P445,000 ​. ​= ​P445,000
.
Expenses are recorded when they are incurred. Expenses can be paid in cash when they occur, or they
can be paid later. The payment for utilities is an expense for the month of March. It represented an
outflow of resources and a reduction of owner’s equity. Expenses have the opposite effect of income;
they cause the business to shrink as shown by the smaller amount of total assets of P445,000.

Mar. 17 ​The entity has service agreements with several Netpreneurs to maintain and update their web
sites weekly. Del Mundo billed these clients P35,000 for services already rendered during the month. ​A
= L + OE
+ ​Computer + ​Computer = ​Accounts + ​Del Mundo,
Cash ​+ ​Accounts Supplies Equipment Payable Capital
Receivable
Bal. P275,000 P25,000 P145,000 ​. ​= P25,000 ​.​ ​P420,000​ ​(17) ​_________​ ​P35,000 ​. ​__________ __________ =
_________​ ​P35,000 ​.​ ​Bal.​ P275,000 ​. ​+​ P35,000 ​. ​+​ P25,000 ​. ​+​ P145,000 ​. ​=​ P25,000 ​. ​+​ P455,000 ​.​ ​ ​P480,000 ​.
P480,000 ​.

The entity has performed services to clients so income should already be recognized. Del Mundo is
entitled to receive payments for these but the clients did not pay immediately. Performing the services
creates an economic resource, the clients’ promise to pay the amount which is called accounts
receivable. This transaction resulted to an increase in an asset–accounts receivable and an increase in
owner’s equity of P35,000.

Mar. 19 ​Del Mundo made a partial payment of P17,000 for the Mar. 9 purchase on account. ​A =
L + OE
+ ​Computer Equipment + ​Del Mundo,
Cash ​+ ​Accounts Supplies = ​Accounts Capital
Receivable + ​Computer Payable
Bal. P275,000 P35,000 ​. ​P25,000 P145,000 ​. ​= P25,000 ​.​ ​P455,000​ ​(19)​ (17,000) ​. ​__________ __________

__________ =​ ​(17,000) ​. _​ ________​.​ ​Bal.​ P258,000 ​. ​+​ P35,000 ​. ​+​ P25,000 ​. ​+​ P145,000 ​. ​=​ P8,000 ​. ​+
P455,000 ​.​ ​ ​P463,000 ​.​ ​P463,000 ​.

This transaction is a payment on ​account.​ The effect on the accounting equation is a decrease in the
asset–cash and a decrease in the liability – accounts payable. The payment of cash on account has no
effect on the asset–computer supplies because the payment does not increase or decrease the
supplies available to the business.
Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​13 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
 Bachelor of Science in Accountancy

Mar. 20 ​Checks totaling P25,000 were received from clients for billings dated Mar. 17. ​A = L +

OE

Cash ​+ ​Accounts + ​Computer + ​Computer = ​Accounts + ​Del Mundo,

Receivable Supplies Equipment Payable Capital
Bal. P258,000
P35,000 ​. ​P25,000
P145,000 ​. ​=
P8,000 ​.​ ​P455,000
(20)​ 25,000 ​.
(25,000) ​.
__________
__________ =
__________
_________​.​ ​Bal.
P283,000 ​. ​+
P10,000 ​. ​+
P25,000 ​. ​+
P145,000 ​. ​=
P8,000 ​. ​+
P455,000 ​.
P463,000 ​.
P463,000 ​.

Last Mar. 17, Del

Mundo billed
clients for services
already rendered.
On Mar. 20, the
entity was able to
collect P25,000
from them. The
asset–cash is
increased by P25,000. The business should not record service income on Mar. 20 since it has already
recorded the income last Mar. 17. Total assets are unchanged the business merely reduced one
asset–accounts receivable and increased another–cash.

Mar. 21 ​Del Mundo withdrew P20,000 from the business for his personal use.
A = L + OE
Receivable + ​Computer Payable Capital
Cash ​+ ​Accounts + ​Computer Equipment + ​Del Mundo,
Supplies = ​Accounts
Bal. P283,000 P10,000 ​. ​P25,000 P145,000 .​ ​= P8,000 ​.​ ​P455,000​ ​(21)​ (20,000) ​. ​__________ __________
__________ = __________​ ​(20,000) ​.​ ​Bal.​ P263,000 ​. ​+​ P10,000 ​. ​+​ P25,000 ​. ​+​ P145,000 ​. ​=​ P8,000 ​. ​+
P435,000 ​.​ ​ ​P443,000 ​.​ ​P443,000 ​.

Withdrawal of cash or other assets for personal use is the way by which the owner of the entity
receives advance distribution of profits. On Mar. 1, Del Mundo invested P350,000; both cash and
owner’s equity increase. The transaction was an investment by the owner and not an income
generating activity. Del Mundo simply transferred funds from his personal account to the business. A
cash withdrawal is exactly the opposite. The P20,000 cash withdrawal transaction resulted to a
reduction in both cash and owner’s equity.

Mar. 27 ​Warlito Blanche Publishing submitted a bill to Del Mundo for P8,000 worth of newspaper
advertisement for this month. Del Mundo will pay this bill next month.
A = L + OE
Receivable Supplies Equipment Payable
Cash ​+ ​Accounts + ​Computer + ​Computer = ​Accounts + ​Del Mundo,
 Capital
Bal. P263,000 P10,000 ​. ​P25,000 P145,000 ​. ​= P8,000 ​.​ ​P435,000​ ​(27) ​_________ __________ __________
__________ = ​8,000 ​. ​(8,000) ​.​ ​Bal.​ P263,000 ​. ​+​ P10,000 ​. ​+​ P25,000 ​. ​+​ P145,000 ​. ​= ​P16,000 ​. ​+​ P427,000 ​.

P443,000 ​.​ ​P443,000 ​.

Warlito Blanche rendered services on account. Del Mundo Graphics Design has incurred an expense in
the amount of P8,000 by availing of Warlito Blanche’s services. There was no payment during the
month. This advertising expense resulted to a decrease in owner’s equity and an increase in the
liability–accounts payable.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​14 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Mar. 31 ​Del Mundo paid his assistant designer salaries of P15,000 for the month. ​A = L + OE
Receivable + ​Computer Payable Capital
Cash ​+ ​Accounts + ​Computer Equipment + ​Del Mundo,
Supplies = ​Accounts
Bal. P263,000 P10,000 ​. ​P25,000 P145,000 ​. ​= P16,000 ​.​ ​P427,000​ ​(28)​ (15,000) ​. ​__________ __________
__________ =
__________
(15,000) ​.​ ​Bal.
P248,000 ​. ​+
P10,000 ​. ​+
P25,000 ​. ​+
P145,000 ​. ​=
P16,000 ​. ​+
P412,000 ​.
P428,000 ​.
P428,000 ​.

This transaction
resulted to a
reduction resulted
to a reduction in
owner’s equity as
well as reduction
in cash. By
providing his services to Del Mundo for the month, the assistant designer has created for the business
an expense an expense–salaries expense.

Use of T-Accounts
Analyzing and recording transactions using the accounting equation is useful in conveying a basic
understanding of how transactions affect the business. However, it is not an efficient approach one
the number of accounts involved increases. Double-entry system provides a formal system of
classification and recording business transactions.
Illustration. ​The rules of debit and credit will be applied to the Del Mundo Graphics Design Illustration
for comparison, three transactions will be added to the example. Before being recorded, a transaction
must be analyzed to determine which accounts must be increased or decreased. After this has been
determined, the rules of debit and credit are applied to effect the appropriate increases and decreases
to the accounts.

Mar. 1 ​Del Mundo started his new business by depositing P350,000 in a bank account in the name of
Del Mundo Graphics Design at BPI Poblacion Branch.

Assets (Increase) ​= ​Owner’s Equity (Increase)

Cash Del Mundo, Capital
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)
3-1 ​350,000 ​3-1 ​350,000

This transaction increased both the asset–cash and owner’s equity. According to the rules of debit and
credit, and an increase in asset is recorded as debit while an increase in owner’s equity is recorded as
credit; thus, the entry is to debit cash and to credit Del Mundo, Capital. The transaction dates are
placed on the left side of the amounts for reference.

Mar. 2 ​Computer equipment is acquired by issuing a P50,000 note payable to Maribeth Buenviaje
Office Systems. The note is due in six months.

Assets (Increase) ​= ​Liabilities (Increase)

Computer Equipment Notes Payable
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)
3-2 ​50,000 ​3-2 ​50,000

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​15 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
 School of Business and Management
Bachelor of Science in Accountancy

The transaction increased by P50,000 the asset – computer equipment and the liability–notes payable.
Computer equipment must be debited and notes payable must be credited.

Mar. 3 ​Del Mundo paid P15,000 to RF Refozar Suites for rent on the office studio for the months of
March, April and May.

Assets (Decrease) ​= ​Assets (Increase)

Cash Prepaid Rent
Debi Credi Debi Credi
t (+) t (-) t (+) t (-)

3-1 ​350,000 ​3-3 ​15,000 ​3-3 ​15,000

The entity paid advance rent for three months. A resource having future economic benefit–prepaid
rent, is acquired for a cash payment of P15,000. Increases in assets are recorded by debits and
decreases in assets are recorded by credits. The transaction resulted to a debit to prepaid rent and a
credit to cash for P15,000. The prepaid rent is consumed based on the passage of time so that after
one month, P5,000 of the prepaid rent will be transferred to the rent expense account.

Mar. 4 ​Received advance payment of P18,000 from Marco Polo Ortigas Hotel for web site updating for
the next three months.
Assets (Increase) ​= ​Liabilities (Increase)
Cash Unearned Revenues
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)
3-1 350,000 3-3 15,000 3-4 ​18,000 ​3-4 ​18,000

The entity has an obligation to Marco Polo Ortigas Hotel for the next three months. This liability is
called ​unearned r​ evenues. The asset – cash is increased by a debit of P18,000 and the liability–
unearned revenues is increased by a credit of P18,000. As it renders service, the entity discharges its
obligation at a rate of P6,000 per month for the next three months.

Mar. 5 ​Computer equipment costing P145,000 is acquired on cash basis.

Assets (Decrease) ​= ​Assets (Increase)
 Cash Computer Equipment
Debi Credi Debi Credi
t (+) t (-) t (+) t (-)
3-1 350,000 3-3 15,000 3-2 50,000
3-4 18,000 3-5 ​145,000 ​3-5 ​145,000

The transaction increased the asset–computer equipment and decreased the asset–cash. Assets are
increased by debits and decreased by credits; thus, computer equipment is debited and cash is
credited for P145,000.

Mar. 9 ​Computer supplies in the amount of P25,000 are purchased on account.

Assets (Increase) ​= ​Liabilities (Increase)
Computer Supplies Accounts Payable
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)
3-9 ​25,000 ​3-9 ​25,000

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​16 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

The asset–computer supplies is increased by a debit of P25,000 while the liability account–accounts
payable is increased by a credit for the same amount.

Mar. 11 ​Del Mundo Graphics Design collected P88,000 in cash for designing web sites.

Assets (Increase) ​= ​Owner’s Equity (Increase)

Cash Design Revenues
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)
3-1 350,000
3-3 15,000
3-11 ​88,000
3-4 18,000
3-5 145,000
3-11 ​88,000

The transaction
increased the asset–cash and increased the income account–design revenues. Assets are increased by
debits, income are increased by credits; hence, a debit of P88,000 to cash and a credit of P88,000 to
design revenues is made. Increases in income increase owner’s equality.

Mar. 16 ​Del Mundo paid P18,000 to Ceradoy Bills Express for the semi-monthly utilities.

Assets (Decrease) ​= ​Owner’s Equity (Decrease)

Cash Utilities Expense
Debi Credi Debi Credi
t (+) t (-) t (+) t (-)
3-1 350,000 3-3 15,000 3-16 ​18,000
3-4 18,000 3-5 145,000
3-11 88,000 3-16 ​18,000

Expenses are increased by debits and assets are decreased by credits; therefore, utilities expense is
debited and cash credited for P18,000. Increases in expenses decrease owner’s equity.

Mar. 17 ​Del Mundo billed clients P35,000 for services already rendered during the month.

Assets (Increase) ​= ​Owner’s Equity (Increase)

Accounts Receivable Design Revenues
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)
3-17 ​35,000 ​3-11 88,000 3-17 ​35,000
Assets are increased by debits, income are increased by credits. Increases in income increase owner’s
equity. A debit of P35,000 to accounts receivable and a credit of P35,000 to the income account–
design revenues is needed.

Mar. 19 ​Del Mundo partially paid P17,000 for the Mar. 9 purchase of computer
supplies. ​Assets (Decrease) ​= ​Liabilities (Decrease)
Cash Accounts Payable
Debi Credi Debi Credi
t (+) t (-) t (-) t (+)

3-1 350,000 3-3 15,000 3-19 ​17,000 ​3-9 25,000 3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-19 ​17,000
Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​17 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy
Assets are decreased by credits while liabilities are decreased by debits. The transaction is recorded by
debiting accounts payable and crediting cash for P17,000 each.

Mar. 20 ​Received checks totaling P25,000 from clients for billings dated Mar. 17.

Assets (Increase) ​= ​Assets (Decrease)

Cash Accounts Receivable
Debi Credi Debi Credi
t (+) t (-) t (+) t (-)
3-1 350,000
3-3 15,000
3-17 35,000
3-20 ​25,000
3-4 18,000
3-5 145,000
3-11 88,000 3-16 18,000
3-20 ​25,000 ​3-19 17,000

Collections on
account reduced the
asset–accounts
receivable but
increased the
asset–cash. Assets
are increased by
debits and decreased
by credits; thus, a
debit to cash for
P25,000 and a credit
to accounts
receivable for
P25,000 is made.

Mar. 21 ​Del Mundo withdrew

P20,000 from the business for his personal use.

Assets (Decrease) ​= ​Owner’s Equity (Decrease)

Cash Del Mundo, Withdrawals
Debi Credi Debi Credi
t (+) t (-) t (+) t (-)
3-1 350,000 3-3 15,000 3-21 ​25,000
3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-20 25,000 3-19 17,000
3-21 ​20,000

Withdrawals are reductions of owner’s equity but are not expenses of the business entity. A
withdrawal is a personal transaction of the owner that is exactly the opposite of an investment. This
transaction increased the withdrawals account but reduced cash. Debits record increases in the
withdrawals account and credits record decreases in asset accounts; thus, a debit to withdrawals and a
credit to cash for P20,000 each is necessary.

Mar. 27 ​Warlito Blanche billed Del Mundo for P8,000 ads, Del Mundo will play next month.

Liabilites (Increase) ​= ​Owner’s Equity (Increase)

Accounts Payable Advertising Expense
Debi Credi Debi Credi
t (-) t (+) t (+) t (-)
 3-19 17,000 3-9 25,000 3-27 ​8,000

3-27 ​8,000

This transaction increased the expense–adverting expense and increased the liability–accounts
payable by P8,000. Expenses are increased by debits while liabilities are increased by credits; hence,
an entry to debit advertising expense and to credit accounts payable for P8,000 is needed.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​18 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

Mar. 31 ​Del Mundo paid his assistant designer salaries of P15,000 for the month.

Assets (Decrease) ​= ​Owner’s Equity (Decrease) ​Cash Salaries Expense

Debi Credi Debi Credi
t (+) t (-) t (+) t (-)
3-1 350,000 3-3 15,000 3-31 ​15,000
 3-4 18,000 3-5 145,000
3-11 88,000 3-16 18,000
3-20 25,000 3-19 17,000
3-21 20,000
3-31 ​15,000

Expenses are increased by debits and assets are decreased by credits. Hence, salaries expense is
debited for P15,000 and cash credited for the same amount. Increases in salaries expense decrease
owner’s equity.

KNOWLEDGE CHECK

GENERAL DIRECTION: ​Write your answer for the following activities in a bond paper. For the
uniformity of the format, in your bond paper, write your name (SURNAME, FIRST NAME, MIDDLE
INITIAL e.g. TAN, MARK REY U.) on the upper left of the bond paper; section and year under your name
(e.g. BSA-1 or BSAIS-1); MODULE #1 ACTIVITIES on the upper right; and date submitted under MODULE
#1 ACTIVITIES.

NOTE: Activities for this module accounts for the 30% of your midterm grade.

Activity #1 Modified True or False. (Estimated time required – 30 minutes)

Direction. ​Write “True” if the statement is correct and write “False” if the statement is incorrect. If it is
incorrect, change the incorrect word or group of words to make the statement true.

1. Expenses represent the cash paid for goods sold or services rendered in the process of generating
revenue.
2. Payment of a liability will not affect total assets but will cause total liabilities to decrease.
3. Owner’s equity is the excess of an entity’s capital over liabilities.
4. Not all financial transactions can be analyzed in terms of the basic accounting model. 5. Accounts
that appear on the left side of the accounting equation usually have credit balances. 6. According to
the balance sheet equation, the assets of a business entity must always equal the liabilities and
owner’s equity.
7. The basic summary device of accounting is the accounting equation.
8. Expenses cause decreases in owner’s equity and are recorded by credits.
9. Income increases owner’s equity and are recorded by debits.
10. For every transaction, there is at least one account affected.

11. A debit entry always decreases the balance of an

account.
12. A cash acquisition of a laptop computer will cause total assets to increase.
13. When a business receives cash, it is always recorded as an increase to Cash and a decrease to an
Expense.
14. Liabilities represent amounts owed to creditors.
15. An owner can invest cash or other assets of value in the business.
16. Both sides of the fundamental accounting equation must always be equal.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​19 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

17. The liability created when a supplies are purchased on account is called an accounts payable.
18. Equipment is listed as an asset because it is used up in a relatively long period of time. 19.
Every transaction is recorded in terms of increases and/or decreases in two or more accounts.
20. Assets are things of value owned by a business.

Activity #2 Accounting Events Problem (Estimated time required – 10 minutes)

Which of the
following events
would be
recognized in the
accounting
records of Rogelio
Ceradoy HR
Consultants on the
date indicated?
Feb. 15 Ceradoy
HR Consultants
offers to purchase
a piece of land for
P1,400,000. There
is a high
 likelihood that the offer will be accepted.
Mar. 2 Ceradoy HR Consultants receives notice that its rentals for an office space will increase from
P50,000 to P60,000 per month effective April 1.
Apr. 29 Ceradoy HR Consultants receives its electricity bill for the month of April. The bill is due on
May 9.
July 10 Ceradoy HR Consultants places an order for an office equipment costing P108,000. Aug.
6 The office equipment ordered on July 10 is delivered. Payment is not due until Sept. 1.

Activity #3 (Estimated time required – 15 minutes)

Elements of Financial Statements Problem
Assets Liabilities Owner’s Equity
a. 760,000 360,000 ?
b. 860,000 ? 592,000
c. ? 108,000 760,000
d. 626,600 376,240 ?
e. ? 800,000 (100,000)
Required​: Fill in the amount of the missing element of financial position.

Activity #4 (Estimated time required – 15 minutes)

Income and Expenses Problem

Income Expenses Profit (Loss)

a. 840,000 ? 360,000
b. 2,400,000 ? 540,000
c. 1,300,000 860,000 ?
d. ? 2,000,000 720,000
e. ? 1,800,000 (400,000)
Required​: Supply the missing element of performance.

Activity #5 (Estimated time required – 15 minutes)

Transaction Effects on the Basic Accounting Model

Problem
During the month of May, company had the following transactions:
A L OE
a. Paid salaries for May, P54,000.
b. Acquired equipment on credit, P90,000.
c. Purchases supplies in cash, P3,000.
d. Additional investment by owner, P120,000.
Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​20 ​of ​25
 Republic of the Philippines
M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

e. Received payment for services rendered, P18,000.

f. Made partial payment on equipment acquired on credit, P30,000.
g. Billed customers for services performed, P48,000.
h. Withdrew cash for personal use, P45,000.
i. Received payment from customers already billed, P9,000.
j. Received bills for utilities to be paid next month, P2,100.

Required​: For
each transaction,
indicate whether
the assets (A),
liabilities (L) or
owner’s equity
(OE) increased
(+), decreased (-),
or did not
changed (o) by
placing the
appropriate sign in
the appropriate
column.

Activity #6 (Estimated
time required – 20
minutes)
Transactions that Affect
the Elements of Financial
Statements

a. Decrease an asset and

decrease owner’s equity
b. Increase a liability and
decrease owner’s equity
c. Increase an asset and increase owner’s equity
d. Decrease a liability and increase owner’s equity
e. Increase an asset and decrease another asset
f. Increase an asset and increase a liability
g. Decrease an asset and decrease a liability
Required​: Give an example of transaction for each of the statement above.

Activity #7 ​Multiple Choice #1 ​(Estimated time required – 30 minutes)

Direction: ​Choose the correct answer. Write the letter of your choice.
1. Which one of the following can the accounting equation can be rewritten as?
a. Assets plus profits less drawings less liabilities equals closing capital
b. Assets less liabilities less drawings equals opening capital plus profit
c. Assets less liabilities less opening capital plus drawings equals profit

2. Which of the following is a liability of a firm?

a. An office building owned by the firm.
b. Inventories for sale stored in the warehouse.
c. Money which the firm has borrowed and has not yet been repaid.
d. Money owned to the firm by its customers.

3. Revenue from sale of the goods in the normal course of business is reported as part of the earning in the
period when:
a. the sale is made.
b. the cash is collected.
c. the products are manufactured.
d. the sale forecasts are completed.

4. Financial statements are said to be fairly presented when:

(i) all relevant accounting standards are adopted.
(ii) all the legal requirements are complied with.
(iii) financial statements are not manipulated.
(iv) financial statements are mathematically accurate.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​21 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

a. i, ii, and iii

b. i and iii
c. ii and iii
d. all of the above

5. An example of an asset is:

a. machinery owned by the firm.
b. money owned by the firm to one of its suppliers for goods purchased.
 c. an overdrawn bank balance.
d. the capital of the firm.

6. Identify the correct statement.

a. Assets – Liabilities = Equity.
b. Equity – Liabilities = Assets.
c. Assets = Equity + Liabilities.
d. Assets – Equity = Liabilities.

7. Which of the following statements is correct?

a. To record an increase in any given asset account, the account must be debited.
b. To record a decrease in capital, the capital account must be credited.
c. To record an increase in any given liability account, that account must be debited.
d. To record a decrease in any given liability account, the account must be credited.

8. Which of the following is true about the double-entry system?

a. The total debits should be equal to the total credits.
b. Each transaction involves two parties.
c. Each transaction involves a debit entry and a corresponding credit entry in the ledger.
d. Each transaction should be entered into two accounts in the ledger.

9. Which of the following definition is not entirely correct?

a. Income refers to the increase in the economic benefits during the accounting period in the form of
inflows or enhancements of assets or decrease of liabilities.
b. An assets is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
c. Equity is the residual interest in the assets of an entity after deducting all its liabilities. d. A
liability is a present obligation of an entity arising from past events, the settlement of which is
expected to result in an outflow of resources from the entity embodying the economic benefits.

10. Swatch is famous for fashion wristwatches. At the end of a recent year, Swatch’s total assets added up to
P381 million, and the owner’s equity was P264 million. How much were Swatch’s liabilities? a. Cannot
determine form the data given
b. P381 million
c. P117 million
d. P264 million
11. Assume that Swatch sold watches to a department store on account for P50,000. How would this
transaction affect Swatch’s accounting equation?
a. Increase both liabilities and owner’s equity by P50,000
b. Increase both assets and liabilities by P50,000
c. Increase both assets and owner’s equity by P50,000
d. No effect on the accounting equation because the effects cancel out

12. Which parts of the accounting equation does a sale on account affect?
a. Accounts Receivable and Accounts Payable
b. Account Receivable and Owner, Capital
Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​22 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

c. Accounts Payable and Owner, Capital

d. Accounts Payable and Cash

13. Assume that Swatch paid expenses totaling P35,000. How does this transaction affect S3watch’s accounting
equation?
a. Increases assets and decreases liabilities
b. Increases both assets and owners’ equity
c. Decreases assets and increases liabilities
 d. Decreases both assets and owners’ equity

14. Consider the overall effects of transactions 11 and 13 on Swatch. What is Swatch’s profit or loss?
a. Profit of P15,000
b. Loss of P35,000
c. Profit of P50,000
d. Cannot determine from the data given

15. The balance sheets reports

a. Results of operations on a specific date
b. Financial position on a specific date
c. Financial position for a specific period
d. Results of operation for a specific period

16. The income statement reports

a. Financial position on a specific date
b. Results of operation on a specific date
c. Results of operations for a specific period
d. Financial position for a specific period

17. The left side of an account is used to record:

a. Debit or Credit, depending on the type of account
b. Credits
c. Debits
d. Increases

18. Suppose your business has cash of P50,000, receivables of P60,000 and furniture totaling P200,000. The
store owes P80,000 on account and has a P100,000 note payable. How much is your equity? a. P20,000
b. P130,000
c. P180,000
d. P310,000

Activity #8 Multiple Choice #2 (Estimated time required – 30 minutes)

Direction: ​Choose the correct answer. Write the letter of your choice.

1. When the rent for the business is paid with a check,

a. Cash is decreased and Accounts Payable is decreased.
b. Cash is decreased and Rent Expense is decreased.
 c. Cash is decreased and Rent Expense is increased.
d. Cash is decreased and Rent Income is increased.
e. Cash is increased and Rent Expense is decreased.

2. When an entity receives cash for services performed,

a. an asset is decreased.
b. the owner’s equity is decreased.

Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​23 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

c. the owner’s equity is increased.

d. the total assets remain unchanged.
e. none of the above.

3. When a business entity receives payment before delivering goods, the unearned revenue account is
a. credited.
b. debited.
c. debited and credited.
 d. not affected.

4. Which is false concerning the rules of debit and credit?

a. The left side of an account is always the debit side and the right side is always the credit side. b.
The word “debit” means to increase and the word “credit” means to decrease.
c. Increase in assets and expenses are debit entries, and increase the liabilities, equity and revenue are
credit entries
d. The normal balance of any account appears on the side for recording increases.

5. A credit entry decreases the balance of

a. assets.
b. income.
c. liabilities.
d. owner’s equity.

6. The purchase of a service vehicle on account

a. Will decrease asset and decrease liability.
b. Will decrease equity.
c. Will increase asset and decrease liability.
d. Will increase asset and increase a liability.

7. Withdrawals by the proprietor has all of the following effects except

a. Reduction of cash balance.
b. Reduction of owner’s equity.
c. Reduction of profit for the period.
d. Reduction of total assets.

8. Which of the following statement is correct?

a. To record a decrease in any given liability account must be credited.
b. To record a decrease in capital, the capital account must be credited.
c. To record an increase in any given asset account, that account must be debited. d.
To record an increase in any given liability account that account must be debited.

9. The future economic benefits embodied in an asset may flow to the enterprise in a number of ways.
Which is the exemption?
a. An asset may be distributed to the owners of the enterprise.
b. An asset may be exchanged for other assets.
c. An asset may be used singly or in combination with other assets in the production of goods or services
to be sold by the enterprise.
 d. An asset may be used to convert an obligation to equity.

10. Recording a single transaction in the double-entry accounting records may

a. Decrease the balance on a liability account by a given amount and decrease the balance on an asset
account by the same amount.
b. Decrease the balance on an asset account by a given amount and increase the balance on a liability
account by the same amount.
c. Increase the balance on an asset account by a given amount and decrease the balance on a liability
account by the same amount.
Fundamentals of Accounting, Part I Mark Rey U. Tan, CPA, MSA ​Page ​24 ​of ​25

Republic of the Philippines

M​ARINDUQUE ​S​TATE C
​ ​OLLEGE
School of Business and Management
Bachelor of Science in Accountancy

d. Increase the balance on one asset account by a given amount and increase the balance on another
asset account by the same amount.

11. The purchase of an asset on account will

a. have no effect on total assets or total liabilities.
b. increase total assets and decrease owner’s equity.
c. increase total assets and increase owner’s equity.
d. increase total assets and increase total liabilities.
 e. increase total liabilities and decrease total assets.

12. Expenses can be defined as

a. decreases in economic benefits during the accounting period in the form of outflows or depletion of
assets or incurrences of liabilities that result in decreases in equity.
b. decreases in owner’s equity.
c. increases in owner’s equity.
d. inflows of assets from delivering or producing goods or rendering services.

13. Inventories are assets which are

a. held for sale in the ordinary course of business.
b. in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
c. in the process of production for such sale.
d. all of the above.

14. Obligation which are expected to be liquidated through the use of existing current assets or the
creation of other current liabilities are called
a. current assets.
b. current liabilities.
c. long-term liabilities.
d. unearned revenue.

15. Debits
a. Decrease assets and expenses and increase liabilities, revenue and owner’s equity.
b. Increase assets and decrease expenses, liabilities, revenue, and owner’s equity.
c. Increase assets and expenses and decrease liabilities, revenue and owner’s equity. d.
Increase assets and owner’s equity and decrease liabilities, expenses, and revenue.

16. Over a period of time, if total assets increase by P270,000 and total liabilities increase by P70,000, then
owner’s equity will be increased by
a. P70,000
b. P340,000
c. P270,000
d. P200,000

17. In the accounting equation, an increase in asset can be associated with

a. A decrease in a liability.
b. A decrease in owner’s equity.
c. An increase in a liability.
d. An increase in another asset.

CONGRATULATIONS! YOU HAVE COMPLETED MODULE 1.

CHILLAX KA MUNA WHILE WAITING FOR MODULE 2.

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