CHAPTER 2

ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM

 Elements of Financial Statements

 Types of Information

Review:
Definition of Accounting
Financial Accounting is a service
activity. Its function is to
Quantitative provide quantitative
Non- information primarily financial
Information financial in nature, about economic
entities that is intended to be
Non- useful in making economic
Qualitative decisions.
financial

 Financial Statements (Financial Information)

Income Statement/ Statement of Comprehensive Income – shows the financial
performance of the company for a given period of time
- It shows if the result of operations is
profit, loss or breakeven
 Elements of income Statement
 Revenues (Income) – are increases in owner’s equity as a result of selling
services or products to customers
 Expenses – the using up of assets or consuming services in the process
of generating revenues

Statement of Financial Position/ Balance Sheet – reflects the financial condition of

the entity as of the end of the period
- It depicts whether the company is in
good financial health
 Elements of the Statement of Financial Position
 Assets – are resources owned by the business
- Resources controlled by an entity as a result of past events
from which future economic benefits are expected to flow to
the entity
 Liabilities – are debts owed to outsiders (creditors)
- A present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow
from the entity of resources embodying economic
benefits
 Owner’s Equity – is the owner’s right to the assets of the business after
all liabilities have been paid
- For a proprietorship, the owner’s equity is represented
by the balance of the owner’s capital account
o A drawing account represents the amount of withdrawals
made by the owner
Statement of Changes in Equity
Cash Flow Statement

 The Accounting Equation

Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity +Revenue - Expenses

 Transaction Analysis
Business Transaction – is an economic event or condition that directly changes an
entity’s financial condition or its results of operations

 Rules on Debit and Credit

 All businesses use what is called the
double entry accounting system. This
system is based on the accounting Debit (DR) Credit (CR)
equation and requires:
o Every business transaction to Latin word "debitum" Latin word "creditum"
be recorded in at least two What is due Something entrusted to
accounts. Debere (dr.) another or a loan
o The total debits recorded for Value Received Credere (cr.)
each transaction to be equal to Left side Value parted with/Value
the total credits recorded given up
Right side
 Normal Balances
 The sum of the increases in an account is usually equal to or greater than the sum of the
decreases in the account
 Thus, the normal balance of an account is either a debit or a credit depending on
whether increases in the account are recorded as debits or credits

 T – Accounts

Title
Debit Credit
The left side of The right side
the account of the account