The Accounting Equation & The Double-Entry System

Prof Rogelio Paran, Jr.

 Parts of an Information System
• People - competent end users working to increase their productivity

• Procedures - manuals and guidelines that instruct end users on how to use
the software and hardware

• Software - another name for programs

• System Software - background software that helps a computer manage its

internal resources.

• Application Software - performs useful work on general-purpose problems

 Parts of an Information System
• Hardware - consists of input devices, the system unit, secondary stage,
output devices and communication devices

• Input devices - translates data and programs that humans can understand
into a form the computer can process

• System Unit - consists of CPU and Memory

• Secondary Storage - stores data and programs

• Output Devices - output processed information from the CPU

 Parts of an Information System

• Communications Devices - send and receive data and programs from one
computer to another

• Data - the raw material for data processing

Accounting Information System
10 minute Break!!!
 Elements of Financial Statements
• Assets - present economic resource controlled by the entity as a result of past events

• Liability - present obligation of the entity to transfer an economic resource as a result

of past events

• Equity - the residual interest in the assets of the entity after deducting all its liabilities

• 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

• Expenses - decreases in assets, or increases in liabilities, that result in decreases in

equity, other than those relating to distributions to holders of equity claims
Accounting Equation
 Accounting Equation

A=L+E
Assets = Liabilities + Equity
The Account
 Debits and Credits - The Double-Entry
System

DEBIT CREDIT

• An account is debited if its • An account is credited if its

entered on the Left Side entered on the Right Side

• From the Latin debere • From the Latin credere

The Account
The Account
 Typical Account Titles Used
• Statement of Financial Position

• Assets - ari-arian

• Current Asset - expects to realize the asset, or intends to sell or

consume it, in its normal operating cycle; holds the asset primarily for
trading; expects to realize the asset within 12 months after the
reporting period; cash or cash equivalent

• Non-current Asset - all other asset that did not qualify as Current
 Typical Account Titles Used
• Current Assets

• Cash - medium of exchange that a bank will accept for deposit at

face value (coins, currency, checks, money orders, bank deposits)

• Cash Equivalents - highly liquid investments that are readily

convertible to known amounts of cash and which are subject to an
insigni cant risk of changes in value

• Notes Receivable - written pledge that the customer will pay the
business a xed amount of money on a certain date
fi
fi
 Typical Account Titles Used

• Current Assets

• Accounts Receivable - claims against customers arising from sale

of services or goods on credit; offers less security than a
promissory note

• Inventories - assets which are (a) held for sale in the ordinary
course of business; (b) in the process of production of such sale;
(c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services
 Typical Account Titles Used

• Current Assets

• Prepaid Expenses - expenses paid for by the business in advance

 Typical Account Titles Used

• Non-Current Assets

• Property, Plant & Equipment (PP&E) - tangible assets that are held
by an enterprise for use in the production or supply of goods or
services, or for rental to others, or for administrative purposes and
which are expected to be used during more than one period

• Accumulated Depreciation - contra account that contains the sum

of the periodic depreciation charges; the balance in this account is
deducted from the cost of related asset to obtain book value
 Typical Account Titles Used

• Non-Current Assets

• Intangible Assets - non-monetary assets without physical

substance held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
 Typical Account Titles Used
• Statement of Financial Position

• Liabilities - “utang”

• Current Liability- it expects to settle the liability in its normal operating

cycle; holds the liability primarily for the purpose of trading; the liability
is due to be settled within 12 months after the reporting period; the
entity does not have an unconditional right to defer settlement of the
liability

• Non-current Liability - all other asset that did not qualify as Current
 Typical Account Titles Used
• Current Liability

• Accounts Payable - represents the reverse relationship of the

Accounts Receivable

• Notes Payable - like a Note Receivable but in a reverse sense

• Accrued Liabilities - Amounts owed to others for unpaid expenses

(salaries payable, utilities payable, interest payable and taxes
payable)
 Typical Account Titles Used

• Current Liability

• Unearned Revenue - when the business entity receives payment

before providing its customers with goods or services

• Current Portion of Long-Term Debt - these 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

• Non-Current Liability

• 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 nance the acquisition of equipment
and other needed assets.

fi
 Typical Account Titles Used
• Statement of Financial Position

• Equity or Owner’s Equity

• Capital - used to record the original and additional investments of the

owner of the business entity

• Withdrawals - when the owner of a business withdraws cash or other

assets, such as recorded in the drawing account (temporary
withdrawing instead of Capital)
 Typical Account Titles Used

• Statement of Financial Position

• Equity or Owner’s Equity

• Income Summary - temporary account used at the end of the

accounting period to close income and expenses. This account shows
the pro t or loss for the period before closing to the capital account.
fi
 Typical Account Titles Used

• Income Statement

• Income

• Service Income - revenues earned by performing services for a

customer or client

• Sales - revenues earned as a result of sale of merchandise

 Typical Account Titles Used
• Income Statement

• Expenses

• Cost of Sales (Cost of Goods Sold) - the 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 such as salaries or wages, 13th month
pay, cost of living allowances, etc
 Typical Account Titles Used
• Expenses

• Telecommunications, Electricity, Fuel and Water Expenses - expenses related

to use of telecommunications, electricity, fuel and water

• Rent Expense - expense for space, equipment or other asset rentals

• Supplies Expense - expense of using supplies (e.g. of ce supplies) in the

conduct of daily business

• Insurance Expense - portion of premiums paid on insurance coverage which

has expired
 Typical Account Titles Used
• Expenses

• Depreciation Expense - portion of the cost of a tangible asset allocated

or charged as expense during an accounting period

• Uncollectible Accounts Expense - amount of receivables estimated to

be doubtful of collection and charged as expense during the
accounting period

• Interest Expense - expense related to the use of borrowed funds

10 minute Break!!!
 Accounting for Business Transactions

• Business Transaction - the occurence of an event or a condition that affects

nancial position and can be reliably recorded
fi
 Transactional Worksheet
During March 2020, these transactions took place for Modesto Graphics
Design:

March 01 - Modesto started her new business by depositing P350,000 in a bank

account in the name of Modesto Graphics Design at BPI Poblacion Branch

Assets = Liabilities + Owner’s Equity

Cash Capital, Modesto

P350,000 P350,000
 Transactional Worksheet

March 5 - Computer equipment costing P145,000 is acquired on cash basis.

 Transactional Worksheet
March 9 - Computer Supplies in the amount of P25,000 are purchased on
account
 Transactional Worksheet
March 11 - Modesto Graphics Design collected P88,000 in cash for designing
interactive websites for two exporters based inside the ASEAN Ecozone
 Transactional Worksheet
March 16 - Modesto paid P18,000 to MVP Bills Express, a one-stop bills
payment service company, for the semi-monthly utilities
 Use of T-Accounts
March 01 - Modesto started her new business by depositing P350,000 in a
bank account in the name of Modesto Graphics Design at BPI Poblacion
Branch
Assets = Liabilities + Owner’s Equity
Cash Capital, Modesto
P350,000 P350,000
 Use of T-Accounts
March 5 - Computer equipment costing P145,000 is acquired on cash basis.

Assets (Decrease) Assets (Increase) OE (Increase)

Cash Computer Equipment Computer Equipment
Debit Credit Debit Credit Debit Credit
(+) (-) + (+) (-) = (-) (+)
March 1 350,000 March 1 350,000
March 5 145,000 March 5 145,000
Total P205,000 Total P145,000 Total P350,000