ANALYZING and SUMMARIZING BUSINESS TRANSACTIONS OF A.....

SERVICE ENTITY

Analyzing Business Transactions

Business Transaction

“is the exchange between two parties of things and rights the value of
which are expressed in monetary terms or pesos.”

“Not all business activities are “accountable”. For example, the hiring of employees, death of company’s president and the entering into contracts are all business activities that cannot be qualified or expressed in terms of unit of measure, thus cannot be recorded in the books of the enterprise.”

“Business activities are said to be accountable and are called business transactions and events when they affect the elements of the accounting equation.”


Accounting Equation

Asset = Liabilities + Owner’s Equity ( - Drawings + Income – Expense)

Therefore: Assets- Liabilities= Owner’s Equity
Assets- Owner’s Equity= Liabilities

“The accounting equation shows the relationship among assets, liabilities and owner’s equity. Assets appear on the left hand side of the equation while the legal and economic claims against the assets- the liabilities and owner’s equity- appear on the right hand side of the equation. The two sides must ALWAYS be EQUAL.”


............................LEFT SIDE ......................................RIGHT SIDE

...........................ASSET .................................LIABILITIES
................................................................................+
....................................................................OWNER’S EQUITY


“Every transaction must always have a dual-effect or must affect atleast two
accounts.”

“The business transactions are analyzed from the viewpoint of the business. If the transaction is “Purchased” or “Bought”, it is the business that is buying. If the transaction is “Sold”, it is the business that is selling, if the transaction is “Paid” it is the business that pays, if the transaction is “Collected” it is the business that receives the payment…..
“ALWAYS CONSIDER YOURSELF AS THE BUSINESS” when making the analysis.”


RULES OF DEBIT AND CREDIT

The effect of changes in Assets, Liabilities and Owner’s Equity are being summarized in an accounting device called “account”. This device will group these accounting values with their amounts belonging to one item only. In the item “cash” for example, all amounts representing increases and decreases in cash are entered in the account “cash”.

As discussed earlier, an “account” is divided into two sides. The left-hand side which is called the “debit side” and the right-side is called the “credit side”



DEBIT ...............................................................CREDIT
Increase in Asset ..............................Decrease in Asset
Decrease in Liability ........................Increase in Liability
Increase in Drawing .........................Increase in Capital
Increase in Expense......................... Increase in Income

Normal Balance corresponds to the increase in each account.
Therefore:
INCREASE

DEBIT ....................................................................CREDIT
ASSET ...................................................................LIABILITY
EXPENSE ...............................................................INCOME
DRAWINGS ...........................................................CAPITAL