Romblon State University

INSTITUTE OF INFORMATION TECHNOLOGY

Liwanag, Odiongan, Romblon

ACCTNG 1 – ACCOUNTING PRINCIPLES

ELEMENTS OF
ACCOUNTING
MODULE TWO

INTRODUCTION
This module deals with the elements of accounting. As you read this material, you will be able to know the different types
and effects of business transactions. Likewise, you will know more about the type of account. After the content discussion, you are
given exercises to work on. Towards the end of this module, you are tasked to give your own reflections. All these activities will
deepen and strengthen your understanding about the lesson presented. Do the task honestly coupled with high interest so that you
can benefit the most of it.

LEARNING OUTCOMES:
 Describe the main elements of financial accounting information – assets, liabilities, revenue and expenses.
 Identify the main financial statements and their purposes.

Prepared by:
RONALD P. GERVACIO
RSU-IIT-01-0013-MOD-2021-08-12
 LESSON 2A: ACCOUNTING TERMINOLOGIES

 LEARNING OBJECTIVES:
Upon completion of the course, the student should be able to:
 Identify the accounts as assets, liabilities, capital, income or expense;
 Cite an example of each type of account;
 Prepare a chart of accounts

 CONTENT EXPLORATION:

Accounting Terminologies

ASSETS

ASSETS – are property or rights on property owned by the business. The assets should be classified only in to two: current assets
and non-current assets.

 Current Assets – refers to cash and other assets that are easily converted into cash or consumed during the accounting
period usually one year.
 Non-Current Assets – refers to assets that have the following characteristics:
1. More or less permanent in nature;
2. They possess physical existence;
3. They are not for sale;
4. They are intended for use in the operation.

CURRENT ASSET

 Cash on hand – refers to cash and other cash items which are not yet deposited in the bank.
 Cash in bank – is money deposited in the bank.
 Notes Receivable – are claims of the business from anyone evidenced by a note.
 Interest Receivable – interest earned on an interest-bearing note not yet collected.

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  Accounts Receivable – refers to claims of the business from anyone for sales made or services rendered on account.
 Estimated Uncollectible Account – sometimes called allowance for bad debts.
 Advance to officers and employees – is a term that refers to amounts given to officers and employees usually deductible
from their salaries.
 Merchandise inventory – refers to goods unsold at the end of the accounting period or on hand at the beginning of the
year.
 Prepaid Expenses – are expenses paid in advance or items that are bought which will be used during accounting period.

NON-CURRENT ASSETS

 Tools – refers to small items of equipment like pliers, hammer, screwdrivers, etc.
 Land – refers to land space owned by the business.
 Building – refers to the building or edifice constructed, owned and intended for use by the business.
 Furniture and Fixtures – is a term used to, include tables and chairs, cabinets, counters, and other pieces of furniture used
in the business.
 Delivery equipment – is a term that includes cars, jeeps, trucks, van, and other transportation vehicles owned by the
business.
 Accumulated Depreciation – is a contra-asset account. It is a deduction from a particular fixed asset account.
 Intangible assets – are assets that do not have physical existence owned by the business. Examples are goodwill, patents.

LIABILITIES

LIABILITIES - is an obligation that a business owes to someone and its settlement involves the transfer of cash or other resources.
Liabilities must be classified in the statement of financial position as current or non-current depending on the duration over which
the entity intends to settle the liability.
 Current liabilities – a liabilities that are expected to be settled within one year from the reporting date.
 Non-current liabilities – a liability which will be settled over the long term.

CURRENT LIABILITIES

 Accounts Payable – is a current liability which refers to debts or obligations that arise from purchase of goods or services
on account.
 Notes Payable – is a current liability if the note is payable within one year.
 Interest Payable – is the interest due to an interest bearing note. Accrued interest expense is term synonymous with interest
payable.

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  Taxes Payable – are taxes due the for government are not yet paid by the business.
 Salaries Payable – are salaries not yet paid by the business to its employees or workers.

NON-CURRENT LIABILITIES

 Long-term liabilities – are obligations or debts of the business that will be due and payable beyond one year.
 Mortgage Payable – is a long-term liability account that refers to debt secured by a mortgage on real estate.

INCOME

INCOME – is generally term to mean any earning made by the business.

 Service Income – refers to earnings derived from services rendered whether on cash or on account.
 Fees – is another generally term used to designate income.
 Legal Fee – is income from rendering legal services.
 Sales – is a term to denote income derived from the sales of goods.
 Commission income – is an income account to designate earnings received from selling anything on a commission basis.
 Other income – is another income account to designate earnings received from sources other than its main source of
income.

COST AND EXPENSE

 Taxes and Licenses – are payments made by the business to the ‘s government for it’s business operations.
 Salaries Expenses – refers to the cost of services rendered by the employees or workers of the business.
 Supplies Expense – refers to the cost of office items like stationery, bond papers, carbon papers and etc.
 Delivery Expense – refers to the cost of transportation in delivering goods or services to customers.
 Bad debts Expense – refers to the portion of accounts receivable which may not be collected.
 Depreciation expense – refers to the portion of the cost of the fixed asset which has been charged to income during the
period.
 Insurance expense – refers to the insurance premium paid by the business.
 Rent Expenses – refers to the space occupied by the business or the payment for the use of any property by the business.
 Interest Expense – refers to the amount charged for the use of money.
 Advertising Expense – includes promotional expenses in the selling of the product.
 Utilities Expense – is a term used to denote the cost of light and water consumed by the business.
 Repair and Maintenance Expense – are expenses for repairing or servicing buildings, machinery, or equipment of the
business.
 Salesmen Salaries – are fixed wages given to salesmen.
 Cost of Good Goods Sold – is the purchase price or the manufacturing cost of goods sold.

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CHART OF ACCOUNTS

A chart of accounts is a list of account titles used by the bookkeeper as a guide in recording business transactions. The
chart is arranged in the financial statement order, that is, assets first, followed by liabilities, owner's equity, income and expenses.
The accounts should be numbered in a flexible manner to permit indexing and cross-referencing. The chart of accounts helps to
identify where the money is coming from and where it is going. It is the foundation of the financial statements. If a chart of account
is given, no other account titles can be used other than those found in the chart.

When analyzing transactions, the accountant refers to the chart of accounts to identify the pertinent accounts to be increased
or decreased. If an appropriate account title is not listed in the chart, an additional account may be added. Presented below is the
chart of accounts for the illustration:

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 Exercise 1A

Matching Type

Assets Accounts Receivable Intangible Assets

Liabilities Notes Receivable Property, Plant and Equipment
Owner’s Equity Rent Expense Prepaid Expense
Cash

____________ 1. It is the obligations of the company payable in money, goods or services.

____________ 2. These are non-current tangible assets.
____________ 3. These assets are identifiable, non-monetary assets without physical substance.
____________ 4. It is the claim of the owner also known as the capital.
____________ 5. It is the most liquid asset and is the medium of exchange for business transactions.
____________ 6. It is an expense for leased office space, equipment or assets rented from others.
____________ 7. Examples of this are cash, account receivable and prepaid expenses.
____________ 8. It is a written promise from the customer to pay his receivables on a certain future date

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 Exercise 1B

CLASSIFICATION. Classify the following assets into current assets and non-current assets.

_____________ 1. Accounts Receivable

_____________ 2. Unexpired Income
_____________ 3. Supplies on hand
_____________ 4. Prepaid rent
_____________ 5. Office Equipment
_____________ 6. Transportation Vehicle
_____________ 7. Tools
_____________ 8. Prepaid Commission
_____________ 9. Accrued interest income
_____________ 10. Medical Equipment

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 Exercise 1C

CLASSIFICATION. Classify the following into current liabilities and non-current liabilities.

_____________ 1. Due to Mr. Reyes

_____________ 2. Salaries Payable
_____________ 3. Installment accounts due to six months
_____________ 4. PhilHealth contributions payable
_____________ 5. Mortgage Payable
_____________ 6. Bonds Payable
_____________ 7. Witholding taxes payable
_____________ 8. Utilities Payable
_____________ 9. Notes Payable for 3 years
_____________ 10. SSS Premium Payable

Exercise 1D

CLASSIFICATION. Classify the following accounts into asset, liability and capital/equity.

_____________ 1. Notes Receivable

_____________ 2. Accounts Payable
_____________ 3. Prepaid Rent
_____________ 4. Unexpired Insurance
_____________ 5. Cash on hand
_____________ 6. SSS Premium expense
_____________ 7. Land
_____________ 8. Building
_____________ 9. Interest Income
_____________ 10. Accumulated depreciation

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 LESSON 2B: ELEMENTS OF ACCOUNTING

 LEARNING OBJECTIVES:
Upon completion of the course, the student should be able to:
 Know the basic elements of Accounting
 Learn the account and accounting equation
 Know the theory of debit and credit
 Learn the effects of business transactions on the accounting equation

 CONTENT EXPLORATION:

ELEMENTS OF BASIC ACCOUNTING

Bookkeeping is centered on three elements: assets, liabilities, and owner's equity. An equation may be formed to show the
relationship of these three elements. Assets = Liabilities + Owner's Equity. It means that the total assets of the business are
contributed by the owner and creditors.

THE ACCOUNT

The basic summary device of the 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
statement. 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 below:

Account Title

Left side or Right side or

Debit side Credit side

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 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 subtraction on the same side (left or right side), but in all cases the
equality must be maintained as shown below:

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 is recorded. A debit
side entry must have a corresponding credit side entry. For every transaction, there must be one or more accounts debited and

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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. Income increases owner's equity and expense decreases owner's equity. Hence, increases in income are recorded as
credits and decreases as debits. Increases in expenses are recorded as debits and decreases as credits. These are the rules of
debit and credit. The following summarizes the rules:

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 NORMAL BALANCE OF AN ACCOUNT

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. This result occurs because increases in an account are usually greater than or equal to decreases.

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 goods 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:
 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.
 Exchange of Assets (EA). One asset account increases and another asset account decreases. Example: Acquired
equipment for cash.
 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.

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  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 Asset (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)

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. Galicano 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 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 businesses. 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, Galicano 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:

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 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.

The financial transaction is analyzed as follows:

An entity separates 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. 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:

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 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 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.

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 transaction caused the business to grow, as shown by the increase in total assets
from P375, 000 to P463, 000.

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 Mar. 16 Del Mundo paid P18, 000 to Ceradoy Bills Express, a one-stop bills payment service company, for the semi-
monthly utilities.

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.

The entity has performed services to clients so income should already be recognized.
Del Mundo is entitled to receive payment 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

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 account.

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.

Mar. 20 Checks totaling P25, 000 were received from clients for billings dated Mar. 17.

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.

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 Mar. 21 Del Mundo withdrew P20, 000 from the business for his personal use.

Withdrawal of cash or other assets for personal use is the way by which the owner of the entity receives advance distribution of
the profits. On Mar. 1, Del Mundo invested P350, 000; both cash and owner's equity increased. 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 advertisements for
this month. Del Mundo will pay this bill next month.

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.

Mar. 28 Del Mundo paid his assistant designer salaries of P15,000 for the month.

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

This transaction increased both the asset-cash and owner's equity. According to the rules of debit and credit, 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.

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 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.

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.

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.

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 The entity has an obligation to Marco Polo Ortigas Hotel for the next three months. This liability is called unearned revenues.
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.

This 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.

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

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.

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 equity.

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

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 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 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 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.

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

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.

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.

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

This transaction increased the expense – advertising 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.

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

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.

DISTICTION BETWEEN REVENUES AND RECEIPTS

At this point, it will be useful to learn the distinction between revenues and receipts as illustrated in the following table. The
table shows various types of sales transactions and classifies the effect of each on cash receipts and sales revenues for “this year”.

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 This Year
Transactions Amount Cash Sales
Receipts Revenue
1. Cash sales made this year. P200, 000 P200, 000 P200, 000
2. Credit sales made last year; 300, 000 300, 000 0
cash received this year.
3. Credit sales made this year; 400, 000 400, 000 400, 000
cash received this year.
4. Credit sales made this year; 100, 000 0 100, 000
cash to be received next year.
Total 900, 000 700, 000

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 Exercise 2B
A
Transaction Analysis

Transactions:

a. Divina deposited money in a bank as an investment

b. Paid cash for 3-month rent
c. Bought a typewriter for cash
d. Bought a table for on account
e. Received cash for services rendered
f. Billed a customer for services rendered
g. Paid salaries of employees
h. Collected one-half of the account in letter F
i. Paid our account in letter D
j. The owner Divina withdrew cash

For each of the transactions for Divina Antique Restorer, a sole proprietorship, fill in the spaces to answer the
following questions:

1. What are the two accounts affected by the transaction?

2. What type of account is affected-asset, liability, owner's capital, owner's withdrawal, income or expense account?
3. Should the account be increased or decreased?
4. Should the account be debited or credited?
Accounts Affected Type of Account Increase or decrease Debit or credit

Transaction

a. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

b. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

c. 1.___________ ____________ ____________ ____________

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 d. 1.___________ ____________ ____________ ____________
2.___________ ___________ ___________ ___________

1.___________ ____________ ____________ ____________

e. 2.___________ ___________ ___________ ___________

f. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

g. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

h. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

i. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

j. 1.___________ ____________ ____________ ____________

2.___________ ___________ ___________ ___________

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 Exercise 2B

Directions: For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease (D) or is not
affected (NE).

A L E
1. The owner invests personal cash in the business. _______ _______ _______

2. The owner withdraws business assets for personal use. _______ _______ _______

3. The company receives cash from a bank loan. _______ _______ _______

4. The company repays the bank that had lent money. _______ _______ _______

5. The company purchases equipment with its cash. _______ _______ _______

6. The company purchases supplies on credit. _______ _______ _______

7. The owner contributes her personal truck to the business. _______ _______ _______

8. The company purchases land by paying half in cash

and signing a note. _______ _______ _______

9. The owner withdraws cash for personal use. _______ _______ _______

10. The company repays the suppliers. _______ _______ _______

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ASSESSMENT

Recording Transactions in T-Accounts

The accounts and transactions of Lailani Pabilario, Systems Consultant, are shown below:

a. Invested P150,000 in cash to start the business.

b. Paid P7,500 for one month's rent.
c. Bought office furniture for P26,000 in cash.
d. Performed services for P10,500 in cash.
e. Performed services for P12,750 on credit.
f. Bought a desktop computer for P55,000; paid 50% down, balance in 30 days.
g. Acquired a personal copier for P39,500 on credit; paid P9,500 cash, balance due in 30 days.
h. Received P7,000 from credit clients.
i. Bought additional office chairs for P8,000 on credit.
j. Issued a check for P32,500 to pay for salaries.
k. Performed services for P10,250 in cash.
I. Performed services for P11,500 on credit.
m. Collected P6,000 on accounts receivable.
n.Issued a check for P4,000 in partial payment of the amount owed for office chairs.
o. Paid P2,250 for the monthly telephone bill.
p. Paid P2,500 for the monthly electric bill.
q. Pabilario withdrew P10,000 in cash for personal expenses.

Required:

1. With the aid of T-accounts, record the transactions listed above. Use the following accounts: Cash; Accounts
Receivable; Office Furniture; Office Equipment; Accounts Payable; Pabilario, Capital; Pabilario, Withdrawals;
Consulting Revenues; Salaries Expense; Rent Expense; Utilities Expense and Miscellaneous Expense.

2. Determine the balances of the T-accounts.

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REFLECTIVE ANALYSIS
Directions: Write 3 most important things that you have learned from
this module. Limit your ideas to 150 words only.

From the topic about introduction to accounting, I realized that…

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________

REFERENCES

Ballada, W. (2014) Basic Accounting . Made Easy Books. DomDame Publishers

Haddocl, M., Proce, J., & Farina, M. (2012). College Accounting: A Contemporary Approach, 2nd ed. New York: McGraw-Hill/Irvin
Lising, G.V. Jr. Basic Accounting. Part 1 Single Proprietorship. Vol 1. Philippines: National Bookstore, Inc
Lising, G.V. Jr. Basic Accounting. Part 1 Single Proprietorship. Vol 2. Philippines: National Bookstore, Inc
Macapilit, C.H, (2009). Worksheet in Basic Accounting. Philippines: Rex Bookstore
Valencia, E.G. & Roxas, G.F. (2010). Basic Accounting 3rd ed. Mandaluyong City, Philippines: Valencia Educational Supply.
Wild, J. (2009). Principles of Accounting 19th Ed. McGraw Hill Publishing.

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