Financial Accounting and Reporting HO#3

Expanded Accounting Equation 2. Fast Forward uses P 2,500 of its cash to buy supplies
of brand name footwear for performance testing over
the next few months.
3. Fast Forward spends P 26,000 to acquire equipment
for testing footwear.
4. Taylor decides more supplies of footwear and
 Assets are resources a company owns or controls. accessories are needed. These additional supplies
These resources are expected to yield future benefits. total P 7,100, but as we see from the accounting
Examples are Web servers for an online services equation in transaction 3, Fast Forward has only
company, musical instruments for a rock band, and P 1,500 in cash. Taylor arranges to purchase them on
land for a vegetable grower. The term receivable is credit from Cal Tech Supply Company. Thus, Fast
used to refer to an asset that promises a future inflow Forward acquires supplies in exchange for a promise
of resources. A company that provides a service or to pay for them later.
product on credit is said to have an account receivable 5. Fast Forward earns revenues by selling online ad
from that customer. space to manufacturers and by consulting with clients
 Liabilities are creditors’ claims on assets. These about test results on footwear and accessories. It
claims reflect company obligations to provide assets, earns net income only if its revenues are greater than
products or services to others. The term payable its expenses incurred in earning them. In one of its first
refers to a liability that promises a future outflow of jobs, Fast Forward provides consulting services to a
resources. Examples are wages payable to workers, powerwalking club and immediately collects P 4,200
accounts payable to suppliers, notes payable to cash.
banks, and taxes payable to the government. 6. Fast Forward pays P 1,000 rent to the landlord of the
 Equity is the owner’s claim on assets. Equity is equal building where its facilities are located. Paying this
to assets minus liabilities. This is the reason equity is amount allows Fast Forward to occupy the space for
also called net assets or residual equity. the month of December.
 Owner investments are assets an owner puts into 7. Fast Forward also pays the biweekly P 700 salary of
the company and are included under the generic the company’s only employee.
account Owner, Capital. 8. Fast Forward provides consulting services of P 1,600
 Owner withdrawals are assets an owner takes from and rents its test facilities for P 300 to a podiatric
the company for personal use. services center. The rental involves allowing members
to try recommended footwear and accessories at Fast
 Revenues are sales of products or services to
Forward’s testing area. The center is billed for the
customers. Revenues increase equity (via net
P 1,900 total.
income) and result from a company’s earnings
9. The client in transaction 8 (the podiatric center) pays
activities. Examples are consulting services provided,
P 1,900 to Fast Forward 10 days after it is billed for
sales of products, facilities rented to others, and
consulting services.
commissions from services.
10. Fast Forward pays Cal Tech Supply P 900 cash as
 Expenses are the costs necessary to earn revenues.
partial payment for its earlier P 7,100 purchase of
Expenses decrease equity. Examples are costs of
supplies (transaction 4), leaving P 6,200 unpaid.
employee time, use of supplies, and advertising,
11. The owner of Fast Forward withdraws P 200 cash for
utilities, and insurance services from others.
personal use.
In sum, equity is the accumulated revenues and owner
Illustration #2
investments less the accumulated expenses and
Indicate whether each of the following is identified with (1)
withdrawals since the company began.
an asset, (2) a liability, or (3) owner’s equity:
a. Accounts payable
 Net income occurs when revenues exceed expenses. b. Accounts receivable
Net income increases equity. c. Fees earned
 A net loss occurs when expenses exceed revenues, d. Supplies
which decreases equity. e. Supplies expense
f. Utilities expense
Illustration #1:
1. On December 1, Chas Taylor forms a consulting Illustration #3
business, named Fast Forward and set up as a What is the effect of each of the following transactions on
proprietorship, which focuses on assessing the the three elements (assets, liabilities, and owner’s equity)
performance of footwear and accessories. Taylor of the accounting equation?
owns and manages the business. The marketing plan a. Owner invested additional cash in the business.
for the business is to focus primarily on publishing b. Paid for business expenses.
online reviews and consulting with clubs, athletes, and c. Owner withdrew cash for personal use
others who place orders for footwear and accessories d. Purchased supplies on account.
with manufacturers. Taylor personally invests e. Received cash for services performed.
P 30,000 cash in the new company and deposits the
cash in a bank account opened under the name of
Fast Forward.
 Financial Accounting and Reporting HO#3

Illustration #4
The following selected transactions were completed by
Cota Delivery Service during July:
1. Received cash from the owner as an additional
investment in the business, P 50,000.
2. Purchased supplies for cash, P 1,800.
3. Paid rent for July, P 4,500.
4. Paid advertising expense, P 1,200.
5. Received cash for providing delivery services,
P 11,500.
6. Billed customers for delivery services on account,
P 33,970.
7. Paid creditors on account, P 900.
8. Received cash from customers on account, P 27,500.
9. Determined that the cost of supplies on hand was
P 300 and P 1,500 of supplies had been used during
the month.
10. Paid cash to the owner for personal use, P 1,000.

Indicate the effect of each transaction on the accounting

equation by listing the numbers identifying the
transactions, (1) through (10), in a column, and inserting
at the right of each number the appropriate letter from the
following list:
a. Increase in an asset, decrease in another asset.
b. Increase in an asset, increase in a liability.
c. Increase in an asset, increase in owner’s equity.
d. Decrease in an asset, decrease in a liability.
e. Decrease in an asset, decrease in owner’s equity.

Illustration #5
Teri West owns and operates her own catering service.
Summary financial data for July are presented in equation
form as follows. Each line designated by a number
indicates the effect of a transaction on the equation. Each
increase and decrease in owner’s equity, except
transaction (5), affects net income.

a. Describe each transaction.

b. What is the amount of the net increase in cash during
the month?
c. What is the amount of the net increase in owner’s
equity during the month?
d. What is the amount of the net income for the month?
e. How much of the net income for the month was
retained in the business?