THE ACCOUNTING

EQUATION AND THE

DOUBLE-ENTRY SYSTEM
CHAPTER 2
 An accounting information system is the
combination of personnel, records and
procedures that a business uses to meet
its need for financial information. Most
firms have an accounting manual that
specifies the policies and procedures to be
followed in accumulating information
within the accounting information system.

ACCOUNTING INFORMATION
SYSTEM
 The
Accounting
Process

Accounting
Economic Information
Activities

Decision
Makers
An effective accounting information system
should achieve the following objectives:

 To process the information efficiently at the

least cost (cost-benefit principle).
 To protect entity’s assets, to ensure that data
are reliable, and to minimize wastes and the
possibility of theft or fraud (control principle).
 To be in harmony with the entity’s
organizational and human factors
(compatibility principle).
 To be able to accommodate growth in the
volume of transactions and for organizational
changes (flexibility principle).
 Manual systems utilize paper-based
journals and ledger
 A computer- based transaction
system maintains accounting data
separately from other operating data.
 Database Systems – Relational
database systems such as enterprise
resource planning (ERP) depart from the
“accounting equation” method of
organizing data.

TYPES OF ACCOUNTING
INFORMATION SYSTEMS
Element Definition of Description
Asset A present economic resource controlled
by the entity as a result of past events.
Liability A present obligation of the entity to
transfer an economic resource as a
result of past events.
Equity The residual interest in the assets of
entity after deducting all its liabilities.
Income Increases in assets, or decreases in
liabilities, that result in increases in
equity, other than those relating to
contributions from holders of equity
claims.
Expenses Decreases in assets, or increases in
liabilities, that result in decreases in
equity, other than those relating to
distributions to holders of equity claims.

ELEMENTS OF FINANCIAL
STATEMENTS
 Assets = Liabilities + Owner’s Equity

THE ACCOUNTING EQUATION

DEBITS AND CREDITS
- THE DOUBLE ENTRY SYSTEM
 Liabilities and Owner’s
Assets Equity

Debit Credit Debit Credit

(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

BALANCE SHEET ACCOUNTS

Debit for decreases in owner’s equity Credit for increases in owner’s equity
Expenses Income
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

INCOME STATEMENT ACCOUNTS

 Debit Credit
Increases in Increases in
Assets Liabilities
Expenses Owner’s Capital
Income
Decreases in
Liabilities Decreases in
Owner’s Capital Assets
Income Expenses

ACCOUNTS
 Increases Recorded by Normal Balance
Account Debit Credit Debit Credit
Category
Assets √ √

Liabilities √ √

Owner’s
Equity:
Owner’s √ √
Capital
Withdrawals √ √

Income √ √

Expenses √ √

NORMAL BALANCE OF AN
ACCOUNT
 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.

ACCOUNTING EVENTS AND

TRANSACTIONS
ASSETS
 Assets should be classified only into two: current assets
and non-current assets. Per revised Philippine Accounting
Standards (PAS) No. 1, an entity shall classify assets as
current when:
A. It expects to realize the asset, or intends to sell or
consume it, in its normal operating cycle
B. It holds the asset primarily for the purpose of trading;
C. It expects to realize the asset within twelve months after
the reporting period; or
D. The asset is cash or a cash equivalent (as defined in PAS
No. 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve
months after the reporting period.
STATEMENT OF FINANCIAL
POSITION
CURRENT ASSETS NON-CURRENT ASSETS

 Cash  Property, Plant and

 Cash Equivalents Equipment
 Notes Receivables  Accumulated
 Accounts Receivables Depreciation
 Inventories  Intangible Assets
 Prepaid Expenses
LIABILITIES
 Per revised Philippine Accounting Standards (PAS) No. 1,
an entity shall classify a liability as current when:
A. It expects to settle the liability in its normal operating
cycle;
B. It holds the liability primarily for the purpose of trading;
C. The liability is due to be settled within 12 months after
the reporting period; or
D. The entity does not have an unconditional right to defer
settlement of the liability for at least 12 months after the
reporting period.

STATEMENT OF FINANCIAL
POSITION
 NON-CURRENT
CURRENT LIABILITIES LIABILITIES

 Accounts Payable  Mortgage Payable

 Notes Payable  Bonds Payable
 Accrued Liabilities
 Unearned Revenues
 Current Portion of
Long-Term Debt

LIABILITIES
 Capital – This account is used to record
the original and additional investments of
the owner of the business entity.
 Withdrawals
 Income Summary – a temporary
account used at the end of the accounting
period to close income and expenses.

OWNER’S EQUITY
 INCOME EXPENSES

 Service Income  Cost of Sales

 Salaries or Wages
 Sales Expense
 Telecommunications,
Electricity, Fuel, and
Water Expenses
 Rent Expense
 Supplies Expense
 Insurance Expense
 Depreciation Expense
 Uncollectible Accounts
Expense
 Interest Expense

INCOME STATEMENT
 Accountants observe many events that
they identify and measure in financial
terms.
 A business transaction is the
occurrence of an event or a condition that
affects financial position and can be
reliably recorded.
• Financial Transaction Worksheet-
Every financial transaction can be
analyzed or expressed in terms of its
effects on the accounting equation.
ACCOUNTING FOR BUSINESS
TRANSACTIONS
Illustration.Galicano Del Mundo decided to establish a
sole proprietorship business and named it as Del
Mundo Graphics Design. Del Mundo is a graphic
designer who has extensive experience in drawing,
layout, typography, lettering, diagramming and
photography. He possesses the talent to visually
communicate to a target audience with the right
combination of words, images and ideas.

Del Mundo Graphics Design can do the layout and

production design of newspapers, magazines,
corporate reports, journals and other publications.
The entity can create promotional displays; marketing
brochures for services and products; packaging
design for products; and distinctive logos for
businesses. He also enters into agreements with
clients for the progressive development and
maintenance of their web sites. His initial revenue
stream comes from web designing.
The owner, Galicano Del Mundo, makes business
decisions.
The assets of the company belong to Del Mundo and all
obligations of the business are his responsibility. Any
income that the entity earns belongs solely to Del
Mundo.

When a specific asset, liability or owner’s equity item is

created by a financial transaction, it is listed in the
financial transaction worksheet using the appropriate
accounts. The worksheet that follows shows the first
transaction of the Del Mundo Graphics Design. The
dates are enclosed in parentheses.

During March 2019, the first month of operations,

various financial transactions took place. These
transactions are described and analyzed as follows:
Mar. 1 Del Mundo started his new business by depositing
P350,000 in a bank account in the name of Del Mundo
Graphics Design at BPI Poblacion Branch.

Mar. 5 Computer equipment costing P145, 000 is acquired on

cash basis. The effect of the transaction on the basic equation
is?

Mar. 9 Computer supplies in the amount of P25, 000 are

purchased on account.

Mar. 11 Del Mundo Graphics Design collected P88,000 in cash

for designing interactive web sites for two exporters based
inside the Ortigas Ecozone.

Mar. 16 Del Mundo paid P18,000 to Ceradoy Bills Express, a

one-stop bills payment service company, for the semi-monthly
utilities.
Mar. 17 The entity has service agreements with several
Netpreneurs to maintain and update their websites weekly. Del
Mundo billed these clients P35, 000 for services already
rendered during the month.

Mar. 19 Del Mundo made a partial payment of P17,000 for the

March. 9 purchase on account.

Mar. 20 Checks totaling P25,000 were received from clients

for bilings dated Mar. 17.

Mar. 21 Del Mundo withdrew P20,000 from the business for

his personal use.

Mar. 27 Warlito Blanche Publishing submitted a bill to Del

Mundo for P8,000 worth of newspaper advertisements for this
month. Del Mundo will pay this bill next month.

Mar. 31 Del Mundo paid his assistant designer salaries of

P15,000, for the month