Fundamentals of

Accounting

Fershie D. Yap, Ph.D.

College of Accountancy and Business Administration
Chapter 2: The Accounting Equation and the Double-
Entry System
 Elements of Financial Statements

1. Asset – a present economic resource controlled by the entity as a result of

past events.
2. Liability – a present obligation of the entity to transfer an economic
resource as a result of past events.
3. Equity – the residual interest in the assets of the entity after deducting all its
liabilities.
4. Income – increases in assets or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders
of equity claims.
5. Expenses – decreases in assets or increases in liabilities, that result in
decreases in equity, other than those relating to distribution to holders of
equity claims.
Account
- The basic summary device of accounting
- A detailed record of the increases,
decreases, and balance of each element
that appears in an entity's financial
statements
T-Account – simplest form of the account. It
has 3 parts:
 The Accounting Equation

- Presents the resources controlled by the enterprise, the present

obligations of the enterprise, and the residual interest in the
assets
 Debits and Credits

Dual Entry System

- Means that the dual effect of business transactions must be
recorded
- A debit side must have a corresponding credit side entry
- Each transaction affects at least 2 accounts
- The total debits must always equal to the total credits
Rules of Debits and Credits
Rules of Debits and Credits

Accounts
Debits: Credits:

Increases in Increases in
Assets Liabilities
Expenses Owner’s Equity
Income

Decreases in Decreases in
Liabilities Assets
Owner’s Equity Expenses
Income
 Typical Account Titles Used
Balance Sheet
Assets
Current Assets
Cash – any medium of exchange that a bank will accept for deposit at face value (coins,
currency, check, monetary orders, bank deposits & drafts)
Cash Equivalents – short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value
Notes Receivable – a written pledge that the customer will pay the business a fixed amount of
money on a certain date
Accounts Receivable – claims against customers arising from sale of services or goods on
credit
Inventories – are assets which are held for sale in the ordinary course of business, in the process
of production for such sale, or in the form of materials or supplies to be consumed in the
production process
Prepaid Expenses – are expenses paid for by the business in advance (insurances and rent)
 Typical Account Titles Used

Balance Sheet
Assets
Non-Current Assets
Property, Plant, and Equipment (PPE) – are tangible assets that are held by an enterprise for use
in the production or supply of goods or service, or for rental to others (land,bldg.,machine)
Accumulated Depreciation – a contra account that contains the sum of the periodic
depreciation charges. This is deducted from the cost of the related assets to obtain book value
Intangible Assets – are identifiable, nonmonetary assets without physical substance held for use
in the production or supply of goods or services, for rental to others, or for administrative
purposes (goodwill, patents, copyrights, licenses, franchises, trademarks)
 Typical Account Titles Used

Balance Sheet
Liabilities
Current Liabilities
Accounts Payable – represents the reverse relationship of the accounts receivable
Notes Payable – the business entity is the maker of the note; the business entity is the party who
promises to pay the other party a specified amount of money on specified future date
Accrued Liabilities – amounts owned to others for unpaid expenses (salaries payable, utilities
payable, interest payable, taxes payable)
Unearned Revenues – when the business entity receives payment before providing its
customers with goods or services
Current Portion of Long-Term Debt – are portions of mortgage notes, bonds and other long-
term indebtedness which are to be paid within one year from the balance sheet date
 Typical Account Titles Used

Balance Sheet
Liabilities
Non-Current Liabilities
Mortgage Payable – records long-term debt of the business entity for which the business entity
has pledged certain assets as security to the creditor
Bonds Payable – business organizations often obtain substantial sums of money from lenders to
finance the acquisition of equipment and other needed assets
Owner’s Equity
Capital – used to record the original and additional investments of the owner. It is increased by
the amount of profit earned during the years or decreased by a loss
Withdrawals – when the owner of a business withdraws cash or other assets, such are recorded
in the withdrawal account rather than directly reducing the owner’s equity account
Income Summary – a temporary account used at the end of the accounting period to close
income and expenses
 Typical Account Titles Used

Income Statement
Income
Service Income – revenues earned by performing services for a
customer or client (accounting services by a CPA firm)
Sales – revenues earned as a result of sale or merchandise (sale of
building materials)
 Typical Account Titles Used

Income Statement
Expenses
Cost of Sales – cost incurred to purchase or to produce the
products sold to customers during the period
Salaries or Wages Expense – includes all payments as a result of an
employer-employee relationship (13th month pay, cost of living
allowance, & other related benefits)
Utilities – expenses related to use of telecommunication facilities,
consumption electricity, fuel and water
 Typical Account Titles Used

Income Statement
Expenses
Rent Expense – expense for space, equipment, or other asset rentals
Supplies Expense – expense of using supplies in the conduct of daily business
Insurance expense – portion of premiums paid on insurance coverage which
has expired
Depreciation Expense – the portion of the cost of a tangible assets allocated or
charged as expense during an accounting period
Uncollectible Accounts Expense – the amount of receivables estimated to be
doubtful of collection
Interest Expense – an expense to use of borrowed funds