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ACCOUNTING BASICS

For Every Transaction

Value of debits = Value of Credits

A + E = L + OE + R

Where:

A = Assets

E = Expenses

L = Liabilities

OE = Owner’s Equity

R = Revenues

Debit Accounts (A + E) = Credit Accounts (L + OE + R)

Debits are on the left and an increase in a debt account reduces a credit account. Credits are on
the right and an increase in a credit account decreases a debit account.

Examples:
1. When you pay with cash, you increase rent (expense) by debiting and decrease cash
(asset) by crediting.
2. When you receive cash for a sale, you increase cash (asset) by debiting and increase sales
(revenue) by crediting.
3. When you buy equipment (asset) with cash, you increase equipment (asset) by debiting
and decrease cash (asset) by crediting.
4. When you borrow cash with a loan, you increase cash (asset) by debiting and increase
loan (liability) by crediting.

Assets are economic resources acquired through a transaction or event that can provide
economic utility in future production or revenues.

Assets are classified (Julian 1974) thus:

1. Current assets are cash or other types of assets that can readily converted into cash.
These assets are expected to consume or sold within one year or within the normal operating
cycle.

Classification of current assets:

 Cash on hand are currency or cash items on hand. Includes checks, bank drafts, money
orders, treasury warrants, etc.
 Cash in bank are deposits in a bank which can be withdrawn or used for current
operations without any restrictions
 Accounts receivable are open accounts without any formal written promise to pay.
 Notes receivable are open accounts with any formal written promise to pay.
 Prepaid expenses are short term prepayments of current operating expenditures. Ex:
prepaid rent, prepaid insurance, office supplies, and store supplies

2. Property, plant and equipment are long term or long-lived tangible assets with an estimated
life of more than one year and re acquired for the purpose of using them in the business to
generate revenues.

Classifications:

 Land
 Building
 Equipment – plant equipment, office equipment, store equipment, delivery or transport
equipment
 Furniture & Fixtures 

Liabilities are economic obligations resulting from past transactions or events which can be
measured in monetary terms. They are settled through the performance of economic resources.
 Classifications of Liabilities

1. Current liabilities are obligations which must be liquidated by using current assets or

the creation of other current liabilities within one year of normal operating cycle.

Classifications:

 Accounts payable refers to the indebtedness arises from purchase of goods & services,
materials, supplies in an open charge business.
 Account payable non-trade  are those that do not arise from purchase of merchandise,
materials, supplies in the ordinary course of business
 Notes payable  are short term obligations which are evidenced by promissory notes.
 Accrued liabilities are accumulated debts arising out of services rendered to the business
enterprise before the balance sheet date but payable at later time.
 Unearned income includes revenues that are collected in advance but have not been
earned.

2. Long term Liabilities are obligations which are not expected to require the use of current
assets or the creation of current liabilities within one year operating cycle.