THE ACCOUNTING EQUATION (Module 5, Camerino,
An obligating event is an event that
D.)
The most basic tool of accounting is the
accounting equation. This equation presents the
resources controlled by the enterprise (assets), the
present obligation of the enterprise (liability), and the
residual interest in the assets (equity). It states that
asset must ALWAYS equal liabilities and owner’s equity.
The basic accounting model is:
Assets = Liabilities + Equity
ELEMENTS OF FINANCIAL STATEMENTS
The major elements of financial statements include:
 Assets
 Liabilities
 Equity
 Income
 Expense
Assets
Assets are the resources that the entity control
that have resulted from past events and can provide
you with future economic benefits.
Essential elements in the definition of asset:
a. Control- the entity must have the exclusive right
to enjoy those benefits or it can prevent others
from enjoying those benefits.
b. Past events- the control over a resource have
resulted from past event or transaction.
Therefore, resources for which control is yet to
be obtained in the future do not qualify as asset
in the present.
c. Future economic benefit- “Future” means that
resource is expected to provide economic
benefits over more than one accounting period.
“Economic benefits” means the potential of the
resource to provide the entity, directly or
indirectly, with cash.
Liability
Liabilities are the entity’s present obligations
that have resulted from past events and can require the
company to give up resources when settling them.
Essential elements in the definition of liability:
a. Present obligation- This means that the entity,
at present, has a responsibility to pay someone
because of an obligating event that has already
transpired.
creates either legal or constructive obligation.
b. Giving up of resources (or Outflow of economic
benefits)- This means that settling an obligation
necessarily would require you to pay cash, to
transfer other non-cash assets, or to render a
service.
Equity
Equity has a residual definition. It is simply
assets minus liabilities. Other terms for equity are
capital, net assets, and net worth. This account is used
to record the original and additional investments of the
owner of the entity. It is increased by the income
earned during the year. On the other hand, Equity is
decreased by withdrawals of the business owner. It is
also reduced by expenses incurred during the year.
THE EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + Equity + Income – Expense
Notice that income is added while expenses are
deducted in the equation. These are because income
increases equity while expenses decrease equity.
Income
Income are increases in economic benefits
during the period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
investments by the business owners.
Expenses
Expenses are decreases in economic benefits
during the period in the form of outflows or depletions
of assets or increases of liabilities that result in
decreases in equity, other than those relating to
distributions to the business owners.
The difference between income and expense
represents profit or loss.
 If Income > Expenses, the difference is profit.
 If Income < Expenses, the difference is loss.
THE FIVE MAJOR ACCOUNTS (Module 9, Camerino, D.)
Statement of Financial Statement of Profit or
Position (Balance Sheet) Loss (Income Statement)
Accounts Accounts
Assets Income
Liabilities Expenses
Equity
COMMON ACCOUNT TITLES
Balance Sheet Accounts
ASSETS
1. Current Assets- are assets that can be realized
(collected, sold, used up) one year after year-end date.
Examples:
 Cash- includes money or its equivalent that is
readily available for unrestricted use, e.g., cash
on hand, cash in bank
 Accounts receivable- receivables supported by
oral or informal promises to pay.
 Allowance for bad debts- the aggregate of
estimated losses from uncollectible accounts
receivable. Another term is “Allowance for
doubtful accounts”.
 Notes receivable- receivables supported by
written or formal promises to pay in the form of
promissory notes
 Inventory- represents the goods that are held
for sale by a business. For a manufacturing
business, inventory also includes good
undergoing the process of production and raw
materials that will be consumed in the
production process.
 Prepaid supplies- represents the cost of unused
office and other supplies.
 Prepaid rent- rent paid in advance
 Prepaid insurance- cost of insurance paid in
advance
2. Non-current Assets- are assets that cannot be
realized (collected, sold, used up) one year after year-
end date.
Examples:
 Land-the lot on which the building of the
business has been constructed or a vacant lot
which is to be used as future plant site. Land is
not depreciable.
 Building- the structure owned by a business for
use in its operation.
 Equipment- consists of various assets such as:
o Machineries and other factory
equipment
o Transportation equipment
o Office equipment
o Computer equipment
o Furniture and fixtures
 Accumulated depreciation- the total amount of
depreciation expenses recognized since the
asset was acquired and made available for use.
LIABILITIES
1. Current Liabilities- liabilities that fall due (paid,
recognized as revenue) within one year after
year-end date.
Examples:
 Accounts payable- obligations supported by
oral or informal promises to pay the debtor.
 Interest payable- interest incurred but not
yet paid. Interest payable arises from
interest-bearing liabilities.
 Salaries payable-salaries already earned by
employees but not yet paid by the business.
 Utilities payable- utilities (e.g., electricity,
water, telephone, internet, etc.) already
used but not yet paid.
 Unearned income- items related to income
that were collected in advance before they
earned. After the earning process is
completed, these items are transferred to
income.
2. Non-current Liabilities- are liabilities that do not
fall due (paid, recognized as revenue) within
one year after year-end date.
Examples:
 Notes payable- obligations supported by
written or formal promises to pay by the
debtor in the form of promissory notes.
 Loans payable
 Mortgage payable
  Rent expense- represents the rentals that have
been used up during the accounting period.
 Utilities expense- represents the cost of utilities
that have been used during the accounting
period.
EQUITY  Supplies expense- represents the cost of
supplies that have been used during the period.
 Owner’s capital/equity- the residual amount
after deducting liabilities from asset. The THE ACCOUNT
owner’s capital account is: An account is the basic storage of information in
accounting. It is a record of the increases and decreases
Increased by: Decreased by: in a specific item of asset, liability, equity, income, or
Investments or Withdrawals or expense. The simplest form of the account is known as
contributions by the distributions to the the “T” account because of its similarity to the letter
owners owners “T”.
Income or Profit Expenses or Loss
earned by the business incurred by the Account Title
business.

 Owner’s drawings- this account is used to record the

Left side or Right side or
temporary withdrawals of the owner during the period.
Debit sideCredit side

INCOME STATEMENT ACCOUNTS

INCOME

 Service fees- revenues earned from rendering

services (e.g., services of a spa, services of a
beauty salon, etc.)
 Sales- revenues earned from the sale of goods
(e.g., sale of clothes, sale of canned goods)
 Interest income- revenues earned from the
issuance of interest-bearing receivables
 Gains- income earned from the sale of assets
(except inventory) or from enhancements of
assets or decreases in liabilities that are not
classified as revenues.

EXPENSES

 Cost of Sales (Cost of Goods Sold)- represents

the value of inventories that have been sold
during the accounting period.
 Freight-out- represents the seller’s costs of
delivering goods to customers.
 Salaries expense- represents the salaries earned
by employees for the services they have
rendered during the accounting period.
CHART OF ACCOUNTS

A chart of accounts is list of all the accounts used by the company.

Example:

CHART OF ACCOUNTS

Account No. Account No.

ASSETS INCOME
110 Cash 410 Service Fees
120 Accounts Receivable 420 Sales
125 Allowance for bad debts 430 Interest Income
130 Notes Receivable 440 Gains
140 Inventory
150 Prepaid Insurance EXPENSES
160 Land 510 Cost of sales
170 Building 520 Freight-out
175 Accumulated Depreciation- Building 530 Salaries expense
180 Equipment 540 Rent Expense
185 Accumulated Depreciation- Equipment 550 Depreciation Expense
560 Insurance Expense
LIABILITIES 570 Interest Expenses
210 Accounts Payable
220 Notes Payable
230 Salaries Payable
240 Interest Payable

EQUITY
310 Owner’s capital
320 Owner’s drawings

Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and retrieval of
information. Although there is no standard way of assigning account numbers, they should be assigned in a manner that
the accounts are categorized logically.
The account titles in the chart of accounts shown above are numbered in the following manner:
1. The first digit in the3-digit numbering refers to the major types of accounts.
 Assets 1
 Liabilities 2
 Equity 3
 Income 4
 Expenses 5
2. The second digit in the 3-digit numbering refers to the account titles in the sequence on how they are listed in
the chart of accounts.
3. The third digit in the 3-digit numbering, if not zero, signifies that the account is a contra account or an adjunct
account to a related account.
 Illustration 1:

July 1 Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during the
month of July. He invested PHP800,000 cash and Cars amounting to PHP200,000
July 2 Reyes borrowed PHP100,000 cash from PNB for use in his
business. July 7 Bought tables and chairs from Orocan and paid PHP45,000 cash
July 15 Various equipment were purchased on account from Fortune for
PHP55,000 July 18 Reyes made a cash withdrawal of PHP5,000 for personal use
July 20 the account due to Fortune was paid in cash.
July 21 A customer hired the services of Reyes. Cash of PHP15,000 was received from the customers.
July 22 Cash was paid for the following: gas and oil, PHP500 and car repairs, PHP1,000.
July 24 Another customer hired the services of Reyes and promised to pay PHP16,000 on July
31. July 25 Paid PHP500 for telephone bill.
July 27 Another customer hired the services of Reyes. A bill was issued to them for PHP20,000, 50% of which
was collected.
July 30 the customer on July 24 paid 50% of his account in cash.
July 31 Paid PHP10,000 for rental of office space, and salaries of PHP9,000.

Date Description Assets Liabilities Equity

Assets invested by the owner

Borrowings from the bank

Asset purchased for cash

Assets purchased on account

Cash withdrawal by the owner

Payment of liability

Received cash for revenue

earned

Paid cash for expenses incurred

 Revenue rendered on account

Paid for expenses incurred

Revenue earned with a down

payment, balance on account.

Customer’s account collected

in cash

Paid cash for expenses incurred

TOTAL ASSETS=LIABILITIES + EQUITY

Illustration 2:

Ludivina Victorino, a veteran photographer, opened a studio for her professional practice on July 1. Transactions
completed during the month follow:

a. Deposited P146,200 in a bank account in the name of the business, Victorino Photo Profiles.
b. Bought new photography equipment on account from Canon Equipment, P71,210.
c. Invested personal photography equipment into the business, P51.620.
d. Paid office rent for the month, P5,500.
e. Bought photography supplies for cash, P7,960.
f. Paid premium for insurance cover on photography equipment, P1,240.
g. Received P8,960 as professional fees for service rendered.
h. Paid salary of part-time assistant, P6,000.
i. Received and paid bill for telephone service, P640
j. Paid Canon Equipment part of the amount owed on the purchase of photography equipment, P4,200.
k. Received P15,480 as professional fees for services rendered.
l. Paid for minor repairs to photography equipment, P760
m. Victorino withdrew cash for personal use, P9,600.

Required:
1. Record the transactions for the month of July.
2. Compute for the profit/loss.
 Equity
Transaction Assets Liabilities
Investments Withdrawals Revenue Expenses

M
 Total
BOOK OF ACCOUNTS (Module 8, Camerino, D.)
THE TWO MAJOR BOOK OF ACCOUNTS
In monitoring and tracking the daily
transactions in a business, the two major books of
accounts are required by law, specifically by the Bureau
of Internal Revenue (BIR). These books are:
 Journal; and
 Ledger
Journal
The journal, also called the book of original
entries, is where business transactions are first
recorded. Different transactions are recorded in the
journal through journal entries. This recording process is
called journalizing.
Types of Journals:
 Special Journal- is used to record transactions of
a similar nature. Special journals simplify the
recording process, thus providing an efficient
way of recording and retrieving of information.
Common example of Special Journals:
o Sales journal- is used to record sales ON
ACCOUNT.
o Cash receipts journal- is used to record
all transactions involving receipts of
cash. This involves sales made in cash
and any collection of receivables that
has been paid in cash.
o Cash disbursements journal- is used to
record all transactions involving
payments of cash.
o Purchase journal- is used to track all
purchases that are made ON ACCOUNT
from suppliers.
o Payroll journal- is used to track
expenses related to staffing costs.
 General Journal- All other transactions that
cannot be recorded in the special journals are
recorded in the general journal. Example of
which is recording of a depreciation of an asset.
Ledger
The ledger is the systematic compilation of a
group of accounts. It is used to classify the effects of
business transactions on the accounts. The ledger is also
called as book of secondary entries or the book of final
entries because it is used only after business
transactions are first recorded in the journals. The
process of recording in the ledger is called posting.
Kinds of Ledgers:
 General ledger- contains all the accounts
appearing in the trial balance
 Subsidiary ledger- provides a breakdown of the
balances of controlling accounts.
*A controlling account is one which consists of a
group of accounts with similar nature. The
balance of the controlling account is shown in
the general ledger while the balances of the
group of accounts that comprise the controlling
account are shown in the subsidiary ledger.
Formats of the Book of Accounts

General Journal

GENERAL JOURNAL
Date Account Titles Ref. No. Debit Credit

08/03/2018 Depreciation Expense ₱ 10,000.00

Accumulated Depreciation- Building ₱ 10,000.00
to record depreciation expense for the
building.

08/07/2018 Bad debt expense ₱ 3,000.00

Allowance for Bat debts ₱ 3,000.00
to record the bad debts expense for the
period.

 Date column- indicates the recording dates of the transactions. Transactions are recorded in the journal
chronologically, meaning arranged by dates.
 Account titles column- The accounts affected by a business transaction are recorded in this column.
 Reference No. column- This column is left blank when the journal entry is made. It is used later when the
journal entries are transferred to the ledger accounts.
 Debit and Credit Columns- the monetary effects of the transaction to the accounts are recorded here.

Special Journal

SALES JOURNAL
Invoice Sales Accounts
Date Customer Sales- Credit
number Receivable-
Debit

08/04/2018 SI-001 Customer 3 ₱6,000.00 ₱6,000.00

08/04/2018 SI-002 Customer 6 ₱320.00 ₱320.00

08/05/2018 SI-003 Customer 7 ₱240.00 ₱240.00

08/06/2018 SI-004 Customer 8 ₱200.00 ₱200.00

CASH RECEIPTS JOURNAL

Debit Credit Credit Credit
Ref.
Date Description (Particulars) Accounts
No.
Cash Sales Receivable Sundry
General and Subsidiary Ledger

GENERAL LEDGER

ACCOUNTS RECEIVABLE 120

Reference
Date Debit Credit Balance
No.
Balance Forwarded ₱ 40,000.00

08/06/2018 ₱ 6,720.00 ₱ 46,720.00

CUSTOMER 3
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/04/2018 SI-001 ₱6,000.00 ₱6,000.00

CUSTOMER 6
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/04/2018 SI-002 ₱320.00 ₱320.00

CUSTOMER 7
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/05/2018 SI-003 ₱240.00 ₱240.00

CUSTOMER 8
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/06/2018 SI-004 ₱200.00 ₱200.00