ACCOUNTING EQUATION AND - Claims against customers arising from sale
DOUBLE-ENTRY SYSTEM of services or goods on credit
- Offers less security than a promissory note
INFORMATION SYSTEM e. INVENTORIES
- Held for sale in the ordinary course of
- Collection of people, procedures, software,
business
hardware and data which works together to
- In the process of production for such sale
provide information essential to run a business
- In the form of materials or supplies to be
organization
consumed in the production process or in
rendering of services
Accounting as an Information System f. PREPAID EXPENSES
Objectives that should be achieve: - Expenses paid for by the business in
● Cost-benefit principle advance
- To process the information efficiently at least - Includes: insurance and rent
cost - Assets → expires → expenses
● Control principle
- To protect entity’s assets, to ensure that data
are reliable, and to minimize wastes and the NON-CURRENT ASSETS
possibility of theft or fraud a. PROPERTY, PLANT, AND EQUIPMENT
● Compatibility principle - Tangible assets
- To be in harmony with the entity’s - Includes: land, building, machinery and
organizational and human factors
equipment, furniture and fixtures, motor
● Flexibility principle
vehicles and equipment
- To be able to accommodate growth in the
volume of transactions and for organizational b. ACCUMULATED DEPRECIATION
changes - Contra account
- Contains the sum of the periodic
ELEMENTS OF FINANCIAL STATEMENTS depreciation charges
- Deducted from the cost of the related
asset (equipment or buildings) to obtain
STATEMENT OF FINANCIAL POSITION OR
book value
BALANCE SHEET
c. INTANGIBLE ASSETS
(permanent accounts) - Identifiable, non-monetary assets without
1. ASSETS physical substance
- Includes: goodwill, patents, copyrights,
- Present economic resource controlled by the
licenses, franchises, trademarks, brand
entity as a result of past events
names, secret processes, subscription lists,
- A right that has a potential to produce
and non-competition agreements
economic benefits
CURRENT ASSETS 2.LIABILITIES
a. CASH - Present obligation of the entity to transfer an
- Any medium of exchange that a bank will economic resource as a result of past events
accept for deposit at face value
CURRENT LIABILITIES
- Includes: coins, currency, checks, money
a. ACCOUNTS PAYABLE
orders, bank deposits, and drafts
- business owes money to its vendors or
b. CASH EQUIVALENTS
suppliers that have provided the business
- Short term, highly liquid investments that
with goods or services on credit
are readily convertible to cash
b. NOTES PAYABLE
- Subject to insignificant risk of changes in
- business entity is the maker of the note
value
- the business entity promises to pay the
c. NOTES RECEIVABLE
other party a specified amount on a
- Written pledge that the customer will pay
specific future date
the business a fixed amount of money on a
c. ACCRUED LIABILITIES
certain date
- amounts owed to others for unpaid
d. ACCOUNTS RECEIVABLE
expenses
- Include: salaries payable, utilities payable, STATEMENT OF FINANCIAL PERFORMANCE
interest payable, and taxes payable
OR INCOME STATEMENT
d. UNEARNED REVENUES
(temporary or nominal accounts)
- Business entity receives payment before
providing its customers with goods or
services
4.INCOME
- Amounts received are recorded in the - Increases in assets or decreases in liabilities,
unearned revenue account (liability that results in increases in equity
method) a. SERVICE INCOME
- Rendered service or goods → unearned - Revenues earned by rendering services to
revenue is reduced → income is recognized customers/clients
e. CURRENT PORTION OF LONG-TERM - Examples: laundry services of laundry shops
DEBT & accounting services by accounting firms
- Portion of mortgage notes, bonds, and b. SALES
other long-term indebtedness which are - Revenues earned as a result of sale of
paid within one year from the balance merchandise
sheet date - Examples: sale of building materials by a
construction supplies firm
NON-CURRENT LIABILITIES
5.EXPENSES
a. MORTGAGE PAYABLE
- Records long-term debt of the business - Decreases in assets or increases in liabilities,
entity for which the business has pledged that results in decreases in equity
certain assets as security to the creditor a. COST OF SALES
b. BONDS PAYABLE - Cost incurred to purchase or to produce
- liability account that contains the amount the product during the period
owed to bond holders by the issuer - Also known as cost of goods sold
★ BOND - contract between the issuer and b. SALARIES OR WAGES EXPENSE
the lender specifying the terms of - Includes: salaries or wages, 13th month pay,
repayment and the interest to be charged cost of living allowances, and other related
benefits
c. UTILITIES EXPENSE
3. EQUITY
- Expenses related to telecommunications,
- Residual interest in the assets of the entity
electricity, water, and fuel expenses
after reducing all its liabilities
d. RENT EXPENSE
a. CAPITAL - Expense for space, equipment or other
- From the Latin “capitalis” meaning asset rentals
property e. SUPPLIES EXPENSE
- The original and additional investments of - Expense of using supplies (e.g. office
the owner supplies) in the conduct of daily business
- Increased by the amount of profit earned f. INSURANCE EXPENSE
during the year or is decreased by a loss - Portion of premiums paid on insurance
- Reduced by the cash or other assets coverage (e.g. on motor vehicle, health,
withdrawn by the owner (withdrawals or life, fire, typhoon, or flood) which has
drawings) expired
b. WITHDRAWALS g. DEPRECIATION EXPENSE
- The owner withdraws cash or other assets - The portion of the cost of the tangible
c. INCOME SUMMARY asset (e.g. building and equipment)
- A temporary account allocated or charged as expense during an
- Used at the end of the accounting period accounting period
to close income and expenses h. UNCOLLECTIBLE ACCOUNTS EXPENSE
- Shows the profit or loss period before - Amount of receivables estimated to be
closing to the capital account doubtful of collection and charged as
expense during an accounting period
i. INTEREST EXPENSE
- An expense related to use of borrowed
funds
★ ACCOUNT
- Basic summary device of accounting
★ T-ACCOUNT
- Simplest form of account
Account Title
DEBIT - left side CREDIT - right side
★ BASIC ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
★ EXPANDED ACCOUNTING EQUATION
A= L+ E -D + R - E
A = assets L = liabilities E = equity
D = drawings R = revenue E = expenses
