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OVERVIEW
a. Production is the process by which resources are combined or transformed into
This handout discusses business transactions, and the related values acquired and products.
values given up by the entity. It also discusses accounting elements such as assets,
liabilities, equity, income and expense. b. Casualties are sudden substantial, unanticipated reduction in enterprise
resources not caused by other entities. Losses from fires, floods, and
earthquakes are examples of casualties. When a flood destroys the building and
BUSINESS TRANSACTIONS AND THE RELATED ACCOUNTING inventories of Fun Company
VALUES OR ELEMENTS
VALUES RECEIVED AND VALUES PARTED WITH
BUSINESS TRANSACTIONS
In every accountable business transaction there is a value received and a value parted
An enterprise performs various activities in order to earn profit. Many of these with. Below are examples of business transactions of Joy Store and the values
activities may be accountable in the sense that they will affect the assets, liabilities and corresponding to these transactions.
equity of the enterprise. Business activities that are accountable are called economic
activities or transactions. In a transaction there is an exchange of assets or services for a Transactions Value received Value parted
certain sum of money or assets. It involves exchange of monetary values between two or with
more parties. 1. Joy invested money to Joy Store Money or cash Right of
In a business transaction, for every value received there is a corresponding value ownership
parted with. Value is an expression of money worth applied to a particular asset, group of 2. Joy invested equipment to Joy Equipment Right of
assets, business entity, or services rendered. Store ownership
3. Payment of store space Right to use the Cash
Business transactions should be authenticated by genuine business forms like sale property
invoices, purchase invoices and official receipts. 4. Purchased of merchandise for cash Merchandise Cash
5. Purchased of merchandised on Merchandise Debt or obligation
Business transactions may either be external or internal. credit to pay the seller
1. External transactions or exchanges are economic events involving the enterprise and 6. Sale of merchandise for cash Cash Merchandise
other entities. These events or transactions may involve transfer of resources or 7. Sale of merchandise on credit Debt collectible Merchandise
obligation to or from other entities. The sale of merchandise to customers is an external 8. Receipt of cash as payment of Cash Release of a debt
transaction. Two parties are involved: the business enterprise and the customers. debt owing to Joy Store collectible from a
debtor
Figure 2 shows that during a sale transaction, there are transfers of resources to or 9. Payment of transportation of Transportation Cash
from the enterprise. A merchandise (a resource) is transferred to the buyer who in turn goods delivered to customers services
transfers cash (a resource), to the seller. 10. Borrowed money from the bank Cash Debt or
Obligation to pay
Figure 2 – Exchanges or transfer of resources during a sale transaction the bank
11. Payment to the bank Cancellation of Cash
Merchandise debt or amount
(resource) owed
Joy Store Buyer 12. Payment of services rendered by Services rendered Cash
Cash employees by employees
(resource)

Borrowing of money from a creditor and payment of liabilities are examples of

ACCOUNTING ELEMENTS
external transactions.
2. Internal transactions are economic events in which only the enterprise participates.
Handout #: 2 Business Transactions and the Related Accounting Values or ElementsAccounting for Service, Merchandising and Manufacturing Businesses
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Data in the books of the enterprise are not recorded in terms of phrases or sentences
but rather with the use of accounts titles and their corresponding amounts. The account Assets are classified into two: current assets and non-current assets (PAS 1).
titles are grouped taking into consideration the concept of accounting elements or values.

The basic accounting elements or values are: assets, liabilities and capital/equity. I. Current Assets
These accounts provide information on the financial condition or position of the business.
Assets, liabilities and equity are presented in the balance sheet or statement of financial The revised PAS 1 provides that an asset shall be classified as current when it
position. Thus, they are popularly known as balance sheet accounts. Balance sheet satisfies any of the following criteria:
accounts are also termed real accounts because their usefulness continues throughout the
life of the business and that their year-end balances are forwarded to the next accounting a. It is cash or a cash equivalent unless it is restricted from being exchanged or used
period. to settle a liability for at least twelve months after the balance sheet date;
b. It is held primarily for the purpose of being traded;
The other accounting elements are income and expenses. These accounts provide c. It is expected to be realized within twelve months after the balance sheet date or;
information on the changes in equity as the result of business operations. They are d. It is expected to be realized or intended for sale or consumption within the
presented in the income statement or statement of comprehensive income. Thus, they are entity’s normal operating cycle.
popularly known as income statement accounts. They are also called nominal accounts
because their usefulness is limited to the year when they are incurred. The year-end The operating cycle is the time between acquisition of assets for processing and their
balances are closed and not forwarded to the next accounting period. realization in cash or cash equivalents. The concept of the normal operating cycle is
needed in the classification of items as current or non-current.

ASSETS The operating cycle of a trading enterprise is the average period of time that it takes
for an enterprise to acquire the merchandise inventory, sell the inventory to customers
Assets in a layman’s point of view are properties or rights on properties owned by and ultimately collect cash from the sale. The operating cycle of a manufacturing
the business. These items of value are used by the enterprise in their day to day activities. company is the period of time it takes to acquire materials, convert them into finished
However, some properties for which the business does not have legal title or ownership goods, sell the finished goods, convert them into receivables and collect the receivables.
are used to earn profit. The enterprise has a control over their uses. In accounting, these When the entity’s normal operating cycle is not clearly identifiable, its duration is
properties under the control of the enterprise may be recorded as assets in its books of assumed to be twelve months.
accounts.
Examples of current assets and contra-accounts are:
For example, Lollipop Trading purchased land and building for P10,000,000. The
company made a P5,000,000 down-payment and issued a note for the balance which is 1. Cash – includes currency or cash items on hand (such as items awaiting deposit and
payable on two equal installments over a period of two years. The legal title passes to cash in working funds as well as peso or foreign currency deposits in banks which
Lollipop Trading upon full payment. are unrestricted and immediately available for use in the current operations. Cash
items include cash on hand, cash in bank, cash fund for current purposes like petty
During the two-year period, the company is using the land and building as site of its cash fund, payroll fund, dividend fund and travel fund.
merchandising business. These assets are used in order to generate profits. Since the
enterprise has a control over the use of the land and building, they are considered as 2. Cash equivalents – are short term highly liquid investments that are readily
assets of the enterprise. convertible to known amounts of cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates. Only
Thus, in accounting assets are defined as resources controlled by the enterprise as a highly liquid investments that are acquired three months before maturity can qualify
result of past transactions or events and from which future economic benefits are as cash equivalents. Three-month BSP treasury bill, three-month deposit and three-
expected to flow to the enterprise. The essential characteristics of an asset are: month money market instruments are cash equivalents.

a. The asset is controlled by the enterprise 3. Trading securities – investments which are readily marketable and represent
b. The asset is the result of a past transaction or event temporary investment of funds available for current operations and are intended to
c. The asset provides future economic benefits and meet working capital requirements. These could include short-term investment in
d. The cost of the asset can be measured reliably. stocks and bonds.
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4. Accounts receivable – are open accounts or those that are not supported by 6. Machineries – machines, motors
promissory notes. Other names used are charge accounts, customer’s accounts or
trade debtors. 7. Furniture and fixtures – tables, chairs, showcases, counters

5. Allowance for doubtful accounts – a contra-asset account which is provided for 8. Accumulated depreciation – contra-account used to accumulate expired cost of
possible losses from uncollected accounts. This valuation allowance is actually not fixed assets. It is a deduction from property, plant and equipment.
an asset. It is a deduction from the accounts receivable.
B. Long Term Investments
6. Notes receivable – amount collectible that are evidenced by a promissory note or a
written promise to pay Investments are assets held by an enterprise for the accretion of wealth through
capital distribution, such as interest, royalties, dividends and rentals, for capital
7. Merchandise Inventory or merchandise – goods held for sale by trading concern appreciation or for other benefits to the investing enterprise such as those obtained
through trading relationship. An investment may either be current or non-current. A
8. Finished goods, goods in process, raw materials and factory or manufacturing current investment is readily realizable and is intended to be held for not more than one
supplies – inventories held by manufacturing firms year. A long-term investment is intended to be held for more than one year.

9. Prepaid rent – rent paid in advance Examples of long-term investments are Investment in bonds, Investment in
subsidiaries, or Cash surrender value of life insurance.
10. Prepaid insurance – insurance paid in advance
C. Intangibles
11. Unused supplies – stationary and other supplies for use and are still unused.
Specific account titles such as Office supplies unused or Store supplies unused may PAS 38 defines intangible assets as identifiable non-monetary assets without
be used. physical substance. The intangible asset must be controlled by the enterprise as a result of
past event and from which future economic benefits are expected to flow to the
enterprise. The following are examples of intangible assets.
II. Non-Current Assets
1. Copyright – right granted to authors, composers, playwrights, artists, publishers or
All other assets except current assets are non-current assets. These include tangible, distributors to publish and dispose of their works for a limited time.
intangible, operating and financial assets of a long-term nature.
2. Franchise – right granted to operate a utility or to manufacture or to market a
A. Property, Plant and Equipment of Fixed Assets product of another company within a specified area.

These are tangible assets which are held by the enterprise in production or supply of 3. Patent – right granted to an inventor to manufacture or produce his inventions or
goods or services, for rental to others, or for administrative purposes, and are expected to products.
be used during more than one period (PAS 16). 4. Goodwill – is an intangible advantage that increases earnings over what is normal. It
is the excess of agreed value over the contributed value.
The following are examples of Property, Plant and Equipment and Contra-accounts
1. Land – land used by the business 5. Trademark or brand name – a symbol, sign, slogan or name used to mark a
product or to distinguish it from other products.
2. Building – building owned or controlled and used by the business
D. Other Non-Current Assets
3. Office equipment – typewriters, adding machines, calculators, computers
Other non-current assets include assets that do not fit in into the definition of the
4. Store equipment – cash register, calculators above-mentioned non-current assets. These include long-term advances to officers, or
employees or abandoned property, and long-term refundable deposits.
5. Delivery equipment – delivery truck or jeep used transporting merchandise
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LIABILITIES 9. Philhealth premium payable – amount due and payable by the enterprise to
Philippine Health Insurance Corporation
Liabilities are debts or obligations of the business. If the company purchased table
and chairs on credit for P5,000, the company has a debt or obligation to pay the amount 10. Withholding tax payable – amount due and payable by the enterprise to BIR for the
in the future. Liabilities of the enterprise may include loans from the bank, salaries due to tax withheld from employees
workers who have already rendered services and taxes due but not paid to the
government. II. Non-Current Liabilities

In accounting, liabilities refer to the present obligations of an enterprise arising from All liabilities that do not fit into the definition of current liabilities are classified as
past transactions or events, the settlement of which is expected to result in an outflow non-current liabilities.
from the enterprise of resources embodying economic benefits. Liabilities are classified
into current liabilities and non-current liabilities. 1. Mortgage payable – economic obligations secured by collateral

I. Current Liabilities 2. Deferred revenue – income received in advance but not yet earned and which will
be realized as income over a period of more than one year or the normal operating
A liability shall be classified as current when it satisfies any of the following criteria: cycle if it exceeds one year.

a. It is expected to be settled in the entity’s normal operating cycle

b. It is held primarily for the purpose of being traded EQUITY
c. It is due to be settled within twelve months after the balance sheet date
d. The entity does not have an unconditional right to defer settlement of the If the business owns or controls asset worth P20,000,000 and has debts worth
liability for at least twelve months after the balance sheet date. P15,000,000, the capital or owner’s equity is P5,000,000. Equity is the difference
between assets and liabilities.
Examples of liability accounts are:
Technically, equity represents residual interest in the assets of the enterprise after
1. Accounts payable – amounts due to suppliers for the purchase of goods or services deducting all liabilities. It is equal to total assets minus liabilities. It is otherwise known
on credit as net assets or net worth. Terms used in reporting the equity of an enterprise are owner’s
equity or capital in a sole proprietorship, partner’s equity or partners’ capital in a
2. Notes payable – amounts due to other parties when it is evidenced by a promissory partnership and stockholder’s equity or shareholders’ equity in a corporation. The
note business may simply use the term equity to refer to owner’s equity, partners’ equity or
shareholders’ equity.

3. Accrued expenses – expenses incurred but not yet paid such as salaries, rent, For a sole proprietorship and partnership, the capital and withdrawal accounts are
interest and taxes. Accounts like salaries payable, rent payable, interest payable and presented as:
taxes payable may be used.
1. Owners’ Capital – This includes the capital contribution of the owner made at the
4. Interest payable – unpaid interest on borrowings formation of the business or subsequent thereto.

5. Salaries payable – services rendered by the employees but still unpaid Ex. Adoracion Grecia, Capital

6. Bank loans payable – obligations due to banks for loans obtained (current portion) 2. Owners’ Drawing – This is used for recording the withdrawal of capital by the
owner.
7. Deferred revenue – income received but not yet earned
Ex. Adoracion Grecia, Drawing or Adoracion Grecia, Personal
8. SSS premium payable – amount due and payable by the enterprise to Social
Security System
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For a corporation, equity accounts are ordinary share or common stock and 2. Sales returns – represent deduction from sale due to merchandise returned by
preference share or preferred stock. customers

3. Sales allowances – represent deductions from selling price of goods with defects or
INCOME goods sent to customers but not as ordered. The goods are retained by customers.

Income refers to the earnings of the enterprise. These includes sales of merchandise, 4. Sales discounts – deductions from the selling price due to payments of the
income due to performance of services, or other type of income realized in the operations customers within the discount period
of the business. These items increase the equity of the owners.

For example, Company AA sold canned goods worth P3,000 and rice worth P5,000. EXPENSES
It also earned P20,000 for renting an extra space to Donuts Company. These amounts are
considered as income of the enterprise. The company has to spend in order to earn. These spending which will include costs
of the merchandise bought and sold, and other spending incident to the operations of the
Technically, income is defined as the increase in economic benefits during the business, will normally reduce income. They are often referred to as expenses.
accounting period in the form of inflow or increase in asset or decrease in liability that
results in increase in equity other than contribution from equity participants. In accounting, expenses are defined as the decrease in economic benefit during the
accounting period in the form of an outflow or decrease in asset or increase in liability
Income may be derived from sales of merchandise to customers, rendering of that results in decrease in equity, other than distributions to equity participants.
services, use of enterprise resources and disposal of resources other than products.
Specifically, expenses include the following: cost of sales, distributions or selling
The income accounts in a service concern may be named as: expenses, administrative expenses, other operating expenses and income tax expense

1. Service income – represents charges to clients or customers for services rendered Cost Accounts – these accounts represent the value of the goods sold. These include:

2. Professional income – charged to clients by professionals for services rendered. 1. Purchases – represent the original acquisition price of the goods for resale
Ex. Legal fees income, accounting fees income or medical fees income
2. Purchase returns – represent the cost of goods purchased but returned to suppliers
3. Rent income – represent charges for the use of assets like equipment and spaces in because they are either damaged, defective or unacceptable
buildings 3. Purchase allowances – represent the reduction in the cost of defective or damaged
4. Repair income – represents charges to customers for repair services rendered goods bought but not returned to the supplier

5. Laundry income – represent charges to customers for laundry services rendered 4. Purchase returns and allowances – is usually used for the two accounts

6. Transportation income or fares earned – represents charges to passengers for 5. Purchase discounts – represent the reduction in the amount to be paid to the
transportation services rendered supplier due to payment of account within the discount period

7. Ticket sales – represent amount of tickets sold to watchers of games, shows or 6. Freight in – represent the cost of transporting goods purchased from the suppliers to
movies the store or the warehouse of the business

8. Miscellaneous income – income earned by the business coming from other sources Other Expense Accounts:
which is not the main line of business and could not be clearly identified
1. Salaries and wages – represents the value of services rendered by employees and
For a merchandising firm, the account title used are: laborers. Account titles like office salaries, sales salaries and the like may be used.

1. Sales – represent income from the sale of merchandise 2. Advertising expense – includes advertising or promotional expenses. This includes
cost of publication in print media and propaganda in radio and television.

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3. Rent expense – amount paid or incurred for the use of properties

4. Repairs and maintenance – amount paid to maintain company assets in good

working conditions

5. Transportation expense – amount paid for services of conveyance or means of

transportation of goods to customers

6. Taxes and licenses – amount of taxes and other licenses paid to the government

7. Depreciation expense – is the portion of the cost of a fixed asset that is charged or
allocated as expense for the period

8. Insurance expense – premiums on insurance policies charged to expense

9. Supplies expense – amount of supplies used. Specifically termed as office supplies

expense or store supplies expense

10. Utilities expense – cost of light and water consumed by the business. An account
title Water and Electricity or Heat, Light and Water may be used

11. Representation and Entertainment – represent value placed on activities that will
promote goodwill and increase customer’s patronage

12. Postage and communications – amount paid for postage, telephone and other forms
of communication
13. SSS Premiums – contributions of employer to the Social Security System

14. Miscellaneous expense – relatively small amount paid for items or services which
do not fall under the above accounts. Account titles like Miscellaneous selling
expense or Miscellaneous office expense may be used.

Handout #: 2 Business Transactions and the Related Accounting Values or ElementsAccounting for Service, Merchandising and Manufacturing Businesses
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