Illustrative Problem

Initial Investment
The following are transactions for Niko Ong Art Gallery for the month of September. They
will be recorded using the double entry system. To analyze each transaction, the
following shall be used to show the effect on the accounts as follows: A (for Asset), L (for
Liability) or OE (Owner 's Equity). The effects on owner 's equity is subclassified as
follows: OE:R (Revenue) and OE:E (Expenses).
Problem #1
Sept 1 Niko Ong has a talent for painting. He is into charcoal, water color,
acrylic, and oil painting. Having the flair for it, he started studying
painting under a private tutor at the age of 10. Because of the many
requests for job paintings Niko is getting from prospective
customers, he decided to put up an art gallery. He invested P500,000
in this initial endeavor.
Analysis Assets increased. Owner's Equity increased.
Rules Debit increases in assets. Credit increases in owner's equity.
Entry Increase in assets is recorded by a debit to cash. Increase in owner's
equity is recorded by a credit to Ong, Capital

Debit Credit
Sept 1 Cash (A) 500,000
Ong, Capital (OE) 500,000
Initial Investment

Problem # 2
Acquisition of Transportation Equipment for Cash
Sept 1 Acquired transportation equipment to be used for delivery P300,000
cash.
Analysis An asset increased. Another asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to transportation equipment.
Decrease in assets is recorded by a credit to cash.

Debit Credit
Sept 1 Transportation 300,000
Equipment (A)
Cash (A) 300,000
Purchased transportation equipment for cash
Problem # 3
Advance payment of Rental
Sept 1 Rented office space and paid two months rent in advance, P30,000
Analysis An asset increased. Another asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to prepaid rent. Decrease in
assets is recorded by a credit to cash.

Debit Credit
Sept 1 Prepaid Rent (A) 30,000
Cash (A) 30,000
Paid two months rent in advance

Problem # 4
Issuance of Note for Cash
Sept 2 Niko Ong issued a promissory note for a P200,000 loan from Metro Bank.
The note carries a 12% interest per annum. The interest and the
principal are payable after one year.
Analysis An asset increased. Liabilities decreased.
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to cash. Increase in liabilities
is recorded by a credit to notes payable.

Debit Credit
Sept 2 Cash (A) 200,000
Notes Payable (L) 200,000
Borrowed money from the bank issuing a promissory note

Problem # 5
Events not affecting the accounting equation ( no journal entry)

Sept 2 Hired an office secretary with P5,000 monthly salary. The secretary
started work on the same day.
There is no entry necessary at this point as the hiring of the secretary has no effect on
the assets, liabilities, and owner's equity.
 Sept 2 Called Enriquez Art Supplies and ordered oil paints and brushes Worth
Php 12,000.
There is no entry necessary at this point as the ordering of the oil paints and brushes has
no effect on the assets, liabilities, and owner's equity. No delivery of the supplies has
been made thereby no liability arises.

Problem # 6
Payment of Insurance Premiums
Sept 4 Paid Insular Life Insurance Co. Php 18,000 for one year insurance of the
art gallery.
Analysis An asset increased. Another asset decreased.
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to cash. Increase in liabilities
is recorded by a credit to notes payable.

Debit Credit
Sept 4 Prepaid Insurance (A) 18,000
Cash (A) 18,000
Paid one year insurance premium

Problem # 7
Acquisition of Office equipment paying down payment and the balance on account
Sept 5 Acquired office equipment from Abenson’S Php 50,000 paying Php
20,000 and the balance at the end of the month. Note: A compound entry
is needed in this transaction.
Analysis Asset Increased. Asset Decreased. Liabilities increased
Rules Debit increases in assets. Credit decreases in assets. Credit increases
in liabilities.
Entry Increase in assets is recorded by a debit to office equipment. Decrease
in assets is recorded by a credit to cash. Increase in liabilities is
recorded by a credit to Accounts Payable.

Debit Credit
Sept 5 Office equipment (A) 50,000
Cash (A) 20,000
Accounts Payable (L) 30,000
Bought office equipment paying cash and the balance on Account.
Problem # 8
Purchase of Supplies on Account
Sept 8 The Php 12,000 oil paints ordered from Enriquez Art Supplies were
delivered on account
Analysis Asset Increased. Liabilities increased
Rules Debit increases in assets. Credit increases in liabilities
Entry Increase in assets is recorded by a debit to Art Supplies. Increase in
liabilities recorded by a credit to Accounts Payable.

Debit Credit
Sept 8 Art Supplies (A) 12,000
Accounts Payable (L) 12,000
Purchased art supplies on account

Problem # 9
Partial Settlement of Accounts Payable
Sept 10 Paid Enriquez Art Supplies Php 5,000 of the amount owed.
Analysis Asset decreased. Liabilities decreased
Rules Debit decreases in liabilities. Credit decreases in assets
Entry Decrease in liabilities is recorded by a debit to accounts payable.
Decrease in assets is recorded by a credit to cash.

Debit Credit
Sept 10 Accounts Payable (L) 5,000
Cash(A) 5,000
Made partial payment of liability

Problem # 10
Cash Collection from income earned
Sept 11 Painted the portrait of Don Enrique Zobel receiving Php 200,000 cash for
the completed portrait.
Analysis Assets increased. Owner's equity increased
Rules Debit increases in assets. Credit increases in owner's equity.
Entry Increase in assets is recorded by a debit to cash. Increase in owner's
equity is recorded by a credit to Painting Revenue.
 Debit Credit
Sept 11 Cash (A) 200,000
Painting Revenue 200,000
Received cash for painting a portrait

Problem # 11
Payment of Salaries
Sept 15 Paid secretary's salary for half month, Php 2,500.
Analysis Assets decreased. Owner's equity decreased.
Rules Debit decreases in owner's equity. Credit decreases in assets.
Entry Decrease in owner's equity is recorded by a debit to salaries expense.
Decrease in assets is recorded by a credit to cash.

Debit Credit
Sept 15 Salaries Expense (OE:E) 2,500
Cash(A) 2500
Paid secretary’s half month salary

Problem # 12
Collection of unearned income
Sept 17 Received P250,000 cash for a contract to paint the portrait of Madam
Susana
Analysis Assets increased. Liabilities increased.
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to cash. Increase in liabilities
is recorded by a credit to unearned painting revenue.

Debit Credit
Sept 17 Cash (A) 250,000
Unearned Painting 250,000
Revenue (L)
Received cash for painting services to be rendered

Problem #13
Income Earned on Account
Sept 21 Delivered and billed Mr. Sy PI 50,000 for a landscape painting
Analysis Assets increased. Owner’ equity increased.
Rules Debit increases in assets. Credit increases in owner equity.
Entry Increase in assets is recorded by a debit to accounts receivable.
Increase in owner’s equity is recorded by a credit to painting revenue.
 Debit Credit
Sept 21 Accounts Receivable (A) 150,000
Painting Revenue (OE;E) 150,000
Landscape painting on account

Problem # 14
Cash withdrawal by owner for Personal Use
Sept 23 Niko Ong withdrew Php 30,000 for personal use.
Analysis Assets decreased. Owner's equity decreased.
Rules Debit decreases in owner's equity. Credit decreases in assets.
Entry Decrease in owner's equity is recorded by a debit to Ong, Drawing.
Decrease in assets is recorded by a credit to cash.

Debit Credit
Sept 23 Ong, Drawing (OE) 30,000
Cash (A) 30,000
Niko Ong withdrew cash for personal use.

Problem # 15
Unpaid Expenses already Consumed / Incurred (Accrued Expenses)
Sept 23 Received bill from PLDT Php 900.
Analysis Liabilities increased. Owner's Equity decreased.
Rules Debit decreases in owner's equity. Credit increases in liabilities.
Entry Decrease in owner's equity is recorded by a debit to utilities expense.
Increase in liabilities is recorded by a credit to utilities payable.

Debit Credit
Sept 23 Utilities Expense (OE:E) 900
Utilities Payable (L) 900
Received bill from PLDT

Problem # 16
Partial Collection of Accounts Receivable
Sept 25 Received Php 100,000 from Mr. Sy as partial payment for landscape
painting delivered last Sept. 21.
Analysis An Asset increased. Another Asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to cash. Decrease in assets is
recorded by a credit to accounts receivable.
 Debit Credit
Sept 25 Cash (A) 100,000
Accounts Receivable (A) 100,000
Received cash as partial collection from Mr. Sy

Problem # 17
Payment of express incurred/consumed
Sept 30 Paid electricity bill for the month, P4,000.
Analysis Assets decreased. Owner's Equity decreased.
Rules Debit decreases in owner's equity. Credit decreases in assets.
Entry Decrease in owner's equity is recorded by a debit to utilities expense..

Debit Credit
Sept 30 Utilities Expense (OE:E) 4,000
Cash (A) 4,000
Paid electric bill for the month