FCAT Self Learning Kit SY 2021 - 2022

FERNANDEZ COLLEGE OF ARTS AND TECHNOLOGY

Baliwag, Bulacan

Subject: Financial Accounting and Reporting

Grade/Course: BSA 1/BSBA 1

Quarter and Semester: First Semester

School Year: 2021 - 2022

Name of Self Learning Kit: Financial Accounting_02

Number of Self Learning Kit: One (1)

Week Covered: Two (2)

Prepared as

SELF LEARNING KIT MODE OF DELIVERY

By:

Myrna C. Calma, CPA, Ph.D.

Associate Professor

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 Fernandez Colleges
College of Business Administration and Accountancy
First Semester, School Year 2021 - 2022

FINANCIAL ACCOUNTING AND REPORTING

MODULE 2

Accounting Equation and Double Entry System

COURSE DESCRIPTION:
This course provides an introduction to accounting, within the context of business and business
decisions. Students obtain basic understanding of the principles and concept of accounting as well as their
applicability and relevance in the national context and learn how to use various types of accounting information
found in the financial statements and annual reports. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an adequate background on the recording,
classification and summarization functions of accounting to enable them to appreciate the varied uses of
accounting data.
LEARNING OBJECTIVES:
1. displayed thorough understanding of the basic accounting equation;
2. outlined and defined the basic elements of accounting;
3. prepared the chart of accounts;
4. shown the ability to analyze the effects of business transactions on the accounting equation;
5. identified the relationships of accounts vis-à-vis with other accounts within the context of debit and credit.

LESSON PROPER
Topics
1. The Accounting Equation
2. Double Entry System
LESSON 1: The Accounting Equation
Accounting Equation

 The relationship of assets, liabilities and owner’s equity of a business enterprise is expressed in
this equation:

Assets = Liabilities + Owner’s Equity

This equation shows that the ownership of the assets is divided between the rights of the creditors
(liabilities) and the rights of the owners (owner’s equity).

The Account
 The basic summary device of accounting
 A detailed record of increases, decreases and the balance of each element that appears in the
financial statements (the final product of the accounting process).
 “T” account – the simplest form of account

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T – Account

ACCOUNT TITLE
_____________________________________

DEBIT SIDE CREDIT SIDE

Rules of Debit and Credit

Debit signifies:
Increase in Assets
Decrease in Liabilities
Decrease in Owner’s Equity
Credit signifies:
Decrease in Assets
Increase in Liabilities
Increase in Owner’s Equity
Normal balance
Whatever it takes to increase the account.
Assets - Debit
Liabilities - Credit
Equity - Credit
Income - Credit
Expense - Debit
Drawings - Debit
- Accounting Events and Transactions’

Types of Accounting Transactions based on Institutional Relationship

 External transactions. These involve the trading of goods and services with money. ...
 Internal transactions. ...
 Cash transactions. ...
 Non-cash transactions. ...
 Credit transactions. ...
 Business transactions. ...
 Non-business transactions. ...
 Personal transactions.
Difference between Event and Transaction? Transactions are created through events, but not all events
can be called transactions.
Event:
 Everything that happens in every moment of human life is an event. Events can be financial and non-
financial. There may be two parties in the event or not. The event may be complete and may be
incomplete.
Transaction:
 The transaction is a phenomenon that is measurable by money and influences the assets, liabilities,
and ownership rights of any business entity. Each transaction must have two parties and if there is no
financial change then there will be no transaction.
 Difference between Event and Transaction
 Although the events and transactions seem to be the same, there is a considerable difference
between them.
 The following are the differences between the event and the transaction:

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 Point of
SN. Event Transaction
Difference

Transactions are the events through

Everything that happens in human
1. Definition which the financial condition of the
life is called an event.
business changes

One event may or may not have a Each transaction is unique and
2. Relation
relationship with another. autonomous.

There are two types of events.

There are different types of
3. Classification Namely: financial events and non-
transactions.
financial events.

The magnitude of the event is The magnitude of the transaction is

4. Magnitude
extremely wide. limited compared to the event.

There is no need for a party to

5. Party The transaction requires two parties.
organize the event.

In the event of an exchange of

In the event of an exchange of goods or
6. Exchange goods or services, it may or may not
services, it always happens.
always happen.

Documentary It is not necessary to have a valid The transaction must have a valid
7.
Evidence document for the event. document.

Record of It may or may not be necessary to It is necessary to hold an account for

8.
Accounts hold an account for the event. every transaction.

There may not be a specific motive There must be a purpose behind every
9. Motive
behind the event. transaction.

There may or may not be monetary The transaction must have a monetary
10. Monetary Value
value in the event. value.

Financial Financial changes do not have to Every transaction must have financial
11.
Change happen by an event. changes.

- Typical Account Titles Used

Elements of Financial Statements

Income Statement (Nominal Accounts) this are temporary accounts which are required to be close ate the end
of the accounting year. As per IFRS (International Financial Reporting Standard) this known as Statement of
Financial Performance
1. Income
2. Expenses

Balance Sheet (Real Accounts) these

1. Assets
2. Liabilities
3. Owner’s Equity

LESSON 11- Double Entry System

It was in 1494 that Luca Pacioli the Italian mathematician, first published his comprehensive
treatise on the principles of Double Entry System. The use of principles of double entry
system made it possible to record not only cash but also all sorts of Mercantile transactions.
It had created a profound impact on auditing too, because it enhanced the duties of an
auditor to a considerable extent.

Features of Double Entry System

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 a. Every transaction has two-fold aspects, i.e., one party giving the benefit and the other receiving
the benefit. Every transaction is divided into two aspects, Debit and Credit. One account is to
be debited and the other account is to be credited.
b. Every debit must have its corresponding and equal credit.
Advantages of Double Entry System
a. Since personal and impersonal accounts are maintained under the double entry
system, both the effects of the transactions are recorded.
b. It ensures arithmetical accuracy of the books of accounts, for every debit, there is a
corresponding and equal credit. This is ascertained by preparing a trial balance
periodically or at the end of the financial year.
c. It prevents and minimizes frauds. Moreover frauds can be detected early.
d. Errors can be checked and rectified easily.
e. The balances of receivables and payables are determined easily, since the personal
accounts are maintained.
f. The businessman can compare the financial position of the current year with that of the past year/s.
g. The businessman can justify the standing of his business in comparison with the previous years
purchase, sales, and stocks, incomes and expenses with that of the current year figures.
h. Helps in decision making.
i. The net operating results can be calculated by preparing the Trading and Profit and
Loss A/c for the year ended and the financial position can be ascertained by the
preparation of the Balance Sheet.
j. It becomes easy for the Government to decide the tax.
k. It helps the Government to decide sickness of business units and extend help accordingly.
l. The other stakeholders like suppliers, banks, etc take a proper decision regarding grant of credit or
loans.

Limitations of Double Entry System

a. The system does not disclose all the errors committed in the books accounts.
b. The trial balance prepared under this system does not disclose certain types of errors.
c. It is costly as it involves maintenance of numbers of books of accounts.

The concept of Account

 An account is defined as a summarized record of transactions related to a person or a
thing e.g. when the business deals with customers and suppliers, each of the customers
and supplier will be a separate account.
 The account is also related to things – both tangible and intangible. e.g. land, building,
equipment, brand value, trademarks etc are some of the things. When a business
transaction happens, one has to identify the ‘account’ that will be affected by it and
then apply the rules to decide the accounting treatment.
 Typically, an account is expressed as a statement in form of English letter ‘T’. It has two
sides. The left hand side is called as “Debit’ side and the right hand side is called as
“Credit’ side. The debit is denoted as ‘Dr’ and the credit by ‘Cr’. The convention is to write
the Dr and Cr labels on both sides as shown below. Please see the following example:

Dr. Cash Account Cr.

Debit Credit
side side

Types of Accounts
(1) Personal Account: As the name suggests these are accounts related to persons.
(a) These persons could be natural persons like Suresh’s A/c, Anil’s a/c, Rani’s A/c etc.
(b) The persons could also be artificial persons like companies, bodies corporate or
association of persons or partnerships etc. Accordingly, we could have Videocon
Industries A/c, Infosys Technologies A/c, Charitable Trust A/c, Ali and Sons
trading A/c, ABC Bank A/c, etc.
(c) There could be representative personal accounts as well. Although the individual
identity of persons related to these is known, the convention is to reflect them as
collective accounts. e.g. when salary is payable to employees, we know how
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 much is payable to each of them, but collectively the account is called as ‘Salary
Payable A/c’. Similar examples are rent payable, Insurance prepaid, commission
pre-received etc. The students should be careful to have clarity on this type and the
chances of error are more here.

(2) Real Accounts : These are accounts related to assets or properties or possessions. Depending
on their physical existence or otherwise, they are further classified as follows:-

(a) Tangible Real Account – Assets that have physical existence and can be seen, and touched.
e.g. Machinery A/c, Stock A/c, Cash A/c, Vehicle A/c, and the like.
(b) Intangible Real Account – These represent possession of properties that have
no physical existence but can be measured in terms of money and have value
attached to them. e.g. Goodwill A/c, Trade mark A/c, Patents & Copy Rights A/c,
Intellectual Property Rights A/c and the like.
(3) Nominal Account : These accounts are related to expenses or losses and incomes or
gains e.g. Salary and Wages A/c, Rent of Rates A/c, Travelling Expenses A/c,
Commission received A/c, Loss by fire A/c etc.

The concept of Debit and Credit

• In double entry book-keeping, debits and credits (abbreviated Dr and Cr, respectively) are entries
made in account ledgers to record changes in value due to business transactions.
• Debit is derived from the latin word “debitum”, which means ‘what we will
receive’. It is the destination, who enjoys the benefit.
• Credit is derived from the latin word “credere” which means ‘what we will have to
pay’. It is the source, who sacrifices for the benefit.
• The source account for the transaction is credited (an entry is made on the right side of the
account’s ledger) and the destination account is debited (an entry is made on the left). Each
transaction’s debit entries must equal its credit entries.
• The difference between the total debits and total credits in a single account is the
account’s balance. If debits exceed credits, the account has a debit balance; if
credits exceed debits, the account has a credit balance

A. American approach : In order to understand the rules of debit and credit according to this approach
transactions are divided into the following five categories:
Transactions relating to owner, e.g., Capital – These are personal accounts
Transactions relating to other liabilities, e.g., suppliers of goods – These are
mostly personal accounts
Transactions relating to assets, e.g., land, building, cash, bank, stock-in-trade, bills receivable
– These are basically all real accounts
Transactions relating to expenses, e.g., rent, salary, commission, wages, cartage – These are
nominal accounts
Transactions relating to revenues, e.g., interest received, dividend received, sale
of goods – These are nominal accounts

To Sum Up

For Assets Increase in Assets Dr.

Decrease in Assets Cr.
For Liabilities Decrease in Liabilities Dr.
Increase in Liabilities Cr.
For Capital Decrease in Capital Dr.
Increase in Capital Cr.
For Incomes Decrease in Income Dr.
Increase in Income Cr.
For Expense Increase in Expense Dr.
Decrease in Expense Cr.

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 For Stock Increase in Stock Dr.
Decrease in Stock Cr.

Double Entry System:

When one identifies the account that is getting affected by a transaction and type of that
account, the next step is to apply the rules to decide whether the accounting treatment is to
debit or credit that account. The Golden Rules will guide us whether the account is to be
debited or credited.

Module 2

Quiz 1

Compute the missing amount. Write your answer in your answer sheet .
1point each (total 20points)

Case Assets Liabilities Owner’s Equity

1 ? 900,000 500,000

2. 110,000 50,000 ?

3. 5,180,000 ? 2,180,000

4. ? 900,000 840,000

5. 512,500 114,110 ?

6. 2,870,000 ? 1,198,450

7. ? 221,125 245,155

8. 671,200 ? 246,000

9. ? 364,000 799,000

10. 1,025,177 ? 375,133

11. 20,000 ? 15,000

12. 150,000 45,500 ?

13. 250,000 ? 50% of asset

14. ? 500,000 1,350,000

15. 40% of liability 40,000 ?

16. 10,000 5,000 ?

17. ? 20,000 100 % of liability

18. ? ? 100,000 which is 100% of assets

19. 130,000 30,000 ?

20. 1,000 ? 200

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Quiz 2

Solve following statement problems individually using the formula ASSETS = LIABILITIES + OWNER’s
EQUITY 1points each (total 10points)

1. If the liabilities amount to P120,000 and its equity amounts to P195,000, what is the amount of assets?
2. If the economic resources amount to P1,120,000 and its economic obligations amount to P880,000,
what would be its residual interest?
3. If the economic resources amount to P500,000 and its residual interest amounts to P199,000, what is
the amount of its economic obligation?
4. . If the total liabilities amount to P2,196,000 which is 60% of the total assets, what is the amount of total
assets?
5. If the owner’s equity is thrice the total liabilities which is 25% of the total assets, what would be the
owner’s equity? The amount of total assets is P720,000.
6. If the total owner’s equity is P180,000 which is 2/3 of the total assets, what would be the amount of
total liabilities?
7. If the liabilities amount to P696,000 and its equity amounts to P385,000, what is the total assets?
8. The assets amount to P920,000 and its liabilities amount to P476,000, what would be the total owner’s
equity?
9. If the total assets amount to P1,500,000 and its residual interest amounts to P998,000, what is the
amount of its economic obligations?
10. . If the owner’s equity is P333,000 which is 1/3 of the total assets, how much is the total liabilities?

Quiz 3
Determine the normal balance of the following accounts 1point each (total 20points)
1. Salaries expense 11. X, Drawings
2. Cash 12. Service Income
3. Accounts Payable 13. Depreciation
4. Supplies 14. Land
5. Rent income 15. Prepaid rent
6. Telephone expense 16. Equipment
7. X, Capital 17. Bad debts
8. Accounts Receivable 18. Fares Earned
9. Utilities Payable 19. Prepaid Insurance
10. Furniture & Fixtures 20. Supplied used

Quiz 4

Indicate if the transaction is an operating activity, investing activities / financing activities 1point each
(TOTAL 20 points)

1. Collections from customer

2. Payment of interest Expenses
3. Initial cash investment owner
4. Proceeds of bank loan
5. Payments made to supplier
6. Sale of old property in cash
7. Payments made to bank loan
8. Purchase of equipment in cash
9. Withdrawal of owner’s in cash
10. Purchase of land and building use in business
11. Payment of operating expenses
12. Collections of claims from customer
13. Payment of payables to suppliers.
14. Receipts of cash from services delivered
15. Purchase of furniture for office used
16. Advance payments for insurance
17. Purchase of land for future sale
18. Purchase of goods for sale in cash
19. Payments made to advertising company
20. Receipts of cash from services rendered

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Quiz 5
Classify the following accounts as to ASSETS. LIABILITIES, OWNER’S EQUUITY, REVENUE,
WITHDRAWALS, EXPENSE then identify the financial statements either BALANCE SHEET or INCOME
STATEMENT. (20 points)

1. Cash in bank
2. Supplies inventory
3. LA Owner’s equity
4. Notes receivable
5. Notes payable
6. Salaries and wages
7. LA withdrawals
8. Interest expense
9. Furniture and fixtures
10. Prepaid advertising
11. Interest expense
12. Cash on hand
13. Accounts receivable
14. Service income
15. Advertising expense
16. Insurance expense
17. Depreciation
18. Utilities expense
19. Land
20. Building

“Love is patient, love is kind. It does not envy, it does not boast, it is not proud. It does not dishonor others, it is not self-
seeking, it is not easily angered, it keeps no record of wrongs. Love does not delight in evil but rejoices with the truth. It always
protects, always trusts, always hopes, always perseveres.” – (1 Corinthians 13:4-7)

“Do not be wise in your own eyes; fear the LORD and shun evil. “
(Proverbs 3:7)

“A man who asks is a fool for five minutes. A man who never asks is a fool for life.”

- END –

References:
1.Financial Accounting and Reporting for Services and Merchandisers – International Edition 2019 by Zenaida
Vera Cruz-Manuel
2. Basic Accounting – 2019 issue – by Win Ballada, and Susan Ballada, DomDane Publishers and Made Easy
Books.
3. Fundamentals of Accounting – Part 1, By:Tulio, VillaBlanca, Abon, Abdon, Albay and Inigo
4. Worktext in Basic Accounting (Service and Merchandising) by:Cecilia Hugo – Macapilit
5.Fundamentals of Basic Accounting, By: Leonardo E. Aliling
6. Fundamentals of Accounting – Voume 1, By: Patricia M. Empleo
7. Intermediate Accounting Part 1-3 by Zeus Vernon B. Millan 2018 edition

Online Resources:

Open Education Resources – Accounting and Finance /Principles of Accounting (Textbook, Modules, Tests
and Video presentation of lectures)
https://guides.library.sc.edu/OER
Corporate Financia Institute -Free Accounting Course – Introduction to Accounting
https://course.corporatefinanceinstitute.com
https://www.indeed.com/career-advice/career-development/cash-vs-accrual
https://www.accountingcoach.com/blog/what-is-the-statement-of-financial-position
http://www.accountingmcqs.com/Statement-of-Financial-Position
YouTube Channels:
https://www.youtube.com/playlist?list=PLuXyIbtL4zN-21X2xN7roYVaIDTIMfRHu
Filipino Accounting Tutorial
CPA Strength
Executive Finance Corporate Finance Institute
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