CHAPTER

Lecture
The Accounting
Equation
and
Double Entry
System
CHAPTER OUTLINE

 The Accounting Equation

 Double Entry Bookkeeping –

Debits and Credits

 Five Major Account
Classifications and Common
Accounts within Each
Classification
The Chart of Accounts
Learning Objectives
At the end of the chapter, you will be able to:
 Identify and explain the basic accounting
equation;
 Understand the basic rules and proper
application of debits and credits;
 identify the five major account classifications;
 Describe the categories and common accounts
within each classification;
 Identify and understand the normal balances of
each account, and
 Understand the chart of accounts.
OBJECTIVES OF ACCOUNTING
To maintain accounting records.
To calculate the results of
operations
To ascertain the financial
position
To communicate the information
to the users
 The
Accounting
Equation
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

 Transactions that Affect
Owner’s Equity
OWNER’S EQUITY OWNER’S EQUITY
INCREASES DECREASES

Owner Investments Owner Withdrawals

in the Business from the Business

Owner’s Equity

Revenues Expenses
Assets = Liabilities + Owner’s Equity
+ Revenues
- Expenses
+ Gains
- Losses
+ Contributions
- Withdrawals
 Double Entry Accounting
The Equality of Debits and Credits

A = L + OE
=
Debit
balances
Credit
balances

In the double-entry accounting system,

every transaction is recorded by equal
amounts of debits and credits.
 Double Entry
Bookkeeping -
Debits and Credits
 DOUBLE-ENTRY SYSTEM
• equal debits and credits made
accounts for each transaction
• total debits always equal the total
credits
• accounting equation always stays in
balance

Assets Liabilities Equity

1.Debit - A debit is
recorded on the left hand
side of a T-account.
• An account entry with a positive
value for asset and negative
value for liabilities and equity.
 Assets
Debit Credit

+ Liabilities & O.E.

Debit Credit
2. Credit. A credit balance is
recorded on the right hand
side of a T-account.
• An account entry with a
negative value for assets, and
positive value for liabilities
and equity.
 Assets
Debit Credit

Liabilities & O.E.

Debit Credit

+
3. Debit Accounts
Asset and Expenses

4. Credit Accounts
Income and Liabilities
and Owner’s Equity
NOTE :
1. ASSETS – Debit Balance

2. EXPENSES – Debit Balance

3. LIABILITIES – Credit Balance

4. EQUITY – Credit Balance

5. INCOME – Credit Balance

 NORMAL BALANCE
• every account has a
designated normal balance.
• It is either a debit or credit.

• accounts rarely have an

abnormal balance.
TABULAR SUMMARY COMPARED
TO ACCOUNT FORM
 Debit and Credit Rules
Debits and credits affect accounts as
follows:

A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
 EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS

Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities
+ Capital - Drawing
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues Expense
- s
Dr. Cr. Dr. Cr.
- + + -
Major Account and
Common Account
Under Each
Classification
• The major account
classifications used in
accounting are known as:
•Assets,
•Liabilities,
•Equity,
•Income, and
•Expenses.
These are also known as
The elements of the financial
statements such as the
Statement of Financial
Position and Income
Statement.
 CHART OF ACCOUNT

• A listing of a company’s
account titles which
guides the bookkeeper
in the recording of the
transactions.
 CHART OF ACCOUNT

• The number and the

nature of accounts
depend on the type of
business operation.
 CHART OF ACCOUNT

• NOTE: Each of account is

assigned a three-digit number
followed by the account name
• The first digit of the number
signifies if it is an asset, liability,
etc.
 CHART OF ACCOUNTS
A Chart of Accounts lists the accounts and the
account numbers which identify their location in the
ledger.
 Steps in Analyzing a Transaction
Step 1. Decide which accounts are involved.
Step 2. Classify the accounts involved (asset,
liability, capital, revenue, expense).
Step 3. Decide if the accounts involved are increased
or decreased.
Step 4. Write the transaction as a debit to one
account (or accounts) and a credit to another
account (or accounts).
Step 5. Check to see if the equation is in balance
after the transaction has been recorded.
 Analyzing the Effects of Business
Transactions
• Dave Mark opened a restaurant
business. To get started, he rents
some space, purchase an initial
inventory of supplies, and open the
shop for business. Here is a listing
of the transactions that occurred
during the first month:
 Analyzing the Effects of Business Transactions

Investment by Owner:
On September 1, Dave Mark contributes P 7,500
in cash to capitalize the business.

Owners
Transactions Assets = Liabilities + Equity

Investment by
1 the owner
 Analyzing the Effects of Business Transactions

Purchased P 2,500 of supplies on account,

payable in 30 days.

Owners
Transactions Assets = Liabilities + Equity

Purchase of assets
8 on account
 Analyzing the Effects of Business Transactions

Paid first month rent of P 1,000.

Owners
Transactions Assets = Liabilities + Equity

Payment of space
15 rental
 Analyzing the Effects of Business Transactions

Sales made for the week, P 1,100;

collected cash P400; balance on credit
P 700.

Owners
Transactions Assets = Liabilities + Equity

Sales made for

17 the week.
 Analyzing the Effects of Business Transactions

P 275 worth of supplies were used.

Owners
Transactions Assets = Liabilities + Equity

Supplies were
18 used up
 Analyzing the Effects of Business Transactions

Collected P 425 from customer

accounts

Owners
Transactions Assets = Liabilities + Equity

Collection from
customers
25 account
 Analyzing the Effects of Business Transactions

Paid P 500 to suppliers for supplies

purchased earlier in the month.

Owners
Transactions Assets = Liabilities + Equity

Paid suppliers
for supplies
28 purchased
 ASSETS = LIABILITIES + OWNER'S EQUITY
Dave Revenue
Accounts Accounts Mark's (Expense
Date Cash + Supplies + Receivables = Payable + Capital + )

Sept 1 7,500.00 = 7,500.00

Sept 8 2,500.00 = 2,500.00

Sept 15 -1,000.00 = -1,000.00

Sept 17 400.00 700.00 = 1,100.00

Sept 18 -275.00 = -275.00

Sept 25 425.00 -425.00 =

Sept 28 -500.00 = -500.00

Totals 6,825.00 + 2,225.00 + 275.00 = 2,000.00 + 7,500.00 + -175.00

9,325.00 = 9,325.00
 Owners
Transactions Assets = Liabilities +
Equity

1 Investment by the owner

2 Withdrawal of assets by the owner
3 Purchase of assets in cash
4 Bought assets for personal use
5 Purchase of assets on account
6 Settlement of liabilites in cash
7 Settlement of account with a note
Settlement of liabilities from the
8
owner's personal cash
9 Hired an employee
The owner Took home asset for his
10
own use
 IDENTIFY the normal
balances of each account
and the category of the
accounts listed.
Write if the normal balance
is a DEBIT or CREDIT
 Account Name Assets Liabilities Equity Income Expenses

Prepaid Expenses Debit

Merchandise Inventory Debit
Ticket Sales` Credit
Cash Debit
Notes Payable Credit
Mortgage Payable Credit
Interest Income Credit
Notes Receivables Debit
Loans Payable Credit
Room Sales Credit
Stockholders Equity Credit
Celestial, Capital Credit
Celestial, Drawing Debit
Land Debit
Accumulated Depreciation Debit
 Account Name Assets Liabilities Equity Income Expenses

Accrued Expenses Credit

Wages payable Credit
Supplies Expense Debit
Utilities Expense Debit
Rent Expense Debit
Advertising Expense Debit
Interest Payable Credit
Supplies Debit
Prepaid Insurance Debit
Salaries Expense Debit
Accounts Receivables Debit
Accounts Payable Credit
Unearned Revenue Credit
Depreciation Expense Debit
Telephone Expense Debit