ANALYSIS OF BUSINESS TRANSACTIONS

Business Transactions

A transaction is an activity or event that takes place in the business characterized by an

exchange of values between two parties and is expressed in terms of money. The payment of a
monthly advertising bill of P75,000, the purchase of P12,000 worth of supplies on credit, and the
acquisition of an equipment for P50,000 are illustrative of the variety of business transactions.

A business transaction must have the following characteristics:

1. It must be for a certain sum of money.

2. It must be supported by a genuine source document, such as a sale of goods must

be evidenced by an invoice, a collection of cash by an official receipt; and a cash
payment by a cash voucher.

3. It must have a two-fold effect on the elements of the accounting equation (assets,
liabilities and proprietorship). This two-fold effect of the business transaction on
the accounting elements is the very foundation of the double-entry bookkeeping
system.

Value Received and Value Parted With

In every transaction, there is a value received and a value parted with. For example, when
an equipment is acquired for P50,000, the buyer receives an equipment with a peso value of
P50,000 and parts away with his cash of P50,000. On the other hand, the seller receives cash of
P50,000 and parts away with the equipment with a selling price of P50,000.

The following tabulation illustrates common types of business transactions and the
corresponding values involved:

Transaction Value Received Value Parted With

1. Mr. G, the owner invested Right over the assets
Cash and Non-cash assets
cash and non-cash assets in the business
2. Mr. G. withdrew cash for Reduction of the right over
Cash
personal use the assets of the business
3. Bought furniture on cash basis Furniture Cash
Debt or obligation to
4. Bought typewriters on account Typewriters
pay the seller
5. Sold some furniture no longer
Cash Furniture
used in the business
6. Sold one typewriter on account Right to collect Typewriter
7. Paid rent of the building Right to use the building Cash
8. Paid salaries of employees Services Cash
9. Purchased supplies on account Supplies Obligation to pay
Cancellation of the
10. Paid the liabilities Cash
obligation to pay
11. Received cash as payment of Right to collect from a
Cash
debt owing to the business debtor
12. Received cash for advertising Advertising services
Cash
services rendered
13. Rendered advertising services
Right to collect Advertising services
on account
14. Collected the advertising fees
Cash Right to collect
in # 13
15. Purchased merchandise on
Merchandise Cash
cash basis
16. Purchased merchandise on Debt or obligation to
Merchandise
account pay
 17. Sold merchandise for cash Cash Merchandise
18. Sold merchandise on account Right to collect Merchandise
NOTE: Items 1-11 are transactions common to both service and merchandising businesses.
Items 12 to 14 are transactions for a service business and items 15 to 18 are for a merchandising
business.

EXERCISE. Indicate the value received and the value parted with in the following transactions.

Transactions Value Received Value Parted with

1. The owner invested cash.

2. Bought furniture for cash.

3. Bought equipment on account.

4. Bought merchandise for cash.

5. Sold merchandise on credit.

6. Bought merchandise on credit.

7. Sold merchandise for cash.

8. Collected receivables.

9. Paid debt due to creditor

10. Returned merchandise bought
on account.

11. Paid for the rent of the building.

12. Paid advertisement to ABS CBN.

13. Paid Ilocos Freight for delivery of
goods bought.
14. Paid for the repair of an
equipment.
15. Received merchandise returned
by a buyer who originally bought
on cash basis.
16. Received merchandise returned
by a buyer who originally bought
on account.
17. Returned merchandise bought
on cash basis.
18. The owner withdrew cash for
personal use.
19. The owner withdrew
merchandise for personal use.

20. Borrowed money from the bank.