1. Review of the Previous Lesson

2. ACCOUNTING EQUATION & THE DOUBLE-ENTRY SYSTEM
Week 2
ACCOUNTING EQUATION & THE DOUBLE-ENTRY SYSTEM
ACCOUNTING INFORMATION SYSTEM
Subject:

3. Learning Objectives Differentiate the elements of financial statements
Explain the meaning of the account
Discuss the accounting equation
Explain the nature of debits and credits – the double-entry system
Discuss accounting events and transactions
Identify and differentiate typical account titles used – Balance Sheet & Income Statement
Explain the accounting procedures for business transactions

4. ELEMENTS OF FINANCIAL STATEMENTS
The elements of financial statements  refer to the quantitative information shown in the statement.
Assets
Liabilities
Owner’s Equity
or Capital
Balance Sheet
(Financial Position)
- Real Account
The elements directly related to the measurement of financial positions are assets, liabilities and equity.
The elements directly related to the measurement of financial performance are income and expenses.
4. Income or Revenue
5. Expenses
Income Statement
(Financial Performance)
- Nominal Accounts

5. ACCOUNT
T-ACCOUNT
A detailed record of the increases, decreases & balance of each element that appears in an entity’s financial statements.
The simplest form of the account.
It has 3 parts: account title, debit side & credit side.
Account Title
ACCOUNT TITLES – are identifications or brief description of items that fall to same kind, class or nature in recording business transactions, the elements of financial statements which are better known as “accounting elements” or “accounting values” are to be assigned with their individual names called “account titles”. In other words, it is a part of our study in accounting where we are to give or assign names to various accounts.
Left side or Debit side
Right side or Credit Side

6. ASSET ACCOUNTS - Debit Current Assets Non-Current Assets
Cash
Petty Cash Fund
Cash Equivalents
Notes Receivable
Accounts Receivable
Allowance for Bad Debts
Accrued Interest Income
Advances to Employees
Inventories
Prepaid Expenses
Unused Supplies
Property, Plant & Equipment
Land
Building
Equipment
Furniture & Fixtures
Accumulated Depreciation
Intangible Assets

7. LIABILITIES ACCOUNTS - Credit
Current Liabilities
Non-Current Liabilities
Accounts Payable
Notes Payable (short-term)
Accrued Expenses or Accrued Liabilities
Unearned Revenues or Unearned Income
SSS Premium Payable
Philhealth Premium Payable
Pag-ibig Premium Payable
Withholding Tax Payable
Pre-collected or Unearned Income
Mortgage Payable
Bonds Payable
Notes Payable (Long-term)
Accounts Payable

8. OWNER’S EQUITY ACCOUNTS
The original and additional investments of the owner of the business entity.
Increased by net income
Decreased by net loss
Capital (Credit)
When the owner of a business entity withdraws cash or other assets
Withdrawals
(Debit)

9. INCOME OR REVENUE ACCOUNTS - Credit
Sales
Income or revenue derived from the sale of merchandise.
Service Income or Service Revenue
Income or revenue derived from rendering services.
Professional Income
Accounting or Auditing Fees Income
Legal Fees Income
Dental Fees Income
Medical Fees Income
Rental Income
Interest Income
Miscellaneous Income

10. EXPENSES ACCOUNTS - Debit
Cost of Sales or Cost of Goods Sold
Salaries or Wages Expense
Bad Debts or Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense
Taxes & Licenses
SSS Contribution
Philhealth Contribution
Pag-ibig Contribution
Insurance Expense
Supplies Expense
Miscellaneous Expense
CHART OF ACCOUNTS – list of account titles or account name.

11. ACCOUNT
T-ACCOUNT
A detailed record of the increases, decreases & balance of each element that appears in an entity’s financial statements.
The simplest form of the account.
It has 3 parts: account title, debit side & credit side.
In every transaction, there is a value received, we call Debit and value parted with, we call a Credit.
Account Title
Left side or Debit side (Dr.)
Value received
Right side or Credit Side (Cr.)
Value parted with
ACCOUNT TITLES – are identifications or brief description of items that fall to same kind, class or nature in recording business transactions, the elements of financial statements which are better known as “accounting elements” or “accounting values” are to be assigned with their individual names called “account titles”. In other words, it is a part of our study in accounting where we are to give or assign names to various accounts.
Debit balance
Credit balance

12. Account titles  are identifications or brief descriptions of items that fall to same kind, class or nature. In other words, are assigned names to various accounts.
Account Title
CREDIT ENTRY:
An amount entered on the right-hand side of the account.
DEBIT ENTRY:
An amount entered on the left-hand side of the account.
Left side or Debit side (Dr.)
Value received
Right side or Credit Side (Cr.)
Value parted with
= account balance
Debit total
Credit total
ACCOUNT BALANCE  the difference between the debit total & credit total of an account.
DEBIT BALANCE  if the debit total exceeds credit total.
CREDIT BALANCE  if the credit total exceeds debit total.
IN BALANCE or CLOSED ACCOUNT  if the debit total equals credit total.
ACCOUNT TITLES – are identifications or brief description of items that fall to same kind, class or nature in recording business transactions, the elements of financial statements which are better known as “accounting elements” or “accounting values” are to be assigned with their individual names called “account titles”. In other words, it is a part of our study in accounting where we are to give or assign names to various accounts.

13. Example of Chart of Accounts
CHART OF ACCOUNTS – list of account titles or account name.
Account titles  are identifications or brief descriptions of items that fall to same kind, class or nature. In other words, are assigned names to various accounts.

14. THE NATURE OF DEBITS AND CREDITS – The double-entry system
A double-entry system means that the dual effects of a business transaction is recorded.
A debit side entry must have a corresponding credit side entry.
Dual effects
debit = credit
value received = value parted with
Each transaction affects at least two accounts. The total debits for a transaction must always equal the total credits.
Business transactions
total debits = total credits
assets = liabilities & owner's equity

15. THE RULES OF DEBIT & CREDIT
Rule 1 – Asset: debit to increase
credit to decrease
Rule 2 - Liabilities: credit to increase
debit to decrease
Rule 3 – Owner’s Equity: credit to increase
Rule 4 – Drawing: debit to increase
Rule 5 – Income: credit to increase
Rule 6 – Expenses: debit to increase

16. NORMAL BALANCE OF THE ELEMENTS OF FINANCIAL STATEMENTS
DEBIT BALANCE
CREDIT BALANCE
Liabilities
Assets
Owner’s Equity
Income or Revenue
Expenses

17. BASIC ACCOUNTING EQUATION
Assets = Liabilities + Capital
Credit
Debit
Credit
normal balance
Credit
Debit
Credit
increase
Credit
Debit
Debit
decrease
Income – Expenses = Net Income
Credit
normal balance
Credit
Debit
Credit
increase
Credit
Debit
Credit
Debit
decrease
Debit

18. EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + Capital (- Drawing + Income – Expenses)
Credit
Credit
Debit
normal balance
Debit
Debit
Credit
increase
Credit
Debit
Debit
Credit
Credit
Debit
Credit
Debit
Credit
decrease
Credit
Debit
Debit

19. NOTE: Steps 1 to 10 is the ACCOUNTING CYCLE.
PHASES OF ACCOUNTING
Recording
Classifying
Summarizing
Interpreting
5. Adjusting journal entries
Profitability – How much is the increase in capital as a result of business operation?
1. Identifying transactions and events – source documents
3. Posting to the ledger – general ledger
6. Preparing the worksheet
4. Trial balance preparation
7. Preparing financial statements
2. Journalizing transactions – the journal
Liquidity – Are there available funds to finance the business operation?
RECORDING
Business transactions are the economic activities of a business. Recording these historical events is a significant function of accounting. Before the effects of transactions can be recorded, they must be measured. In order that accounting information will be useful, it must be expressed in terms of a common financial denominator---money. Money serves as both a medium of exchange and a measure of value.
CLASSIFYING – by simply measuring and recording transactions, the resulting information will be of limited use. To be useful in making decisions, the recorded data must be classified and summarized. Classification reduces the effects of numerous transactions into useful groups or categories.
SUMMARIZING – summarization of financial data is achieved through the preparation of financial statements or financial reports. These usually summarize the effects of all business transactions that occurred during some period.
INTERPRETING – after going through the preceding phases, it is imperative that the result of the summarization phase be interpreted of analyzed to evaluate the liquidity, profitability and solvency of the business organization.
8. Closing entries
NOTE: Steps 1 to 10 is the ACCOUNTING CYCLE.
9. Post-closing trial balance
Solvency – Can the business pay its long-term obligations to others?
10. Reversing entries

20. Steps 1 of the ACCOUNTING CYCLE.
PHASE 1 - RECORDING
Steps 1 of the ACCOUNTING CYCLE.
1. Identifying transactions and events – source documents
a) Identification of business transaction  what transactions are considered as accountable and what are not.
RULE: Only transactions & events which are of financial character to the business are being recognized.
SOURCE DOCUMENTS or SUPPORTING BUSINESS DOCUMENTS the basis of identifying transactions.
b) Analysis of business transactions  Business transactions are analyzed from the view point of the business. “Always consider yourself as the business” when making the analysis.
By analyzing, we have to ask: What is the value received and value parted with in this particular transactions?
c) Measuring of business transaction  the peso is our financial denominator.

21. Example of Source Documents (under Servicing Activities)
Customers’ & suppliers’ sales invoices
Official receipts
Cash or Check Vouchers
Service Order Slip

22. Steps 2 of the ACCOUNTING CYCLE.
PHASE 1 - RECORDING
RECORDING  is the 1st phase of accounting. This involves the writing down of business transaction in a systematic manner and in order of their occurrence in the book of original entry called Journal.
Steps 2 of the ACCOUNTING CYCLE.
2. Journalizing transactions – the journal
JOURNALIZING  is the process of recording the effects of economic transaction in the journal.
 the act of recording business transactions in the journal.
JOURNAL ENTRY  the accounting record written in the journal which consists of debit account and credit account with their respective values.

23. ANALYSIS OF BUSINESS TRANSACTION
Transaction: Bought a car for cash, P650,
Questions guide:
Identifying: Who bought the car? The business.
Analyzing: What is the value received? Car. What is the value parted with? Cash.
Measuring: What is the amount involved? P650,
Journalizing:
Debit, value received – car P650,000.00
Credit, value parted with – cash 650,000.00

24. To illustrate the analyzing process of accounting, consider the transactions of Valrox, a servicing business.
Chart of Accounts
Utility expense
Bank charge expense
Service Income
Salaries expense
Owner’s drawing
Cash on hand
Cash in bank
Accounts Receivable
Office equipment
Notes Payable
Valrox, Capital
SSS Premium Payable
Withholding tax payable
Supplies expense

25. The formal reports prepared by accountants
Financial Statements Objective: To provide financial information useful to the users.
The information that accumulated and processed in financial accounting
The formal reports prepared by accountants
The final products of the accounting process.
Shows the financial position of a business entity as of a particular date.
1. Statement of Financial Position
Shows the performance of the business entity for a given period.
2. Income Statement
3. Statement of Changes in Equity
Shows the movement or changes in owner’s capital or equity in a certain period.
4. Cash Flow Statement
Shows and explains the changes of cash during an accounting period.
5. Notes to the Financial Statement
Part of the financial statements in a parenthesis form, to achieve proper understanding of the financial reports.

26. Relationships Among the Financial Statements

27. Example of Income Statement Example of the Statement of Owner’s Equity

28. Example of Statement of Financial Position
Report Form – in vertical order
Account Form – in horizontal order

29. Example of Statement of Cash Flows

30. Example of Notes to Financial Statement

31. ELEMENTS OF FINANCIAL STATEMENTS
The elements of financial statements  refer to the quantitative information shown in the statement.
Assets
Liabilities
Owner’s Equity
or Capital
Balance Sheet
(Financial Position)
- Real Account
4. Income or Revenue
5. Expenses
Income Statement
(Financial Performance)
- Nominal Accounts
The elements directly related to the measurement of financial positions are assets, liabilities and equity.
The elements directly related to the measurement of financial performance are income and expenses.
Real accounts are not closed at the end of the accounting period.
Nominal accounts are temporary accounts that are closed or put to zero balance at the end of the accounting period.

32. ELEMENTS OF FINANCIAL STATEMENTS
Assets – are resources controlled by the entity as a result of past transactions or events and from which future economic benefits are expected to flow to the entity. Asset accounts have a normal debit balance.
Is a leased lot or rented machines considered an asset of the entity?
Is a machine that can not be repaired and owned by the entity considered an asset?
Is buying a machine in the future transactions considered an asset?
Is a machine bought by the entity for the personal use of the owner considered an asset?

33. ELEMENTS OF FINANCIAL STATEMENTS
2. Liabilities – are present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liability accounts have normal credit balance.
a. Is the debt of the owner considered a liability of the entity?
b. Is a bank loan in the future transaction, thus a future obligation considered a liability?

34. ELEMENTS OF FINANCIAL STATEMENTS
3. Equity – is the residual interest in the assets of the entity after deducting all of its liabilities (asset – liabilities = equity). Equity accounts have normal credit balance.
4. Income or Revenue – represents the earnings of the business from sales of goods or service rendered. Revenue accounts have a normal credit balance.
5. Expenses – are costs incurred in conducting the business activities. Expense accounts have normal debit balances.

35. ELEMENTS OF FINANCIAL STATEMENTS
RECOGNITION OF ELEMENTS
MEASUREMENT OF ELEMENTS
Recognition  means the process of reporting the elements of financial statements of an entity.
Measurement  is the process of determining the monetary amounts at which the elements of financial statements are recognized.
The 4 measurement bases:
When is an item recognized as an
element of financial statements?
Historical cost
Current cost
Realizable value
Present value
Probability of future benefit  When the item has any future economic benefit that will flow to or from the entity.
Reliability of measurement  When the item has a cost or value that can be measured with reliability.

36. MEASUREMENT OF ELEMENTS
The 4 measurement bases:
Historical cost  is the amount paid when an asset was acquired.
Current cost  is the amount to be paid if the asset (already acquired) was acquired today.
Realizable value or settlement value  is the amount to be received if the asset is to be sold.
Present value  the amount that a future sum of money is worth today given a specified rate of return.
Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. This sounds a bit confusing, but it really isn't. An investment that earns 10% per year and can be redeemed for $1,000 in five years would have a present value of $620. In other words, $620 today is worth $1,000 in five years.
the amount that a future sum of money is worth today given a specified rate of return.
10%
5 years from now
P1,000.00
P620.00

37. ACCOUNTING CONCEPTS & PRINCIPLES
Accounting concepts  are important assumptions or ideas which accountants observe in recording business transactions in the books of accounts.
Accounting conventions  are the means of implementing accounting principles. They are the rules, procedures & methods used in accounting practice. They comprise the large body of practices that prescribe definitely how to do the accounting process.
Accounting principles  refers to a doctrine which is the basis of accounting conventions.
GAAP  Generally Accepted Accounting Principles
Guide accountants in the accounting process of an enterprise.
Are developed based on experience, research, & careful study.
Become generally accepted by agreement among accounting practitioners.
OBJECTIVE: to fairly present the financial statements…in conformity with GAAP.

38. ACCOUNTING CONCEPTS & PRINCIPLES
IMPLICIT ASSUMPTIONS
ACCOUNTING PRINCIPLES
Entity concept
Periodicity concept
Stable monetary unit concept
Objectivity principle
Historical cost
Revenue recognition principle
Expense recognition principle
Adequate disclosure
Materiality
Consistency principle
UNDERLYING ASSUMPTIONS
Accrual basis
Going concern
Assignment: Give the description of each concepts & principles
(except implicit assumptions).

39. THE END