ACCOUNTING EQUATION AND THE DOUBLE account offsets a credit in another, the sum of all debits

ENTRY SYSTEM must equal the sum of all credits. The double-entry
system of bookkeeping standardizes the accounting
Elements of Financial Statement
process and improves the accuracy of prepared
 Asset – a present economic resource financial statements, allowing for improved detection of
controlled by the entity as a result of past errors.
events.
Account Normal Balances
 Liability – the present obligation of the entity to
transfer and economic resource as a result of Normal Balance (Increase)
past events. Account Debit Credit
 Equity – the residual interest in the assets of Assets /
the entity after deducting all its liabilities. Liabilities /
 Income – increases assets, or decreases Equity
liability, that results in increase in equity. Capital /
 Expenses – decrease in assets, or increase in Withdrawal /
liability, that results in decrease in equity. Income /
Assets, Liabilities, and Equity are found in the Expense /
Statement of Financial Position (Balance Sheet) while Types and Effects of Transactions
Income and Expenses are found in Statement of
Financial Performance (Income Statement). Source of Assets (SA)
The T- Account An asset account increases and a corresponding claims
(liability or equity) account increases. Example: Sold
Account is the basic summary device of accounting. It good on cash basis; purchase of supplies on account.
is the detailed record of the increases, decreases, and
balance of each element that appears in the entity’s Exchange of Assets (EA)
financial statements. The simplest form of Account is One asset account increases and another asset
the T-Account similar to letter T. account decreases. Example: Purchase of equipment
for cash.
Use of Assets (UA)
An asset account decreases and corresponding claims
(liability or equity) decreases. Example: Payment of a
accounts payable for cash
Exchange of Claims (EA)
A T-account is an informal term for a set of financial One claim (liability or equity) account increases and
records that use double-entry bookkeeping. The another claim (liability or equity) account decreases.
account title appears just above the T. Underneath, Example: Received utilities bill but did not pay.
debits are listed on the left and credits are recorded on
the right, separated by a line. Typical Account Title Used
Double Entry System Assets
Double entry, a fundamental concept underlying  Cash – any medium of exchange that a bank
present-day bookkeeping and accounting, states that will accept for deposit at face value. It can be
every financial transaction has equal and opposite coins, currency, money orders, bank deposits,
effects in at least two different accounts. There is a dual and drafts.
effect where debit side entry must have a  Cash Equivalents – short-term highly liquid
corresponding credit. It is used to satisfy the accounting investments that are readily convertible into
equation: known amounts of cash and which are subject
to an insignificant risk of changes in value.
Assets=Liabilities + Equity  Notes Receivable – written pledge (e.g.
With a double entry system, credits are offset by debits promissory note) that the customer will pay the
in a general ledger or T-account. business a fixed amount of money on a certain
date.
In the double-entry system, transactions are recorded in
 Accounts Receivable – claims against
terms of debits and credits. Since a debit in one
customers arising from sale of goods or
 services on credit. It offers less security than a Income
notes receivable.  Service Income – revenues earned by
 Inventories – held for sale in the ordinary performing services to customer or client.
course of business. It can also be materials or  Sales – revenues earned as a result of sale of
supplies to be consumed in the production merchandise.
process or in the rendering of service.
 Prepaid Expenses – expenses paid by the Expenses
business in advance.  Cost of Sales – it is also called cost of goods
 Property, Plant, and Equipment – tangible sold. It is the cost incurred to purchase or to
assets expected to be used for more than a produce the products sold to customer during
year. This includes land, building, machinery, the period.
equipment, furniture and fixtures, motor, and  Salaries or Wages Expense – includes all
vehicles. payments to employees. This includes salaries,
 Accumulated Depreciation – contra account 13th month pay, allowances, and other benefits.
that contains the sum of the periodic  Utilities Expense – expenses related to the use
depreciation changes. All fixed assets of telecommunications, facilities, electricity,
depreciate except for land. fuel, and water.
 Intangible Assets – assets that cannot be  Rent Expense – expenses for space,
touched or has no physical being but can be equipment, and other asset rentals.
used for years. This includes goodwill, patent,  Supplies Expense – expenses of using
trademark, copyright, brand name, license, supplies in the conduct of daily business.
franchise, secret process, subscription lists,  Insurance Expense – portion of premiums paid
and non-competition agreements. on insurance coverage which has expired.
Liabilities  Depreciation Expense – portion of the cost o
tangible assets allocated as expense during the
 Accounts Payable – something (money or accounting period.
asset) the company owes that has to be paid in  Uncollectible Accounts Expense – amount of
12 months. receivables estimated to be doubtful of
 Notes Payable – an entity’s obligation to other collection and charged as expense during an
entity that is written as a pledge. accounting period. It is also called Bad Debts
 Accrued Liabilities – amounts owed to other for Expense.
unpaid expenses. This may include salaries  Interest Expense – expenses related to the use
payable, utilities payable, interest payable, and of borrowed funds.
tax payable.
 Unearned Revenues – when business entity Distinction between Revenues and Receipts
receives payment first before providing goods This Year
or services. Amounts Receipts Revenues
 Current Portion of Long term debt – portion of Cash Sales made this
20,000 20,000 20,000
long term debt that has to be paid within a year year
from the balance sheet date. Cash sales last year,
30,000 30,000 0
 Mortgage Payable – records long term debt of cash received this year
Cash sales this year,
a business for which the business entity has cash received this year
40,000 40,000 40,000
pledged certain assets as security to the Cash sales this year,
creditor. cash to be received 10,000 0 10,000
 Bonds Payable – bond is a contract between next year
the issuer and the lender specifying the terms if TOTAL 90,000 70,000
repayment and the interest to be charged.
Equity
 Capital – used to record the original and
additional investment of the owner.
 Withdrawals – records the owner’s personal
drawings for personal use.
 Income Summary – temporary account used at
the end of the accounting period to close
income and expenses.