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Chapter 3

ANALYZING TRANSACTIONS
TO START BUSINESS
Financial Structure of a Business

Financial Structure is based on the three elements –


Asset, Liabilities and Equity

Assets – resources owned by the business, they are


used in the operations of the company
Liabilities – obligations of the company
Equity – residual interest of the owners
Accounting Equation

Assets = Liabilities + Equity


Accounts

Used to record changes in the accounting elements

Assets
 Cash, Accounts Receivable, Inventory, Supplies, Land,
Equipment etc.
Liabilities
 Accounts Payable, Interest Payable, Salaries Payable, Notes
Payable, Loan Payable etc.
Equity
 Owner’s Equity, Owner’s Drawing
Normal Balance

Assets – Debit (increase DR; decrease CR)

Liabilities – Credit (increase CR; decrease DR)

Equity – Credit (increase CR; decrease DR)


Business Transactions

 Exchange in values between two parties expressed in


monetary terms
 Equal Value

 For every value received there is value parted


 Increase or decrease the elements but the identity should
always be maintained
Accounting Principles

Business Entity Concept


Cost Concept or Exchange Price
Objectivity Principle
Monetary Measurement Principle
Going Concern
Accrual Assumption
Reporting Period
Illustration 1

March 1 May Gomez opened a tour and travel service by


contributing cash of P50,000. She has three cars worth
P1,200,000 but contributed only two cars worth
P750,000.
3 Gomez borrowed P100,000 cash from PNB for use in her
business
7 Bought tables and chairs from Blim’s and paid cash
15 Various equipment were purchased on account from
National Winners for P55,000
18 Gomez made cash withdrawal of P5,000 for personal use
20 The account due to National Winners was paid in cash
Statement of Financial Position

Happy Tour & Travel


Statement of Financial Position
March 20, 2018

ASSETS LIABILITIES AND OWNER'S EQUITY


Cash P45,000 Loans Payable P100,000
Cars 750,000 Gomez, Capital 795,000
Equipment 55,000
Furniture and Fixtures 45,000
Total P895,000 P895,000
Illustration 2
Copyclear and Bindery Center situated at Taft Avenue, Manila was set
up January 2, 2018. The owner, Susan Alegre, contributed cash of
P20,000, and equipment of P48,000. The following are the additional
transactions for January:
Jan 5 Bought furniture and fixtures worth P6,000 on account
7 Bought a photocopier machine for P20,000. Terms: 50% down, balance on
account
8 Hired a helper on commission basis, based on 10% of sales, to operate the
machine
10 An emergency prompted Ms. Alegre to withdraw P1,500 cash for personal
use
15 Bought supplies costing P3,000 and paid cash
20 The account of January 5 is due. Ms. Alegre paid this from her personal
cash
30 The account of January 7 is due. Issued a 60-day promissory note for this
COPYCLEAR AND BINDERY CENTER
Statement of Financial Position
January 30, 2018

ASSETS LIABILITIES AND OWNER'S EQUITY


Cash P5,500 Notes Payable P10,000
Supplies 3,000 Alegre, Capital 72,500
Equipment 68,000
Furniture and Fixtures 6,000
Total P82,500 P82,500
Qualitative Attributes

Understandability
Relevance
Reliability
Comparability