The Accounts and

The Double-Entry
System
Learning Objectives
1. Describe the account (the simple T-Account) and its uses.
2. Define debits and credits.
3. Describe the nature of the typical account titles used in recording
transactions.
4. Understand what is meant by the double-entry system.
5. Summarize the rules of debit and credit as applied to balance
sheet and income statement accounts.
6. Analyze and state the effects of business transactions on an
entity’s assets, liabilities and owner’s equity
The Accounts
 Accounts is the basic storage of
information in accounting or summary
device of accounting. It is a record of the
increases and decreases in a specific item
of asset, liability, equity, income and
expenses.
 An account may be depicted through a “T-
Account”. It is called as such because it
resembles the letter “T”. It has three
parts, namely:
 Accounts title – describes the specific
item of asset, liability, equity,
income or expense
 Debit side – the left side of the
account, come from a Latin word
debere means left, abbreviated as Dr.
 Credit side – the right side of the
account, come from a Latin word
credere means right, abbreviated as
Cr.
The Five Major Accounts
The five majors accounts, also called the elements of the financial statements.
 Assets – are the resources you control that have resulted from past events and can
provide you with future economic benefits.
• Current Assets are assets when:
o It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
o It holds the asset primarily for the purpose of trading;
o It expects to realize the asset within twelve months after the reporting period; or
o The asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting period.

 Cash – a medium of exchange; includes coins, currency, checks, money order, bank deposits
 Cash Equivalents – highly liquid investments that are readily convertible to cash
 Accounts Receivable – claims against customers arising from sale of services or goods on
credit.
 Notes Receivable – written pledge that the customer will pay the business a fixed amount of
money on a certain date
 Inventories – these are assets which are held for sale in the ordinary course of business, in the
process of production for such sale, or in the form of materials or supplies to be consumed in
the production process or rendering of services.
 Supplies- represents the cost of unused and other supplies
 Prepaid Expenses – expenses paid for by the business in advance. These paid items represent
future economic benefits until the time these start to contribute to the earning process, these,
then become as expense. Ex. Prepaid Insurance, Rent.

Non-Current Assets – assets does not fall the definition of current assets
 Land – a lot on which the building of business has been constructed or a vacant lot which is to
be used as future plant site.
 Building – structure owned by a business for use in its operations
 Property, Plant and Equipment – tangible assets that are held by an entity for use in the
production or supply of goods or services, or for rental to other, which are expected to be used
during more than one period.
 Accumulated Depreciation – it is a contra account that contains the sum of the periodic
depreciation charges. The balance in this account is deducted from the cost of related asset.
 Intangible Assets – identifiable, non-monetary asset without physical substance held for use in
the production or supply of goods or services, for rental to others. Include goodwill, patents,
copyrights, licenses, franchises, trademarks, brand names.
 Liabilities – are your present obligations that have resulted from past events and
can require you to give up resources when settling them.
• Current Liabilities are liabilities when:
o It expects to settle the liability in its normal operating cycle;
o It holds the liability primarily for the purpose of trading;
o The liability is due to be settled within twelve months after the reporting period; or
o The entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period.

 Accounts Payable – represents the reverse relationship of the accounts receivable. The
buyer agrees to pay in the near future for accepting the goods or services.
 Notes Payable – the reverse sense of note receivable, the business entity is the maker
of the note.
 Accrued Liabilities – amounts owed to others for unpaid expenses. Includes salaries,
payable, utilities payable, interest payable and taxes payable.
 Unearned Revenues – advance payment receives from customers for the goods and
services not yet provided or rendered.
 Current Portion of Long-Term Debt – the portion of the mortgage notes, bonds and
other long-term indebtedness which are to be paid within one year from the balance
sheet date.
 All other liabilities should be classified as non-current liabilities
 Mortgage Payable – this account records long-term debt of the entity for which the
entity has pledged certain assets as security to the creditor.
 Bonds Payable – funds is obtained by issuing bonds. Bond is a contract between the
issuer and the lender specifying the terms of repayment and the interest to be
charged.

 Owner’s Equity – is assets minus liabilities, net asset/net worth

 Capital – account used to record the initial and additional investment of the
business owner
 Withdrawals – account used to record the owner’s drawing
 Income Summary – a temporary account used to close the income and expense at
the end of the accounting period
 Income – are increases in economic benefits during the period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to investments by the business owners.
 Service Income/Revenue – revenues earned from rendering services to customer or clients
(services of a spa, services of entertainment and event organizers)
 Sales – revenues earned from the sale of goods (sale of barbecue, sale of souvenir items.
 Expenses – are decreases in economic benefits during the period in the form of
outflows or depletions of assets or increases of liabilities that result in decrease in
equity, other than those relating to distributions to the business owners.
 Cost of Sales (Cost of Goods Sold) – the cost incurred to purchase or to produce the products sold to
customers
 Salaries and Wages Expense – represents the salaries earned by the employees for the services they
have rendered
 Rent Expense – the rentals that have been used up
 Utilities Expense – represent the cost of utilities (telecommunications, electricity, fuel and water
expense)
 Supplies Expense –the used up of supplies in the conduct of daily business
 Insurance Expense – cost of insurance pertaining to the current period
 Interest Expense – expense related to use of borrowed funds.
 Depreciation Expense – the portion of the cost of a tangible asset allocated or charged as expense
 Bad Debt Expense – the amount estimated to be doubtful of collection.
Classification of the Major Accounts

Balance Sheet Accounts Income Statement

Assets Income
Liabilities Expense
Equity

Chart of Accounts – is a list of all accounts used by the business

Example of basic chart of accounts:

Double-Entry System – Debits and Credits
 All transaction are recorded in the accounting records is using the
double-entry system. Under this system, each transaction is recorded
in two parts – debit and credit.

Concepts of Duality and Equilibrium

 The concept of duality views each transaction as having two-fold
effect on values – a value received, and the value parted with, and
each transaction is recorded using at least two accounts.
 The concept of equilibrium requires that each transaction is recorded
in terms of equal debits and credits. For every peso debited there is a
corresponding peso credited, and vice versa.
Rules of Debits and Credits
Normal Balance of An Account
Types and Effects of Transactions

An accounting event is an economic occurrence that causes changes in an

enterprise’s assets, liabilities and/or equity.
A transaction is a particular kind of event that involves the transfer of something of
value between two entities. Below are the classification of transactions:
 Source of Assets (SA). An asset account increases and a corresponding claims
(liabilities or owner’s equity) account increases. Examples: Purchase of supplies
on account; Sold goods on cash on delivery basis.
 Exchange of Assets (EA). One asset account increases and another asset account
decreases. Example: Acquired equipment for cash.
 Use of Assets (UA). An asset account decreases and a corresponding claims
(liabilities or equity) account decreases. Example: Settled accounts payable;
Paid salaries of employees.
 Exchange of Claims (EC). One claims (liabilities or owner’s equity) account
increases and another claims (liabilities or owner’s equity) account decreases.
Example: Received utilities bill but did not pay.
 The four types of transactions may be further expanded in to nine types
of effects as follows:
 Increase in Assets = Increase in Liabilities (SA)
 Increase in Assets = Increase in Owner’s Equity (SA)
 Increase in one Asset = Decrease in another Asset (EA)
 Decrease in Assets = Decrease in Liabilities (UA)
 Decrease in Assets = Decrease in Owner’s Equity (UA)
 Increase in Liabilities = Decrease in Owner’s Equity (EC)
 Increase in Owner’s Equity = Decrease in Liabilities (EC)
 Increase in one Liability = Decrease in another Liability (EC)
 Increase in one Owner’s Equity = Decrease in another Owner’s Equity (EC)