THE ACCOUNTING EQUATION AND THE DOUBLE-
ENTRY SYSTEM
CHAPTER 2
ACCOUNTING INFORMATION SYSTEM
ACCOUNTING INFORMATION SYSTEM
The accounting information system must be able to generate reliable financial
information needed by decision-makers in a timely manner.
The design and operation of a system must consider the anticipated users of the
information and the types of decisions they are expected to make.
An accounting information system is a combination of personnel, records and
procedures that a business uses to meet its need for financial information.
ACCOUNTING INFORMATION SYSTEM
Objectives:
1. To process the information efficiently at the least cost (cost-benefit principle).
2. To protect entity’s assets, to ensure that data are reliable, and to minimize wastes and
the possibility of theft or fraud (control principle).
3. To be in harmony with the entity’s organizational and human factors (Compatibility
principle.
4. To be able to accommodate growth in the volume of transactions and for
organizational changes (flexibility principle).
ACCOUNTING INFORMATION SYSTEM
Types:
1. Manual systems – utilizes paper-based journals and ledger
2. Computer-based transaction systems – utilize computer-based journals and ledger
3. Database Systems – embed accounting data within the business event data on which
they are based.
STAGES OF DATA PROCESSING
Input – Processing - Output
ELEMENTS OF FINANCIAL STATEMENTS
Element Definition or Description
ASSET A present economic resource controlled by the entity as a result of past events. An
economic recourse is a right that has the potential to produce economic benefits
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 the 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 the 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 ACCOUNTING EQUATION
ASSETS:
anything with economic value that a company controls that can
be used to benefit the business now or in the future.
Includes:
Tangibles assets
Intangible assets
Cash
ELEMENTS OF ACCOUNTING EQUATION
LIABILITIES:
The rights of the creditors
Financial obligation your business is required to meet.
Loans, accounts payable,
Mortgages, Deferred revenues,
Bond issues, Warranties
Accrued expenses
ELEMENTS OF ACCOUNTING EQUATION
STOCKHOLDER’S EQUITY
The right of the owners
Expanded Accounting Equation:
Asset = Liability + (Capital + Net profit)
Asset = Liability + [ Capital + (Revenue-Expenses)]
DOUBLE ENTRY ACCOUNTING SYSTEM
This is the basic accounting equation.
It gives meaning to the balance sheet structure, and is the foundation of
double-entry accounting.
A business transaction is an economic event that has a direct impact on
the business.
All business transactions affect the accounting equation through specific
accounts.
DOUBLE ENTRY ACCOUNTING SYSTEM
The accounting procedure used in recording business transaction is the double
entry system.
It is a logical and integrated system based on the hypotheses:
Value of property (assets) is equal to the value of rights (Liability and Equity) on
the property, thus the accounting equation:
Assets = Liability + Equity.
When an effect, whether increase or decrease, is recorded on one accounting
element, the system requires a corresponding effect, increase or decrease, on another
element.
DOUBLE ENTRY ACCOUNTING SYSTEM
in double-entry accounting both sides of the accounting equation are required to
balance out at all times.
One of the main benefits of using the accounting equation is the fact that it provides
an easy way to verify the accuracy of your bookkeeping.
It also helps measure the profitability of your business.
re your liabilities significantly higher than your assets? This may indicate that you
aren’t managing your money very well.
if the equation balances, it is a good indication that your finances are on the right
track.
DOUBLE ENTRY ACCOUNTING SYSTEM
Maintain the equality of the Accounting Equation. Identify the asset, liabilities and or
stockholders’ equity in the following business transaction:
1. Receiving an allowance from Mom, P5,000.
2. Paying jeepney fare, P500.
3. Purchase of school supplies, P3,000
4. Pay for internet usage in a Café, P1,000
5. Paying for food P1,500 (P500 coming from own pocket, P1,000, borrowed from
classmate).
DOUBLE ENTRY ACCOUNTING SYSTEM
Balance Sheet Accounts
Assets Liabilities & Owner's Equity
Debit Credit Debit Credit
+ - - +
Increases Decreases Decreases Increases
Normal Balance Normal Balance
DOUBLE ENTRY ACCOUNTING SYSTEM
Income Statement Accounts
Debit for decreases in Credit for increases in
owner's Equity owner's equity
Assets Liabilities & Owner's Equity
Debit Credit Debit Credit
+ - - +
Increases Decreases Decreases Increases
Normal Balance Normal Balance
NORMAL BALANCE OF AN ACCOUNT
Increases Recorded by Normal Balance
Account Category Debit Credit Debit Credit
Assets √ √
Liabilities √ √
Owner's Equity:
Owner's Capital √ √
Withdrawals √ √
Income √ √
Expenses √ √
ACCOUNTING EVENTS AND TRANSACTIONS
An accounting event is an economic occurrence that causes changes in an enterprise’s assets, liabilities
and/or equity.
An accounting event is a transaction that is recognized in the financial statements of an accounting
entity.
Accounting events are only those events that can be measurable in monetary terms.
Types of Accounting Event:
An external accounting event is when a company engages in a transaction with an outside party or there is a change in the
company's finances due to an external cause. For example, if a company purchases from a supplier the raw materials needed
for the manufacturing of its goods, this would be categorized as an external event. When a company receives payment from a
customer, this would also be an external event that it would need to record in its financial statements.
An internal event involves other changes that need to be reflected in the accounting entity's records. These may include the
"purchase" of goods such as supplies from one department by another department within the company. The recording of
depreciation expenses is another type of internal accounting event.
ACCOUNTING EVENTS AND TRANSACTIONS
Accounting transactions are any business activities that affect the company's financial statements and status.
Essentially, any exchange of money is an accounting transaction.
An accounting transaction is a business event having a monetary impact on the financial statements of a business.
It is recorded in the accounting records of the business.
Examples of accounting transactions are as follows:
Sale in cash to a customer
Sale on credit to a customer
Receive cash in payment of an invoice owed by a customer
Purchase fixed assets from a supplier
Record the depreciation of a fixed asset over time
TYPES & EFFECTS OF TRANSACTIONS
1. Source of Assets (SA) A asset account increases and a corresponding claims (liabilities or owner’s equity) account
increases.
2. Exchange of Assets (EA) One asset account increases and another asset account decreases.
3. Use of Assets (UA)
ACCOUNTING EVENTS AND TRANSACTIONS
Events are used to provide context and background information for the financial
statements. Transactions are used to determine the financial position of a business.
Events are used to provide insight into the reasons behind the financial position of a
business. Transactions are recorded in chronological order.
While transactions are the deliberate acts performed by the business entities, events
are the results of the transactions. In accounting, all the transactions are recorded, as
and when they take place, whereas only those events are recorded in the books of
accounts which are of financial in nature.
DOUBLE ENTRY ACCOUNTING SYSTEM
Maintain the equality of the Accounting Equation. Identify the asset, liabilities and or
stockholders’ equity in the following business transaction:
1. Receiving an allowance from Mom, P5,000.
2. Paying jeepney fare, P500.
3. Purchase of school supplies, P3,000
4. Pay for internet usage in a Café, P1,000
5. Paying for food P1,500 (P500 coming from own pocket, P1,000, borrowed from
classmate).
