Review of the Previous Lesson

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Review of the Previous Lesson
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ACCOUNTING EQUATION THE DOUBLE-ENTRY SYSTEM

• Week 2

ACCOUNTING INFORMATION SYSTEM
Subject
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Learning Objectives

• Differentiate the elements of financial
  statements
• Explain the meaning of the account
• Discuss the accounting equation
• Explain the nature of debits and credits the
  double-entry system
• Discuss accounting events and transactions
• Identify and differentiate typical account titles
  used Balance Sheet Income Statement
• Explain the accounting procedures for business
  transactions

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ELEMENTS OF FINANCIAL STATEMENTS

• The elements of financial statements ? refer to
  the quantitative information shown in the
  statement.

• Assets
• Liabilities
• Owners Equity
• or Capital

Balance Sheet (Financial Position) - Real Account
4. Income or Revenue 5. Expenses
Income Statement (Financial Performance) -
Nominal Accounts
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ACCOUNT
T-ACCOUNT
A detailed record of the increases, decreases
balance of each element that appears in an
entitys financial statements.
The simplest form of the account.
It has 3 parts account title, debit side
credit side.
Account Title
Left side or Debit side
Right side or Credit Side
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ASSET ACCOUNTS - Debit
Current Assets
Non-Current Assets
Cash Petty Cash Fund Cash Equivalents Notes
Receivable Accounts Receivable Allowance for Bad
Debts Accrued Interest Income Advances to
Employees Inventories Prepaid Expenses Unused
Supplies
Property, Plant Equipment Land Building Equipmen
t Furniture Fixtures Accumulated
Depreciation Intangible Assets
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LIABILITIES ACCOUNTS - Credit
Current Liabilities
Non-Current Liabilities
Accounts Payable Notes Payable (short-term) Accrue
d Expenses or Accrued Liabilities Unearned
Revenues or Unearned Income SSS Premium
Payable Philhealth Premium Payable Pag-ibig
Premium Payable Withholding Tax
Payable Pre-collected or Unearned Income
Mortgage Payable Bonds Payable Notes Payable
(Long-term) Accounts Payable
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OWNERS EQUITY ACCOUNTS

• The original and additional investments of the
  owner of the business entity.
• Increased by net income
• Decreased by net loss

Capital (Credit)
When the owner of a business entity withdraws
cash or other assets
Withdrawals (Debit)
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INCOME OR REVENUE ACCOUNTS - Credit
Sales
Income or revenue derived from the sale of
merchandise.
Service Income or Service Revenue
Income or revenue derived from rendering services.
Professional Income Accounting or Auditing
Fees Income Legal Fees Income Dental
Fees Income Medical Fees Income Rental
Income Interest Income Miscellaneous Income
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EXPENSES ACCOUNTS - Debit
Cost of Sales or Cost of Goods Sold Salaries or
Wages Expense Bad Debts or Uncollectible Accounts
Expense Utilities Expense Depreciation
Expense Taxes Licenses
SSS Contribution Philhealth Contribution Pag-ibig
Contribution Insurance Expense Supplies
Expense Miscellaneous Expense
CHART OF ACCOUNTS list of account titles or
account name.
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ACCOUNT
T-ACCOUNT
A detailed record of the increases, decreases
balance of each element that appears in an
entitys financial statements.
The simplest form of the account.
It has 3 parts account title, debit side
credit side.
In every transaction, there is a value received,
we call Debit and value parted with, we call a
Credit.
Account Title
Left side or Debit side (Dr.) Value received
Right side or Credit Side (Cr.) Value parted with
Debit balance
Credit balance
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• Account titles ? are identifications or brief
  descriptions of items that fall to same kind,
  class or nature. In other words, are assigned
  names to various accounts.

Account Title
CREDIT ENTRY An amount entered on the right-hand
side of the account.
DEBIT ENTRY An amount entered on the left-hand
side of the account.
Left side or Debit side (Dr.) Value received
Right side or Credit Side (Cr.) Value parted with
account balance
Debit total
Credit total
ACCOUNT BALANCE ? the difference between the
debit total credit total of an account. DEBIT
BALANCE ? if the debit total exceeds credit
total. CREDIT BALANCE ? if the credit total
exceeds debit total. IN BALANCE or CLOSED ACCOUNT
? if the debit total equals credit total.
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Example of Chart of Accounts
CHART OF ACCOUNTS list of account titles or
account name.

• Account titles ? are identifications or brief
  descriptions of items that fall to same kind,
  class or nature. In other words, are assigned
  names to various accounts.

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THE NATURE OF DEBITS AND CREDITS The
double-entry system

• A double-entry system means that the dual effects
  of a business transaction is recorded.

A debit side entry must have a corresponding
credit side entry.
Dual effects
debit credit
value received value parted with
Each transaction affects at least two accounts.
The total debits for a transaction must always
equal the total credits.
Business transactions
total debits total credits
assets liabilities owner's equity
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THE RULES OF DEBIT CREDIT

• Rule 1 Asset debit to increase
• credit to decrease
• Rule 2 - Liabilities credit to increase
• debit to decrease
• Rule 3 Owners Equity credit to increase
• debit to decrease
• Rule 4 Drawing debit to increase
• credit to decrease
• Rule 5 Income credit to increase
• debit to decrease
• Rule 6 Expenses debit to increase
• credit to decrease

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NORMAL BALANCE OF THE ELEMENTS OF FINANCIAL
STATEMENTS
DEBIT BALANCE
CREDIT BALANCE
Liabilities
Assets
Owners Equity
Income or Revenue
Expenses
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BASIC ACCOUNTING EQUATION
Assets Liabilities Capital
Credit
Debit
Credit
normal balance
Credit
Debit
Credit
increase
Debit
Credit
Debit
decrease
Income Expenses Net Income
Credit
normal balance
Credit
Debit
Credit
increase
Credit
Debit
decrease
Credit
Debit
Debit
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EXPANDED ACCOUNTING EQUATION
Assets Liabilities Capital (- Drawing
Income Expenses)
Credit
Credit
normal balance
Debit
Debit
Credit
Debit
increase
Credit
Debit
Debit
Credit
Credit
Debit
Credit
Debit
Credit
decrease
Debit
Credit
Debit
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PHASES OF ACCOUNTING
Recording
Classifying
Summarizing
Interpreting
5. Adjusting journal entries
Profitability How much is the increase in
capital as a result of business operation?
1. Identifying transactions and events source
documents
3. Posting to the ledger general ledger
6. Preparing the worksheet
4. Trial balance preparation
7. Preparing financial statements
2. Journalizing transactions the journal
Liquidity Are there available funds to finance
the business operation?
8. Closing entries
NOTE Steps 1 to 10 is the ACCOUNTING CYCLE.
Solvency Can the business pay its long-term
obligations to others?
9. Post-closing trial balance
10. Reversing entries
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PHASE 1 - RECORDING
Steps 1 of the ACCOUNTING CYCLE.
1. Identifying transactions and events source
documents
a) Identification of business transaction ? what
transactions are considered as accountable and
what are not. RULE Only transactions events
which are of financial character to the business
are being recognized. SOURCE DOCUMENTS or
SUPPORTING BUSINESS DOCUMENTS? the basis of
identifying transactions. b) Analysis of
business transactions ? Business transactions are
analyzed from the view point of the business.
Always consider yourself as the business when
making the analysis. By analyzing, we have to
ask What is the value received and value parted
with in this particular transactions? c)
Measuring of business transaction ? the peso is
our financial denominator.
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Example of Source Documents(under Servicing
Activities)

1. Customers suppliers sales invoices
2. Official receipts
3. Cash or Check Vouchers
4. Service Order Slip

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PHASE 1 - RECORDING
RECORDING ? is the 1st phase of accounting. This
involves the writing down of business transaction
in a systematic manner and in order of their
occurrence in the book of original entry called
Journal.
Steps 2 of the ACCOUNTING CYCLE.
2. Journalizing transactions the journal
JOURNALIZING ? is the process of recording the
effects of economic transaction in the
journal. ? the act of recording business
transactions in the journal. JOURNAL ENTRY ? the
accounting record written in the journal which
consists of debit account and credit account with
their respective values.
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ANALYSIS OF BUSINESS TRANSACTION

• Transaction Bought a car for cash, P650,000.00.
• Questions guide
• Identifying Who bought the car? The business.
• Analyzing What is the value received? Car. What
  is the value parted with? Cash.
• Measuring What is the amount involved?
  P650,000.00.
• Journalizing
• Debit, value received car P650,000.00
• Credit, value parted with cash 650,000.00

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To illustrate the analyzing process of
accounting, consider the transactions of Valrox,
a servicing business.
Chart of Accounts
Utility expense Bank charge expense Service
Income Salaries expense Owners drawing
Cash on hand Cash in bank Accounts
Receivable Office equipment
Notes Payable Valrox, Capital SSS Premium
Payable Withholding tax payable Supplies expense
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Financial StatementsObjective To provide
financial information useful to the users.
The information that accumulated and processed in
financial accounting
The formal reports prepared by accountants
The final products of the accounting process.
Shows the financial position of a business entity
as of a particular date.
1. Statement of Financial Position
Shows the performance of the business entity for
a given period.
2. Income Statement
3. Statement of Changes in Equity
Shows the movement or changes in owners capital
or equity in a certain period.
4. Cash Flow Statement
Shows and explains the changes of cash during an
accounting period.
Part of the financial statements in a parenthesis
form, to achieve proper understanding of the
financial reports.
5. Notes to the Financial Statement
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Relationships Among the Financial Statements
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Example of Income Statement
Example of the Statement of Owners Equity
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Example of Statement of Financial Position
Account Form in horizontal order
Report Form in vertical order
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Example of Statement of Cash Flows
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Example of Notes to Financial Statement
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ELEMENTS OF FINANCIAL STATEMENTS

• The elements of financial statements ? refer to
  the quantitative information shown in the
  statement.

• Assets
• Liabilities
• Owners Equity
• or Capital

Balance Sheet (Financial Position) - Real Account
4. Income or Revenue 5. Expenses
Income Statement (Financial Performance) -
Nominal Accounts
Real accounts are not closed at the end of the
accounting period. Nominal accounts are temporary
accounts that are closed or put to zero balance
at the end of the accounting period.
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ELEMENTS OF FINANCIAL STATEMENTS

1. Assets are resources controlled by the entity
   as a result of past transactions or events and
   from which future economic benefits are expected
   to flow to the entity. Asset accounts have a
   normal debit balance.
2. Is a leased lot or rented machines considered an
   asset of the entity?
3. Is a machine that can not be repaired and owned
   by the entity considered an asset?
4. Is buying a machine in the future transactions
   considered an asset?
5. Is a machine bought by the entity for the
   personal use of the owner considered an asset?

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ELEMENTS OF FINANCIAL STATEMENTS

• 2. Liabilities are present obligations of the
  entity arising from past transactions or events
  the settlement of which is expected to result in
  an outflow from the entity of resources embodying
  economic benefits. Liability accounts have
  normal credit balance.
• a. Is the debt of the owner considered a
  liability of the entity?
• b. Is a bank loan in the future transaction,
  thus a future obligation considered a liability?

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ELEMENTS OF FINANCIAL STATEMENTS

• 3. Equity is the residual interest in the
  assets of the entity after deducting all of its
  liabilities (asset liabilities equity).
  Equity accounts have normal credit balance.
• 4. Income or Revenue represents the earnings of
  the business from sales of goods or service
  rendered. Revenue accounts have a normal credit
  balance.
• 5. Expenses are costs incurred in conducting
  the business activities. Expense accounts have
  normal debit balances.

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ELEMENTS OF FINANCIAL STATEMENTS
RECOGNITION OF ELEMENTS
MEASUREMENT OF ELEMENTS
Recognition ? means the process of reporting the
elements of financial statements of an entity.
Measurement ? is the process of determining the
monetary amounts at which the elements of
financial statements are recognized.
The 4 measurement bases
When is an item recognized as an element of
financial statements?

1. Historical cost
2. Current cost
3. Realizable value
4. Present value

1. Probability of future benefit ? When the item has
   any future economic benefit that will flow to or
   from the entity.
2. Reliability of measurement ? When the item has a
   cost or value that can be measured with
   reliability.

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MEASUREMENT OF ELEMENTS
The 4 measurement bases

1. Historical cost ? is the amount paid when an
   asset was acquired.
2. Current cost ? is the amount to be paid if the
   asset (already acquired) was acquired today.
3. Realizable value or settlement value ? is the
   amount to be received if the asset is to be sold.
4. Present value ? the amount that a future sum of
   money is worth today given a specified rate of
   return.

the amount that a future sum of money is worth
today given a specified rate of return.
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5 years from now
P1,000.00
P620.00
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ACCOUNTING CONCEPTS PRINCIPLES

• Accounting concepts ? are important assumptions
  or ideas which accountants observe in recording
  business transactions in the books of accounts.
• Accounting conventions ? are the means of
  implementing accounting principles. They are
  the rules, procedures methods used in
  accounting practice. They comprise the large
  body of practices that prescribe definitely how
  to do the accounting process.
• Accounting principles ? refers to a doctrine
  which is the basis of accounting conventions.
• GAAP ? Generally Accepted Accounting Principles
• Guide accountants in the accounting process of an
  enterprise.
• Are developed based on experience, research,
  careful study.
• Become generally accepted by agreement among
  accounting practitioners.
• OBJECTIVE to fairly present the financial
  statementsin conformity with GAAP.

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ACCOUNTING CONCEPTS PRINCIPLES
IMPLICIT ASSUMPTIONS
ACCOUNTING PRINCIPLES

1. Entity concept
2. Periodicity concept
3. Stable monetary unit concept

1. Objectivity principle
2. Historical cost
3. Revenue recognition principle
4. Expense recognition principle
5. Adequate disclosure
6. Materiality
7. Consistency principle

UNDERLYING ASSUMPTIONS

1. Accrual basis
2. Going concern

Assignment Give the description of each concepts
principles (except implicit assumptions).
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THE END