Transcript WEEK 2 - InFoRmAtIoN oVeRLoAd | infoblog

Review of the Previous Lesson
Week 2
ACCOUNTING EQUATION &
THE DOUBLE-ENTRY
SYSTEM
ACCOUNTING INFORMATION SYSTEM
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
ELEMENTS OF FINANCIAL STATEMENTS
• The elements of financial statements  refer to
the quantitative information shown in the
statement.
1. Assets
2. Liabilities
3. Owner’s Equity
or Capital
4. Income or Revenue
5. Expenses
ACCOUNT
T-ACCOUNT
A detailed record of the
increases, decreases &
balance of each element
that appears in an entity’s
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
ASSET ACCOUNTS - Debit
Current Assets
Non-Current Assets
Cash
Petty Cash Fund
Property, Plant & Equipment
Cash Equivalents
Land
Notes Receivable
Building
Accounts Receivable
Equipment
Allowance for Bad Debts
Furniture & Fixtures
Accrued Interest Income
Accumulated Depreciation
Advances to Employees
Intangible Assets
Inventories
Prepaid Expenses
Unused Supplies
LIABILITIES ACCOUNTS - Credit
Current Liabilities
Accounts Payable
Notes Payable (short-term)
Accrued 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
Non-Current Liabilities
Mortgage Payable
Bonds Payable
Notes Payable (Long-term)
Accounts Payable
OWNER’S EQUITY ACCOUNTS
- The
Capital (Credit)
original and additional
investments of the owner of the
business entity.
- Increased by net income
- Decreased by net loss
Withdrawals
(Debit)
When the owner of a business
entity withdraws cash or other
assets
INCOME OR REVENUE ACCOUNTS - Credit
Sales
Service Income or Service Revenue
Professional Income
Accounting or Auditing Fees Income
Legal Fees Income
Dental Fees Income
Medical Fees Income
Rental Income
Interest Income
Miscellaneous Income
Income or revenue derived from
the sale of merchandise.
Income or revenue derived from
rendering services.
EXPENSES ACCOUNTS - Debit
Cost of Sales or Cost of
Goods Sold
Salaries or Wages Expense
SSS Contribution
Philhealth Contribution
Pag-ibig Contribution
Bad Debts or Uncollectible
Accounts Expense
Insurance Expense
Utilities Expense
Supplies Expense
Depreciation Expense
Miscellaneous Expense
Taxes & Licenses
CHART OF ACCOUNTS – list of account
titles or account name.
ACCOUNT
T-ACCOUNT
A detailed record of the
increases, decreases &
balance of each element
that appears in an entity’s
financial statements.
The simplest form of the
account.
In every transaction, there
is a value received, we
call Debit and value parted
with, we call a Credit.
It has 3 parts: account
title, debit side & credit
side.
Account Title
Left side or
Debit side (Dr.)
Right side or Credit
Side (Cr.)
Value received
Value parted with
Debit balance
Credit balance
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
DEBIT ENTRY:
An amount entered
on the left-hand side
of the account.
CREDIT ENTRY:
Left side or
Debit side (Dr.)
Right side or Credit
An amount entered
Side (Cr.)
Value received
Value parted with
Debit total
Credit total
on the right-hand
side of the account.
= account balance
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.
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.
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
Business transactions
Each transaction affects at least two accounts.
The total debits for a transaction must always
equal the total credits.
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 – Owner’s 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
NORMAL BALANCE OF THE
ELEMENTS OF FINANCIAL STATEMENTS
DEBIT BALANCE
Assets
CREDIT BALANCE
Liabilities
Owner’s Equity
Expenses
Income or Revenue
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Capital
Income – Expenses = Net Income
EXPANDED ACCOUNTING EQUATION
PHASES OF ACCOUNTING
1. Identifying
transactions and
events – source
documents
2. Journalizing
transactions – the
journal
3. Posting to the
ledger – general
ledger
4. Trial balance
preparation
5. Adjusting
journal entries
6. Preparing the
worksheet
7. Preparing
financial
statements
8. Closing
entries
NOTE: Steps 1 to 10 is
the ACCOUNTING
CYCLE.
9. Post-closing
trial balance
10. Reversing
entries
Profitability – How
much is the
increase in capital
as a result of
business
operation?
Liquidity – Are there
available funds to
finance the
business
operation?
Solvency – Can the
business pay its
long-term
obligations to
others?
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.
Example of Source Documents
(under Servicing Activities)
1.
2.
3.
4.
Customers’ & suppliers’ sales invoices
Official receipts
Cash or Check Vouchers
Service Order Slip
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.
ANALYSIS OF BUSINESS TRANSACTION
Transaction: Bought a car for cash, P650,000.00.
Questions guide:
1. Identifying: Who bought the car? The
business.
2. Analyzing: What is the value received? Car.
What is the value parted with? Cash.
3. Measuring: What is the amount involved?
P650,000.00.
4. Journalizing:
1. Debit, value received – car P650,000.00
2. Credit, value parted with – cash
650,000.00
To illustrate the analyzing process of accounting, consider the
transactions of Valrox, a servicing business.
Cash on hand
Cash in bank
Accounts Receivable
Office equipment
Notes Payable
Valrox, Capital
Utility expense
Bank charge expense
SSS Premium Payable
Service Income
Withholding tax payable
Salaries expense
Supplies expense
Owner’s drawing
Financial Statements
Objective: To provide financial information useful to the users.
The formal reports
prepared by accountants
The information that accumulated and
processed in financial accounting
The final products of the accounting
process.
1. Statement of Financial Position
Shows the financial position of a business
entity as of a particular date.
2. Income Statement
Shows the performance of the business
entity for a given period.
3. Statement of Changes in Equity
Shows the movement or changes in owner’s
capital or equity in a certain period.
4. Cash Flow Statement
Shows and explains the changes of
cash during an accounting period.
5. Notes to the Financial Statement
Part of the financial statements in a parenthesis
form, to achieve proper understanding of the
financial reports.
Relationships Among the Financial Statements
Example of Income Statement
Example of the Statement of
Owner’s Equity
Example of Statement of Financial Position
Report Form – in vertical order
Account Form – in
horizontal order
Example of Statement of Cash Flows
Example of Notes to Financial
Statement
ELEMENTS OF FINANCIAL STATEMENTS
• The elements of financial statements  refer to the
quantitative information shown in the statement.
1. Assets
2. Liabilities
3. Owner’s Equity
or Capital
4. Income or Revenue
5. Expenses
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.
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.
1. Is a leased lot or rented machines considered an
asset of the entity?
2. Is a machine that can not be repaired and owned by
the entity considered an asset?
3. Is buying a machine in the future transactions
considered an asset?
4. Is a machine bought by the entity for the personal
use of the owner considered an asset?
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?
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.
ELEMENTS OF FINANCIAL STATEMENTS
RECOGNITION OF ELEMENTS
Recognition  means the
process of reporting the
elements of financial
statements of an entity.
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.
MEASUREMENT OF ELEMENTS
Measurement  is the process of
determining the monetary amounts
at which the elements of financial
statements are recognized.
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
MEASUREMENT OF ELEMENTS
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.
5 years from now
P1,000.00
P620.00
10%
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 statements…in conformity
with GAAP.
IMPLICIT ASSUMPTIONS
ACCOUNTING PRINCIPLES
1. Entity concept
2. Periodicity concept
3. Stable monetary unit
concept
1. Objectivity principle
2. Historical cost
UNDERLYING ASSUMPTIONS
3. Revenue recognition principle
4. Expense recognition principle
5. Adequate disclosure
1. Accrual basis
6. Materiality
2. Going concern
7. Consistency principle
Assignment: Give the description of each concepts & principles
(except implicit assumptions).