Professional Documents
Culture Documents
Increased by:
Contributions and Income
Assets:
1. Cash, which comprises cash on hand and demand deposits.
2
Chapter 3 – The Accounting Equation and Double-Entry System
Liabilities:
1. Accounts payable, or trade accounts, are liabilities arising from
the purchase of goods, materials or supplies on an open-charge
account basis.
2. Interest payable, refers to the obligation of a company for interest
already incurred but not yet paid.
3. Provision, are liabilities of uncertain timing or amount.
4. Unearned rent, amount received in advance from lessee for the
use of the asset in the future.
5. Note payable, an obligation arising from an unconditional promise
in writing by a debtor to another, engaging to pay on demand or at
a fixed determinable date, a sum certain in money.
3
Chapter 3 – The Accounting Equation and Double-Entry System
Equity:
1. Dela Cruz, Capital, the equity or capital account of an owner over
an enterprise
2. Retained Earnings, is the accumulated profits and losses of an
enterprise from the time it started operations up to the current
period.
Income:
1. Service income, income earned after providing services to the
clients or customers.
2. Interest income, income earned from lending of money, computed
using a stated interest rate.
3. Rent income, income arising from the use of property.
4. Sales / Revenue, income arising from sale of goods in the normal
course of business.
5. Gain on sale or gain on disposal, the excess of the net selling
price over the carrying value of the asset disposed.
Expenses
1. Advertising expense, amount incurred in marketing or advertising
a product or service.
2. Cost of sales, the cost of services or products sold during the
current period.
3. Loss on sale, occurs when the carrying value of the asset disposed
exceed the net selling price.
4. Warranty expense, expense arising from the estimate of the repair
or service costs during a specified period if the products sold are
defective.
4
Chapter 3 – The Accounting Equation and Double-Entry System
TRANSACTION ANALYSIS
January 3
Dolores contributed cash of P100,000, land worth P400,000, and office
building worth P300,000.
5
Chapter 3 – The Accounting Equation and Double-Entry System
January 10
Dolores borrowed P250,000 cash from Metrobank for use in business.
January 13
Dolores bought tables and chairs for P125,000 cash and office equipment
in exchange for P200,000 notes payable.
Furniture P125,000
Equipment 200,000 = Notes payable P200,000 + No effect
Cash (125,000)
6
Chapter 3 – The Accounting Equation and Double-Entry System
January 15
Dolores withdrew P10,000 from the business.
January 20
Dolores paid advertising cost of P15,000 to market the services of the
firm.
January 25
Dolores had its first customer. Dolores billed and collected from the
customer, P50,000
7
Chapter 3 – The Accounting Equation and Double-Entry System
January 28
Dolores paid 50% of the notes payable.
January 29
Dolores paid 5,000 for water, electricity and telephone expenses.
January 31
Dolores paid the salary of her accounting staff in the amount of P15,000.
8
Chapter 3 – The Accounting Equation and Double-Entry System
9
Chapter 3 – The Accounting Equation and Double-Entry System
Assets Liabilities
Cash P 130,000 Notes payable P 100,000
Furniture 125,000 Loans payable 250,000
Equipment 200,000 Total liabilities 350,000
Building 300,000
Land 400,000 Equity
Dolores, Capital P 805,000
10
Chapter 3 – The Accounting Equation and Double-Entry System
Debit Credit
(left) (right)
Debit Credit
Assets Liabilities and Equity
Using the foregoing diagram, assets are placed in the debit side
while liabilities and equity are in the credit side, which determine their
normal balances. Normal balance of assets is debit while the normal
balance of liabilities and equity is credit. It is important to identify the
normal balance of the accounts since accounts are increased if placed in its
normal balance. Therefore, assets accounts are increased if debited and
decreased if credited. Needless to say, liabilities and equity accounts
are increased if credited and decreased if debited.
11
Chapter 3 – The Accounting Equation and Double-Entry System
Income increases equity, thus the rules on debit and credit for
equity also apply to income. On the other hand, expenses decrease equity
hence expenses are increased by debit and decreased by credit.
Asset
Debit Credit Liability
increase decrease Debit Credit
decrease increase
Debit Credit Equity
(left) (right) Debit Credit
decrease increase
Income
Debit Credit
decrease increase Expense
12
Chapter 3 – The Accounting Equation and Double-Entry System
Debit Credit
increase decrease
January 3
Dolores contributed cash of P100,000, land worth P400,000, and office
building worth P300,000.
Analysis:
Account Element Change Action
Cash Asset Increase Debit
Land Asset Increase Debit
Building Asset Increase Debit
Dolores, Capital Equity Increase Credit
Cash Building
100,000 300,000
January 10
Dolores borrowed P250,000 cash from Metrobank for use in business.
13
Chapter 3 – The Accounting Equation and Double-Entry System
Analysis:
Account Element Change Action
Cash Asset Increase Debit
Loan payable Liability Increase Credit
January 13
Dolores bought tables and chairs for P125,000 cash and office equipment
in exchange for P200,000 notes payable.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Furniture Asset Increase Debit
Equipment Asset Increase Debit
Note payable Equity Increase Credit
Furniture
Cash 125,000
125,000
Note payable
Equipment 200,000
200,000
January 15
Dolores withdrew P10,000 from the business.
14
Chapter 3 – The Accounting Equation and Double-Entry System
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Dolores, Capital Equity Decrease Debit
January 20
Dolores paid advertising cost of P15,000 to market the services of the
firm.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Advertising Expense Expense Increase Debit
January 25
Dolores had its first customer. Dolores billed and collected from the
customer, P50,000.
Analysis:
Account Element Change Action
Cash Asset Increase Debit
Service Income Income Increase Credit
Cash
50,000
15
Chapter 3 – The Accounting Equation and Double-Entry System
January 28
Dolores paid 50% of the notes payable.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Note payable Liability Decrease Debit
January 29
Dolores paid 5,000 for water, electricity and telephone expenses.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Utilities Expense Expense Increase Debit
January 31
Dolores paid the salary of her accounting staff in the amount of P15,000.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
16
Chapter 3 – The Accounting Equation and Double-Entry System
17