In-Depth Notes on ABM: Analysis of Business Transactions

Business Transactions
  • Business transactions change the financial status of a business.
    • Types of Transactions:
    • Simple Exchange: Buying or selling an asset (e.g., cash paid for a delivery van).
    • Non-Cash Events:
      • Bad Debts: Loss incurred when customers fail to pay.
      • Calamity Loss: Loss due to unforeseen events (e.g., flood, theft).
      • Depreciation: Reduction in asset value due to use over time (e.g., computers).
Common Currency in Transactions
  • All transactions are recorded in a common currency (e.g., Philippine peso).
  • Transactions in foreign currencies are converted to pesos based on current exchange rates.
Transaction Analysis
  • Definition: The process of examining how a transaction affects a business’s finances.
  • Accounting Equation: Assets = Liabilities + Owner's Equity
    • Assets: Owned items (e.g., cash, equipment).
    • Liabilities: Debts owed (e.g., loans).
    • Owner's Equity: Owner's share in the business after liabilities are settled.
Effect of Transactions on the Accounting Equation
  • Every transaction affects the accounting equation to maintain balance.
  • Example: Buying equipment for cash:
    • Before: Cash (₱100,000) + No Equipment (₱0) = ₱100,000 in Assets.
    • Transaction: Buy equipment worth ₱50,000 in cash.
    • After: Cash (₱50,000) + Equipment (₱50,000) = ₱100,000 in Assets.
Rearranging the Accounting Equation
  • To find Owner's Equity: Assets - Liabilities = Owner's Equity.
  • To find Liabilities: Assets - Owner's Equity = Liabilities.
  • Distinctions:
    • Creditors (Outsiders): Claims on liabilities.
    • Owners (Insiders): Claims on owner's equity.
Three Basic Accounting Elements
  1. Assets: All items of value owned by the business.
  2. Liabilities: Obligations or debts owed by the business.
  3. Owner's Equity: Net value owned after liabilities are covered.

Accounting Equation Restated:

  • Assets - Liabilities = Owner's Equity
  • Assets - Owner's Equity = Liabilities
Examples of Transactions
  • Transaction Examples for ML Machine Shop:
    • A: Owner invested ₱200,000.
    • B: Business borrowed ₱100,000.
    • C: Purchased office equipment for ₱40,000 cash.
    • D: Bought ₱50,000 furniture on credit.
    • E: Received ₱100,000 payment for services.
    • F: Promised to pay ₱40,000 rent.
Revenue and Expenses

  • Revenue: Money earned from goods/services sold; increases owner’s equity.

    • Example: ₱100,000 earned from services boosts equity.
    • Unearned Income: Advance payment recorded as a liability increases equity after the service period.

  • Expenses: Costs incurred in the operation; decreases assets or increases liabilities.

    • Example: ₱40,000 paid for rent as an expense reduces cash and decreases equity.
Business Documents
  • Official Receipt (OR): Proof of cash received; supports cash journal entries.
  • Sales Invoice (SI): Proof of sale for seller/buyer; affects cash collection.
  • Purchase Order (PO): Authorizes purchase and can be oral or written.
  • Check Disbursement Voucher (CDV): Pertains to issuing checks, needs approval.
  • Bank Deposit Slip (BDS): Evidence of cash deposits; supports journal entries.
  • Journal Voucher (JV): Records nonrecurring transactions, needs adequate explanation.
  • Statement of Account (SOA): Issued by service providers/billers; supports expense increases.
  • Promissory Note (PN): Document of obligation to pay, used for loans and asset purchases.
Rules of Debits and Credits

  • Debits:

    • Increase in assets or expenses.
    • Decrease in liabilities, owner's equity, or income.

  • Credits:

    • Decrease in assets or expenses.
    • Increase in liabilities or owner’s equity or income.
Practical Examples of Debits and Credits

  • Debit Examples:

    • Buying a computer increases the asset (debit computer).
    • Paying off a loan decreases liability (debit loan payable).
    • Owner withdrawals decrease equity (debit owner’s drawings).

  • Credit Examples:

    • Using cash for supplies decreases cash (credit cash).
    • Taking a bank loan increases liability (credit loan payable).
    • Owner investing more increases equity (credit capital).