MODULE 1 - Accounting Equation and Double Entry

Binalbagan Catholic College - FINACC

The Account

An account is a summary device of accounting. Usually, we use the “T-Account.” It has three parts:

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Account Title Cash
This is the debit side. This is the credit side. P800, 230.00 P479, 430.00

P320, 800.00

We “account” for transactions and events that affect our business. These accounts are classified into five (5) big families:
ASSETS, LIABILITIES, EQUITIES, INCOME, and EXPENSES.

[Kabati ka na sang, “Account sa bangko?” Basically, kung may ipasulod ka sa Bangko, ginapasulod na sa imo Account.
Kung mag-withdraw ka naman, ginabuhin sa imo Account. Therefore, Account is what we use para sa mga parepareho nga
items sang aton nga business. Kung madungan ang ina nga item, dira ta isulod sa iya account. Kung mabuhinan, dira ta sa
ibuhin sa iya account.

For example, bond papers. For bond papers, paper clips, thumbtacks, staplers, folders, pencils, ballpens, erases, liquid
erasers, and envelopes, ginasulod or ginabuhin na sa Office Supplies nga account. So kung magbakal and business sang
bond papers, madugangan ang Office Supplies account.

Another example of an account is Office Equipment. Kung magbakal o magbaligya ang business sang laptop, printer, PC,
or webcam para gamiton sa business, Office Equipment and gamiton.]

Listed below are the examples of account titles that companies use although they can differ from company to company.

Assets Accounts
1. Cash Equity Accounts
2. Petty Cash 1. Owner’s Capital
3. Accounts Receivable 2. Withdrawal

4. Marketable Securities
5. Supplies (Office Supplies, Shop Supplies, Revenue Accounts
Factory Supplies) 1. Revenue
6. Prepayments (Prepaid Rent, Prepaid 2. Sales
Insurance, Prepaid Load)
7. Inventory Expense Accounts
8. Furniture and Fixtures 1. Cost of Goods Sold
9. Machinery &Equipment (Office Equipment, 2. Advertising Expense
Computer Equipment) 3. Interest Expense
10. Building 4. Depreciation Expense
11. Land 5. Payroll Tax Expense
12. Vehicle 6. Rent Expense
7. Supplies Expense
Liability Accounts
8. Utilities Expense
1. Accounts Payable
9. Salaries Expense
2. Accrued Liabilities
10. Losses
3. Taxes Payable
4. Wages Payable
5. Notes Payable

Asset
MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC
Per March 2018 Conceptual Framework for Financial Reporting, asset is a present economic resource controlled by the
entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. There
are three aspects to these definitions: "right"; "potential to produce economic benefits"; and "control"

Rights that have the potential to produce economic benefits take many forms, including:

(a) Rights that correspond to an obligation of another party, for example:

(i) Rights to receive cash.
(ii) Rights to receive goods or services.
(iii) Rights to exchange economic resources with another party on favourable terms. Such rights include, for
example, a forward contract to buy an economic resource on terms that are currently favourable or an option to buy an
economic resource.
(iv) Rights to benefit from an obligation of another party to transfer an economic resource if a specified uncertain
future event occurs.
(b) Rights that do not correspond to an obligation of another party, for example:
(i) Rights over physical objects, such as property, plant and equipment or inventories. Examples of such rights are
a right to use a physical object or a right to benefit from the residual value of a leased object.
(ii) Rights to use intellectual property.

An economic resource could produce economic benefits for an entity by entitling or enabling it to do, for example, one or
more of the following:
(a) Receive contractual cash flows or another economic resource;
(b) Exchange economic resources with another party on favourable terms;
(c) Produce cash inflows or avoid cash outflows by, for example:

(i) Using the economic resource either individually or in combination with other economic resources to produce
goods or provide services;
(ii) Using the economic resource to enhance the value of other economic resources; or
(iii) Leasing the economic resource to another party;

(d) Receive cash or other economic resources by selling the economic resource; or
(e) Extinguish liabilities by transferring the economic resource.

An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain
the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing
the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, it one
party controls an economic resource, no other party controls that resource.

Liability
A liability is a present obligation of the entity to transfer an economic resource as a result of past events. For a liability to
exist, three criteria must all be satisfied:

(a) The entity has an obligation;

MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC
(b) The obligation is to transfer an economic resource; and
(c) The obligation is a present obligation that exists as a result of past events

An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation is always owed to
another party (or parties). The other party (or parties) could be a person or another entity, a group of people or other
entities, or society at large. It is not necessary to know the identity of the party (or parties) to whom the obligation is
owed. If one party has an obligation to transfer an economic resource, it follows that another party (or parties) has a right
to receive that economic resource.

Obligations to transfer an economic resource include, for example:

(a) Obligations to pay cash.

(b) Obligations to deliver goods or provide services.
(c) Obligations to exchange economic resources with another party on unfavourable terms. Such obligations
include, for example, a forward contract to sell an economic resource on terms that are currently unfavourable or an
option that entitles another party to buy an economic resource from the entity.
(d) Obligations to transfer an economic resource if a specified uncertain future event occurs.
(e) Obligations to issue a financial instrument if that financial instrument will oblige the entity to transfer an
economic resource.

A present obligation exists as a result of past events only if

(a) The entity has already obtained economic benefits or taken an action and
(b) As a consequence, the entity will or may have to transfer an economic resource that it would not otherwise
have had to transfer.

Equity

Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. In other words, they are claims
against the entity that do not meet the definition of a liability.
Equity may pertain to any of the following depending on the form of business organization:
 In a sole proprietorship, there is only one owner's equity account because there is only one owner.
 In a partnership, an owner's equity account exists for each partner.
 In a corporation, Owners equity or stockholders' equity consists of share capital, retained earnings and reserves
representing appropriations of retained earnings among others.

Income
Income is 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 are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to
distributions to holders of equity claims.
It follows from these definitions of income and expenses that contributions from holders of equity claims are not income,
and distributions to holders of equity claims are not expenses. Income and expenses are the elements of financial
statements that relate to an entity's financial performance. Users of financial statements need information about both an
entity's financial position and its financial performance.
Hence, although income and expenses are defined in terms of changes in assets and liabilities, information about income
and expenses is just as important as information about assets and liabilities.
MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC

The Accounting Equation

Now, please correct the misconception that accounting is about mathematics. Surely, accounting boils down to
computing for one’s wealth, but the calculations are the basic ones. If you have a calculator there by your side,
you will be fine.

Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity

Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity
Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity
Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity
Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity
Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity
Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity
Asset = Liabilities + Equity Asset = Liabilities + Equity Asset = Liabilities + Equity

[malipatan mo pa gid ni?]

[Kung sa aton pa, ang Assets amo na ang tanan nga may ara ang isa aka Business, iya ginapanag-iyahan. Ang
ginapanag-iyahan sang isa ka business pwede maghalin sa
1. Tag-iya (investment), or
2. Gin-utang sang negosyo. Correct?
Please remember ang Separate Entity Concept. This concept states that the owner and the business are two
different people. Lain ang kwarta sang Negosyo, Lain man ang kwarta sang tag-iya. This concept states that,
indi mo pagsamu-on ang imo personal nga kwarta sa bentahan sang negosyo.

Therefore, pwede man makapangutang, makapamakal or makapamaligya ang negosyo sa iya mismo pangalan
KAG INDI SA PANGALAN SANG TAG-IYA maskin ang tag-iya pa ang nagprocess.

Example:
May changgi si Chang-e. Ang ngalan sang iya baligyaan is Magic Sarap Store. In this story, may DUHA
KABILOG nga taho, si
1. Chang-e kag si
2. Magic Sarap Store.
Sa panan-awan sang Separate Entity Concept, taho man si Magic Sarap Store. Kag ang Accounting ginabuhat
ta para kay Magic Sarap Stor, indi para sa kay Chang-e. Waay ta nay a labot siya.
Therefore ang kwarta ni Magic Sarap Store lain man ya sa kwarta ni Chang-e. Kag since taho man si Magic
Sarap Store, kaya nya man mangutang, mamakal, mamaligya. Kung may Ref man si Magic Sarap Store, may
cabinet, may water dispenser, may cash, may duta, may building, may car whatever, pwede nga investment na
ni owner or inutang ya na sa gwa.

Example 1. Nag-utang si Magic Sarap Store sang Sala Set sa Du Ek Sam, worth P20,000. Therefore, may Sala
Set na si Magic Sarap Store, pero may utang lang sa galing.

Question: Kay sin-o ang Sala Set?

Answer: kay Magic Sarap Store. INDI IYA NI CHANG-I maskin si Chang-I pa ang nagkadto sa DEK nga
nagprocess.
MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC

Asset = Liabilities + Equity

P20,000.00 = P20,000.00 + P0.00

Example 2. Nag-invest si Chang-e P10,000 kwarta sa business para mas makagiho pa ang business. Therefore,
may Ref na ang business kag may P10,000 cash.

Question: Kay sin-o ang kwarta, kay Chang-e pa japon?

Answer: Indi na. Iya na ni Magic Sarap Store.

Asset = Liabilities + Equity

P20,000.00+ P10,000 = P20,000.00 + P10,000.00]

Financial Statements tell us how a business is performing. They are the final products of accounting process. But how do
we arrive at the items and amounts that make up Financial Statements? The most basic tool of accounting is the
accounting equation.
This equation presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual
interest in the assets. It states that assets must always equal liabilities and owner's equity.
Note that the Assets are on the left side of the equation opposite the Liabilities and Owner's Equity, on the right. This
explains why increases and decreases in assets are recorded in the opposite manner ("mirror image") as liabilities and
owner's equity are recorded. The equation also explains why liabilities and owner's equity follow the same rules of debit
and credit.

DEBITS AND CREDITS-THE DOUBLE-ENTRY SYSTEM

Accounting is based on a double-entry system which means that the dual effects of a business transaction is recorded. A
debit side entry must have a corresponding credit side entry. For every transaction, there must be one or more accounts
debited and one or more accounts credited. Each transaction affects at least two accounts. The total debits for a transaction
must always equal the total credits.
An account is debited when an amount is entered on the left side of the account and credited when an amount is entered
on the right side. The abbreviations for debit and credit are Dr. (from the Latin debere) and Cr. (from the Latin credere),
respectively.
The account type determines how increases or decreases in it are recorded. Increases in assets are recorded as debits (on
the left side of the account) while decreases in assets are recorded as credits (on the right side). Conversely, increases in
liabilities and owner's equity are recorded by credits and decreases are entered as debits.
The rules of debit and credit for income and expense accounts are based on the relationship of these accounts to owner’s
equity. Income increases owners’ equity and expense decreases owner's equity. Hence, increases in income are recorded
as credits and decreases as debits. Increases in expenses are recorded as debits and decreases as credits. These are the
rules of debit and credit. The following summarizes the rules:

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Assets Liabilities and Owner’s Equity
Debit Credit Debit Credit

(+) (-) (-) (+)

Increases Decreases Decreases Increases

MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC

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Expenses Revenue

Debit Credit Debit Credit

(+) (-) (-) (+)

Increases Decreases Decreases Increases

Illustration. Galicano Del Mundo decided to establish a sole proprietorship business and named it as
Delmundo Graphics Design. DelMundo is a graphic designer who has extensive experience in drawing, layout,
typography, lettering, diagramming, and photography. He possesses the talent to visually communicate to a
target audience with the right combination of words, images, and ideas.

Del Mundo graphics design can do the layout and production design of newspapers, magazines, corporate
reports, and other publications. The entity can create promotional displays; marketing brochures for services
and products; packaging design for products; and distinctive logos for businesses. He also enters into
agreements with clients for the progressive development and maintenance of their web sites. His initial
revenue streams come from web designing.
The owner, Galicano Del Mundo, makes the business decisions. The assets of the company belong to Del
Mundo and all obligations of the business are his responsibilities. Any income that the end of the year belongs
solely to Del Mundo.
During March 2019, the first month of operations, these financial transactions took place. Transactions are
described and analyzed as follows:

March 1 Del Mundo started his new business by depositing P350,000 in a bank account in the name of
the Del Mundo Graphics Design at the bpi Poblacion branch.

Assets Liabilities + Equity

Cash Del Mundo, Capital
P350,000 P350,000

The financial transaction is analyzed as follows:

 An entity separate and distinct from Del Mundo's personal financial affairs is created.
 An economic resource - cash of P350,000 invested in the business and the source of these assets is the
contribution made by the owner, a person's owner's equity. The owner's equity account is Del Mundo,
Capital.
 The dual nature of the transaction is that, cash is invested and Owner’s Equity is created. The effects on
the accounting equation are as follows: increase in asset – cash from zero to P350,000.
 At this point, the entity has no liabilities, and assets equal owner’s equity.

March 5 Computer equipment costing P145,000 is acquired on cash basis. The effect of transaction on the basic
equation is:

Assets Liabilities + Equity

Cash Computer Equipment = Del Mundo,
Capital
P350,000 = P350,000
(145,000) P145,000 =
MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC
P205,000 P145,000 = P350,000

This transaction did not change the total assets but did change the composition of the assets. It decreased one asset
(Cash) and increased another asset (Computer Equipment) by P145,000. Note that the sums of the balances on both
sides of the equation are equal. This Equity must always exist.

March 9 Computer supplies in the amount of P25,000 are purchased on account.

Assets Liabilities + Equity

Cash Computer Computer = Del Mundo,
Suppliers Equipment Capital
P205,000 P145,000 = P350,000
P25,000 = P25,000

Assets don’t have to be purchased on cash. It can also be purchased on credit. Acquiring the computer supplies with a
promise to pay the amount due later is called “buying on account.” This transaction increases both the assets and
liabilities of the business. The asset affected is Computer Supplies and the Liability Created in an Accounts Payable.

March 11 Del Mundo Graphics Design collected P88,000 in cash for designing interactive web sites for two
exporters based inside the Ortigas EcoZone.

Assets Liabilities + Equity

Cash Computer Computer = Accounts Payable Del Mundo,
Suppliers Equipment Capital
P205,000 P25,000 P145,000 = P25,000 P350,000
88,000 = 88,000
P293,000 P25,000 P145,000 P25,000 P438,000

The entity earned service income by designing web sites for clients. Del Mundo rendered his professional services and
collected revenues in cash. The effect on the accounting equation is an increase in the asset – Cash and an increase in
owner’s equity. This transaction caused the business to grow, as shown by an increase in total assets from P375,000 to
P463,000.

March 16 Del Mundo paid P18,000 to Ceradoy Bills Express, a one-stop bills payment service company, for the
semi-monthly utilities.

Assets Liabilities + Equity

Cash Computer Computer = Accounts Payable Del Mundo,
Suppliers Equipment Capital
P293,000 P25,000 P145,000 = P25,000 P438,000
(18,000) = (18,000)
P275,000 P25,000 P145,000 P25,000 P420,000

Expenses are recorded when they are incurred. Expenses can be paid in cash when they occur, or they can be paid later.
The payment for utilities is an expense for the month of March. It represented an outflow of resources and a reduction
of Owner’s Equity. Expenses have the opposite effect of income; they cause the business to shrink as shown by the
smaller amount of total assets of P445,000.

March 17 The entity has service agreements with several Netrepreneurs to maintain and update their websites
weekly. Del Mundo billed these clients P35,000 for services already rendered during the month.

Assets Liabilities + Equity

Cash Accounts Computer Computer = Accounts Payable Del Mundo,
Receivable Suppliers Equipment Capital
P275,000 P25,000 P145,000 = P25,000 P420,000
P35,000 35,000
MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC
P275,000 P35,000 P25,000 P145,000 = P25,000 455,000

The entity has performed services to clients so income should already be recognized. Del Mundo is recognized. Del
Mundo is entitled to receive payment for these but the clients did not pay immediately. Performing the services creates
an economic resource, the client’s promise to pay the amount which is called Accounts Receivable. This transaction
resulted to an increase in an asset – Accounts Receivable and an increase in owner’s equity of P35,000.

March 19 Del Mundo made a partial payment of P17,000 for the March 9 purchase on account.

Assets Liabilities + Equity

Cash Accounts Computer Computer = Accounts Payable Del Mundo,
Receivable Suppliers Equipment Capital
P275,000 P35,000 P25,000 P145,000 = P25,000 455,000
(17,000) (17,000)
P258,000 P35,000 P25,000 P145,000 = P8,000 455,000

This transaction is a payment on account. The effect on the accounting equation is a decrease in asset – cash and a
decrease in the liability – accounts payable.

March 20 Checks totaling P25,000 were received from clients for billings dated March 17.

Assets Liabilities + Equity

Cash Accounts Computer Computer = Accounts Payable Del Mundo,
Receivable Suppliers Equipment Capital
P258,000 P35,000 P25,000 P145,000 = P8,000 455,000
25,000 (25,000)
P283,000 P10,000 P25,000 P145,000 = P8,000 455,000

Last March 17, Del Mundo billed clients for services already rendered. On March 20, the entity was able to collect
P25,000 from them. The asset – cash is increased by P25,000 but its collectible has decreased.

March 21 Del Mundo withdrew P20,000 from the business for his personal use.

Assets Liabilities + Equity

Cash Accounts Computer Computer = Accounts Payable Del Mundo,
Receivable Suppliers Equipment Capital
P283,000 P10,000 P25,000 P145,000 = P8,000 455,000
(20,000) (20,000)
P263,000 P35,000 P25,000 P145,000 = P8,000 455,000

Withdrawal of cash or other assets for personal use is the way by which the owner of the entity receives advance
distribution of profits. On March 1, Del Mundo invested P350,000; both cash and owner’s equity increased. The
transaction was an investment by the owner and not an income-generating activity. Del Mundo simply transferred funds
from his personal account to the business. A cash withdrawal is exactly the opposite. The P20,000 cash withdrawal
transaction resulted to a reduction in both cash and owner’s equity.

March 27 Warlito Blanche Publishing submitted a bill to Del Mundo for P8,000 worth of newspaper
advertisements for this month. Del Mundo will pay this bill next month.

Assets Liabilities + Equity

Cash Accounts Computer Computer = Accounts Payable Del Mundo,
Receivable Suppliers Equipment Capital
P263,000 P10,000 P25,000 P145,000 = P8,000 455,000
8,000 (8,000)
P263,000 P10,000 P25,000 P145,000 = P16,000 427,000
MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC

Warlito Blanche rendered services on account. Del Mundo Graphics Design has incurred an expense in the amount of
P8,000 by availing of Warlito Blanche’s Services. There was no payment during the month. The advertising expense
resulted to a decrease in owner’s equity and an increase in the liability – Accounts Payable.

March 31 Del Mundo paid his assistant designer salaries of P15,000 for the month.

Assets Liabilities + Equity

Cash Accounts Computer Computer = Accounts Payable Del Mundo,
Receivable Suppliers Equipment Capital
P263,000 P10,000 P25,000 P145,000 = P16,000 427,000
(15,000) (15,000)
P248,000 P10,000 P25,000 P145,000 = P16,000 412,000

This transaction resulted to a reduction in owner’s equity as well as a reduction in cash. By providing his services to Del
Mundo for the month, the assistant designer has created for the business an expense – Salaries Expense.

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MODULE 1 - Accounting Equation and Double Entry
Binalbagan Catholic College - FINACC
Assignment
Enter the respective effects of the transactions below to the respective accounts. USE YELLOWPAD. Send
this together with your other modules from other subjects.

Stephanie Calamba is the owner of the Calamba Repairs Specialist. On January 1, 2020, the assets, liabilities and
proprietor’s capital of the business were: Cash, P25,000; Accounts Receivable, P4,000; Supplies, P5,000; Equipment,
P60,000; Accounts Payable, P9,000; Calamba, Capital P85,000. The transaction for the month of January were as follows:

Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Calamba, Capital

Jan. 1
Bal. P3,000 P4,000 P5,000 P60,000 P60,000 P85,000

a. =
b. =
c. =
d. =
e. =
f. =
g. =
h. =
i. =

a. Paid P3,000 of the outstanding accounts payable.

b. Receive P1,000 on account (part payment) from customers.
c. Purchased P2,500 worth of supplies on account (on credit).
d. Returned a defective piece of equipment that was purchased last month and received cash refund of P12,000.
e. Borrowed P10,000 from supplier, to repay the loan in 30 days.
f. Paid creditor P2,000 on account (part payment).
g. Purchased equipment for P10,000, giving P2,000 cash and promising to pay the balance in 60 days.
h. Bought supplied paying P1,650 cash.
i. Receive a P2,500 check from customer on account.