Analyzing and Recording Financial A business transaction is an activity or event that has

Transactions an effect on a company's financial position or

performance, and which can be measured in terms of
Business Transaction Overview: money.
 Business transactions affect one or more of the
accounting elements: assets, liabilities, capital,
income, and expenses. Financial Statements report on the financial
 Transactions are categorized as exchange and performance and condition of an organization.
non-exchange.
Types of Transactions:

 Exchange Transactions: These involve

physical exchanges, such as buying, selling,
collecting receivables, and paying accounts.
 Non-Exchange Transactions: These events do
not involve physical exchanges but result in
changes in monetary values (e.g., equipment
depreciation, fire losses).
The accounting process identifies business
Qualifications for Recordable Business
transactions and events, analyze and records
Transactions:
their effects, and summarizes and presents
1. Involvement of the Business Entity: information in reports and financial
Transactions must involve the business entity statements. These re-ports and statements are
itself, separate from its owner(s). used for making investing, lending, and other
2. Financial Character: Transactions should have business decisions.
a financial impact, with a specific monetary
value assigned to the affected accounts. 1. Business transactions and events are the
- Losses from fire, typhoon and other starting points. Relying on source documents,
calamities may be estimated and assigned thetransactions and events are analyzed using
with monetary values. the accounting equation to understand how
- The mere request or an order by a theyaffect company performance and financial
customer is not a recordable business position.
transaction. There should be an actual sale - Source documents identify and describe
or performance of service first to give the transactions and events entering the
company a right over the income or accounting process. They are the sources
revenue. of accounting information and can be in
3. Dual Effect (Double-Entry): Each transaction either hard copy orelectronic form.
should have a dual effect, meaning it affects at Examples are sales tickets, checks,
least two accounts following the double-entry purchase orders, bills from suppliers,
accounting principle. employee earnings records, and bank
4. Be supported by a source document: statements
Transactions should be supported by source
documents, such as official receipts, sales
invoices, cash vouchers, statements of An account is a record of increases and
account, and more. decreases in a specific asset, liability, equity,
revenue or expense item. Information from an
account is analyzed, summarized, and
KEY TAKEAWAYS
presented in re-ports and financial statements.
The general ledger or simply ledger is a record
containing all accounts used by a company.
 4. Accrued Liabilties are amounts owed that are
not yet paid. Examples are wages payable,
ASSET ACCOUNTS
taxes payable, and interest payable.
 Assets are resources owned or controlled by a
EQUITY ACCOUNT
company and that have expected future
benefits.  The owner’s claim on a company’s assets is
1. Cash account reflects a company’s cash called equity or owner’s equity.
balance.  Equity is the owner’s residual interest in the
2. Accounts Receivable are held by a seller and assets of a business after deducting liabilities.
refer to promises of payment from customers  Equity is impacted by four types of accounts:
to sellers. owner’s capital, owner’s withdrawals,
3. Notes Receivable or promissory note, is a revenues, and expenses.
written promise of another entity to pay a 1. When an owner invests in a company, the
definite sum of money on a specified future invested amount is recorded in an account
date to the holder of the note. titled Owner’s Capital.
4. Prepaid Accounts (also called prepaid 2. The Owner’s Withdrawals account is used to
expenses) are assets that represent record asset distributions to the owner.
prepayments of future expenses (not current 3. Revenues and expenses also impact equity.
expenses). Examples of revenue accounts are Sales,
5. Supplies are assets until they are used. Commissions Earned, Professional Fees
6. Equipment is an asset. When equipment is Earned, Rent Earned, and Interest Revenue.
used and gets worn down, its cost is gradually Revenues increase equity and result from
reported as an expense (called depreciation). products and services provided to customers.
7. Building such as stores, offices, warehouses, 4. Examples of expense accounts are Advertising
and factories are assets because they provide Expense, Store Supplies Expense, Office
expected future benefits to those who control Salaries Expense, Office Supplies Expense,
or own them. Rent Expense, Utilities Expense, and
Insurance Expense. Expenses decrease equity
and result from assets and services used in a
LIABILITY ACCOUNTS company’s operations.

 Liabilities are claims (by creditors) against

assets, which means they are obligations to
transfer assets or provide products or services
to other entities.
 Creditors are individuals and organizations
that own the right to receive payments from a
company.
1. Accounts Payable refer to oral or implied
promises to pay later, which usually arise from
purchases of merchandise. Payables can also
arise from purchases of supplies, equipment,
and services.
2. Notes Payable refers to a formal promise,
usually denoted by the signing of a promissory
note, to pay a future amount.
3. Unearned Revenue refers to a liability that is
settled in the future when a company delivers
its products or services.