BASIC FINANCIAL AND REPORTING

The Accounting Equation and the Double-Entry System

by Win Ballada

ELEMENTS OF FINANCIAL
STATEMENT
Assets, liabilities, and equity - relate
to a reporting entity’s financial position
Income and expenses - relate to a
reporting entity’s financial performance.
ASSETS is a present economic resource
controlled by the entity that can be used to
produce positive economic value.
LIABILITIES - a present obligation of the
entity that hasn’t yet been fulfilled or paid
in full or to acquire something on account.
EQUITY - the residual interest in the
assets of the entity after deducting all its
liabilities.
INCOME - the generated profit that was
deducted to expenses.
THE ACCOUNT
- the basic summary device of accounting
is the account. A separate account is
maintained for each element that appears
in the balance sheet (assets, liabilities,
and equity) and in the income statement
(income and expenses). The simplest form
of the account is known as the “T” account
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 are recorded.
● Each transaction affects at least
two accounts.
● The total debits for a transaction
must always equal the total credits.
● abbreviation for debit are Dr (from
Latin debere) and credit Cr (from
Latin credere)

EXPENSES - the cost of operations that a

company incurs to generate revenue.

THE ACCOUNTING EQUATION

● most basic tool of accounting

● it states that assets must always
equal liabilities and owner’s
equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

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BASIC FINANCIAL AND REPORTING
The Accounting Equation and the Double-Entry System
by Win Ballada
THE ACCOUNTING EQUATION
● most basic tool of accounting
● it states that assets must always
equal liabilities and owner’s
equity.
ASSETS = LIABILITIES + OWNER’S EQUITY
NORMAL BALANCE ACCOUNT
Normal Balance
- refers to the side of the account
debit or credit where increases are
recorded.
NORMAL DEBIT BALANCE
● Assets
● Owner’s Withdrawal
● Expenses
NORMAL CREDIT BALANCE
● Liability
● Owner’s Equity
● Income
TYPES AND EFFECTS OF
TRANSACTIONS
Source of Assets - increase in assets,
increases in liabilities or owner’s equity
Example: Purchase on account
Exchange of Assets - increases in
assets, decrease in assets.
Example: Acquired equipment for cash.
Use of Assets - decrease in asset,
decrease in liabilities
Example: Paid salaries of employees.
Exchange of Claims - liabilities or
owner’s equity increases, liabilities or
owner’s equity decreases.
Example: Received utilities bill but did not
pay.
TYPICAL ACCOUNT TITLES USED
Statement of Financial Position
ASSETS
classified into two: current and non-current
assets.
CURRENT ASSETS
- intends to sell or consume in its
operating normal cycle
- cash or cash equivalent, unless it is
restricted from being exchanged or used
to settle a liability for at least twelve
months.
- has a purpose of trading
Cash - medium of exchange that a bank
will accept for deposit at face value
Cash Equivalents - convertible to cash
Notes Receivable - written pledge that
the customer will pay the business on a
certain date.
Accounts Receivable - sold goods on
credit.
Inventories - goods that are subjected to
sale.
Prepaid Expenses - expenses paid in
advance. Includes insurance and rent.
NONCURRENT ASSETS
Property, Plant and Equipment -
tangible assets that are held by an
enterprise for use in the production or
supply of goods or services
Accumulated Depreciation - contra
account that contains the sum of periodic
depreciation charges.
Intangible Assets - identifiable,
nonmonetary assets without physical
substance.
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BASIC FINANCIAL AND REPORTING
The Accounting Equation and the Double-Entry System
by Win Ballada

to close income and expenses accounts

CURRENT LIABILITIES
- expects to sell the liability in its normal
operating cycle.
liability is due to be settled within twelve
months
Accounts Payable - accepting goods that
the buyer agrees to pay the business in
the near future.
Notes Payable - a written pledge from the
business who promises to pay an
specified amount on a certain date.
Accrued Liabilities - amounts owed to
other for unpaid expense: Salaries
Payable (1); Utilities Payable (2)
Unearned Revenue - when the business
receives payment before providing the
customers with goods or services.
Current Portion of Long-Term Debt -
portions of mortgage notes, bonds and
other long term indebtedness which are
to be paid within one year from the
balance sheet date.
NONCURRENT LIABILITIES
Mortgage Payable - the debt payments of
an entity to a certain asset that has been
pledged as security to the creditor.
Bonds Payable - are recorded when an
entity issues bonds to generate cash.
and shows whether the business
generated a profit or loss for the period
before closing the capital account.
Income Statement
INCOME
Service Income - revenues earned by
performing services for a customer or
client.
Sales - revenue earned as a result of sale
of merchandise.
EXPENSES
Cost of Sales - the direct costs of
producing the goods sold by a company.
Salaries Expense - payment for the
employees including 13th month pay,
allowances and benefits.
Utilities Expense - cost incurred by using
utilities such as electricity, water, etc.
Rent Expense - expense for space or
rent.
Supplies Expense - expense of using
supplies in the conduct of daily business.
Insurance Expense - portions of
premiums paid on insurance coverage
which has expired.
Depreciation Expense - portion of a fixed
asset that has been considered consumed
in the current period.

OWNER’S EQUITY Uncollectible Accounts Expense - the

amount of receivable estimated to be
Capital - (from the Latin capitalis,
doubtful of collection and charged as
meaning “property”) an account used to
expense during an accounting period.
record the original and additional
investment of the owner of the business Interest Expense - an expense related to
entity. use of borrowed funds.
Withdrawal - an account used to record
the withdrawals made by the owner from
the business entity.
Income Summary - temporary account
used at the end of the accounting period