Accounting
Reporting and
Analysis I
Module II
The Accounting Equation and Double Entry System
The Accounting Equation
Assets = Liabilities + Owner’s Equity
• Assets
• Resource controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to
the enterprise.
• Liabilities
• Is a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic
benefit.
• Owner’s Equity
• Residual interest in the assets of the enterprise after deducting
all its liabilities.
Current Assets
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.
d. The asset is cash or cash equivalents (PAS No. 7)
unless asset is restricted from being exchange or
used to settle a liability for at least 12 months after
the reporting period.
ASSETS
Current Asset Non Current Asset
• Cash • Property, Plant and
• Cash Equivalents Equipment
• Notes Receivable • Accumulated Depreciation
• Accounts Receivable • Intangible Assets
• Allowance for Uncollectible
Accounts
• Inventories
• Prepaid Expense
Current Liabilities
An entity shall classify liabilities 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 twelve months
after the reporting period;
d. The entity does not have an unconditional right to
defer settlement of the liability for at least 12 months
after the reporting period.
LIABILITIES
Current Liabilities Non Current Liabilities
• Accounts Payable • Mortgage Payable
• Notes Payable • Bonds Payable
• Accrued Liabilities
• Unearned Revenues
• Current Portion of a Long –
term debt
Owner’s Equity
a. Capital
This account is used to record the original and
additional investments of the owner of the business.
b. Withdrawal
When the owner of a business entity withdraws
cash or other assets.
c. Income Summary
temporary account used at the end of the
accounting period to close income summary and
expenses
Chart of Accounts
• A listing of all the accounts and their account numbers
in the ledger.
• It is arranged in financial statement order.
• The account should be numbered in a flexible manner.
• If an account title is not listed in the chart, an
additional account may be added.
"Gutierrez Services"
Chart of Accounts
Balance Sheet Account Income Statement Accounts
Assets Income Accounts
110 Cash 410 Service Revenue
120 Accounts Receivable
130 Supplies Expenses
140 Prepaid Rent 420 Salaries Expense
150 Prepaid Insurance 430 Supplies Expense
160 Service Vehicle 440 Rent Expense
170 Accumulated Depreciation - Service Vehicle 450 Insurance Expense
180 Office Equipment 460 Utilities Expense
190 Accumulated Depreciation - Office Equipment 470 Depreciation Expense - Office Equipment
480 Depreciation Expense - Service Vehicle
Liabilities
210 Noes Payable
220 Accounts Payable
230 Salaries Payable
240 Utilities Payable
250 Interest Payable
260 Unearned Referral Revenues
Owner's Equity
310 Gutierrez, Capital
320 Gutierrez, Withdrawals
330 Income Summary
Rule on Debit and Credit
An account is debited (Dr) when an amount is entered
on the left side of the account and credited when an
amount is entered on the right side.
Normal Balance of any account refers to the side of the
account, whether debit or credit, where increases are
recorded.
Normal Balance of an
Account
Normal Balance
Account Category
Debit Credit
Assets o
Liabilities o
Owner’s Equity
Owner’s Capital o
Withdrawals o
Income o
Expenses o
Effects of Business
Transaction in Accounting
Equation
Accounts
Debit Credit
Increases in
Increases in Assets:
Liabilities; Owner's
Expenses
Capital; Income
Decreases in
Decreases in
Liabilities; Owner's
Assets; Expenses
Capital; Income
Types of Transactions
• Source of Assets: An asset account increases and a
corresponding claims (liabilities or owner’s equity)
increases.
• Exchange of Assets: One asset account increases and
another asset account decreases.
• Use of Assets: An asset account decreases and a
corresponding claims (liabilities or equity) account
decreases.
• Exchange of Claims: One claims (liabilities or equity)
account increases and another claims (liabilities or
equity) account decreases.
The Accounting Cycle
• Step 1: Identification of Events to
be recorded
• Step 2: Transactions are recorded in
During the
the journal
accounting
period • Step 3: Journal entries are posted to
the ledger
• Step 4: Preparation of trial balance
• Step 5: Preparation of the worksheet
including adjusting entries
• Step 6: Preparation of the financial
statements
At the end of • Step 7: Adjusting journal entries are
the accounting journalized and posted
period • Step 8: Closing journal entries are
journalized and posted
• Step 9: Preparation of post – closing
trial balance
• Step 10: Reversing journal entries are
journalized and posted
