FABM 1

CHAPTER 4
Effects of Transactions to the Accounting Equation
by: Mrs. Bernal
(Sources: Textbook of Flocer Lao Ong & DepEd Modules)

ILLUSTRATION

OWNER'S
Trans. No. TRANSACTIONS ASSETS LIABILITIES EQUITY
EFFECTS OF OWNER'S INVESTMENT/WITHDRAWAL AND CASH ACQUISITION OF ASSE

1 Owner invests cash in the business. ↑ NC ↑

2 Owner invests furniture. ↑ NC ↑

3 Owner withdraws cash for personal use. ↓ NC ↓

4 Owner purchases supplies using cash. ↑↓ NC NC

Owner gets cash refund for returning

5 damaged supplies bought in cash. ↑↓ NC NC

6 Owner purchases furniture using cash. ↑↓ NC NC

Owner makes additional cash

7 investment. ↑ NC ↑

Owner withdrawas supplies for personal

8 use. ↓ NC ↓
EFFECTS OF INCOME EARNED AND PAYMENT OF EXPENSES

1 Rendered services for cash. ↑ NC ↑

2 Rendered services on credit. ↑ NC ↑
3 Paid telephone bill. ↓ NC ↓
 FABM 1
CHAPTER 4
cts of Transactions to the Accounting Equation
by: Mrs. Bernal
ources: Textbook of Flocer Lao Ong & DepEd Modules)

ANALYSIS
ER'S INVESTMENT/WITHDRAWAL AND CASH ACQUISITION OF ASSETS
Cash increases because the owner invests cash in the business which is an asset.
Owner's interest in the business increases as represented by an increase in capital.

Assets increase because owner invests furniture in the business which is an asset.
Owner's interest in the business increases because of the investment as represented by
an increase in capital.

Assets decrease because the owner withdraws cash which is an asset. Owner's interest
in the business decreases because of the withdrawal as represented by a decrease in
capital.
Supplies increase because of the purchase but cash decreases because of the payment.
Since both are assets, one asset increases while another asset correspondingly
decreases.

Cash increases because of the refund but supplies decreases because of the return.
Since both are assets, one asset increases while another asset correspondingly
decreases.

Furniture increases because of the purchase but cash decreases because of the
payment. Since both are assets, one asset increase while another asset correspondingly
decreases.

Assets increase because the owner invests additional cash in the business which is an
asset. Owner's interest in the business increases because of the investment as
represented by an increase in capital.

Assets decrease because the owner withdraws supplies from the business which is an
asset. Owner's interest in the business decreases because of the withdrawal which is
represented by a decrease in capital.

CTS OF INCOME EARNED AND PAYMENT OF EXPENSES

Assets increase because the owner collected cash as a result of services rendered.
Owner's equity increases because the business earned income for services rendered.

Assets increase because of an account collectible from the customer which is an asset.
Likewise, owner's equity increases because of income earned from services rendered.

Assets decrease because owner pays cash for the telephone bill. Owner's equity
decreases because the telephone bill representes utilities expense which decreases
capital.
 FABM 1
CHAPTER 4
Effects of Transactions to the Accounting Equation
by: Mrs. Bernal
(Sources: Textbook of Flocer Lao Ong & DepEd Modules)

DRILL No. 1 INC - Increase; DEC - Decrease; NC - No Change

OWNER'S
Trans. No. TRANSACTIONS ASSETS LIABILITIES EQUITY

1 Owner invests cash.

2 Owner invests equipment.

3 Renders services for cash.

4 Renders services on account/credit.

5 Collects account in transaction no. 4.

6 Purchases supplies on credit.

7 Returns a portion of supplies bought in

no. 6 as these are found to be defective.

8 Pays the supplies bought on account in

no. 6.

9 Borrows cash issuing a note.

10 Purchases land using cash.

11 Pays utilities expense for the month.

12 Pays the note in full in no. 9.

13 The owner withdraws cash.

14 Pays salaries of employees for the

month.

15 The business purchases one printer for

business use in cash.
 FABM 1
CHAPTER 4
Effects of Transactions to the Accounting Equation
by: Mrs. Bernal
(Sources: Textbook of Flocer Lao Ong & DepEd Modules)

ANALYSIS
An entity separate and distinct from the owner is created. The cash investment of the
owner increases the assets of the business and the capital of the owner.

The equipment increases the assets of the business. Since this is an investment of the
owner, capital of the owner increases correspondingly.

The business earned an income by rendering services and collecting revenues in cash.
The effect in the accounting equation is an increase in cash for the cash collected and an
increase in capital as revenue increases capital.

Assets increase by the amount of revenue expected to be collected from the customer to
whom the services were rendered. Capital also increases since rendering of services
represents revenue.

Assets increase as there is cash inflow in the amount of the collection. However, assets
will likewise decrease with the amount of the collection as the accounts receivable, an
asset account, will decrease. This is because the amount the customer owes has already
been collected.

Supplies increase the assets of the business and the liabilities correspondingly increase
as the supplies were bought on account or on credit.

Assets decrease with the amount of supplies returned. Liabilities correspondingly

decrease as the returned supplies decrease the amount owed.

The transaction is a payment of account. Since there is cash outflow representing the
payment of an existing liability, assets decrease in the amount of cash paid and liabilities
decrease in the amount of the liabilitiy on supplies paid.

Cash increases the assets of the business as there is an inflow of cash because the
business borrowed money. Notes payable increases the liabilities of the business as it
represents an obligation on the part of the business to pay at a future date.

Land increases the assets of the business but cash correspondingly decreases due to
the payment for the purchase of land.

Payment represents cash outflow decreasing the assets of the business. Expenses
decrease the capital as they have opposite effect on income.

The transaction is a payment of liabilitiy. Since there is cash outflow representing the
payment of the note, assets decrease in the amount of cash paid and liabilities decrease
in the amount of the notes payable.

Assets decrease by the amount of the withdrawal. Owner's capital correspondingly

decrease as a result of the cash withdrawal.

Payment represents cash outflow decreasing the assets (cash) of the business.
Expenses (salaries expense) decrease the capital as they have opposite effect on
income.

The transaction is a payment of one printer, thus, increases asset (office equipment) and
decreases asset another asset (cash).
 FABM 1
CHAPTER 4
Effects of Transactions to the Accounting Equation
by: Mrs. Bernal
(Sources: Textbook of Flocer Lao Ong & DepEd Modules)

DRILL No. 2 INC - Increase; DEC - Decrease; NC - No Change

OWNER'S
Trans. No. TRANSACTIONS ASSETS LIABILITIES EQUITY

1 Ms. Go invests cash of ₱

800,000.

2 Ms. Go invests equipment amounting to

₱ 50,000.

3 The business renders services for cash

amounting to ₱ 125,000.

4 The business renders services on credit

amounting to ₱ 9,000.

5 Collects account in transaction no. 4.

6 Purchases supplies on credit amounting

to ₱ 1,000.

Returns a portion of supplies bought in

7 no. 6 as these are found to be defective,
₱ 120.

8 Pays the supplies bought on account in

no. 6.

9 Borrows ₱ 90,000 cash issuing a note.

10 Purchases land worth ₱

500,000 in cash.

11 Pays utilities expense for the month, ₱

800.

12 Pays the note in full in no. 9.

13 The owner withdraws cash amounting to

₱ 500.

14 Pays salaries of employees for the

month, ₱ 1,500.

The business purchases one printer for

15 business use in cash amounting to ₱
15,000.
 FABM 1
CHAPTER 4
Effects of Transactions to the Accounting Equation
by: Mrs. Bernal
(Sources: Textbook of Flocer Lao Ong & DepEd Modules)

ANALYSIS