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