Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOd. Define and describe the accounting

information system, the elements of financial statements, the
account titles used in recording the account(T-Account), the rules
of debit and credit and the double-entry system;

Metalanguage

For you to demonstrate ULOd, you will need operational understanding of the terms
enumerated below.

Accounting Information System is a set of inter-related processes and procedures

that will process raw data to become information that are stored and disseminated to
the users.

Financial Statements are reports of the operation of the business that are provided
by the accountant to the user for decision making

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge laid down in the succeeding pages.
Please note that you are not limited to exclusively refer to these resources. Thus, you
are expected to utilize other books, research articles and other resources that are
available in the university’s library e.g. ebrary, search.proquest.com etc., and even
online tutorial websites.

1. ACCOUNTNG INFORMATION SYSTEM

Information System
This a collection of people, procedures, software, hardware and data that works
together to provide information essential in running an organization.

Accounting Information System

This system is needed to generate reliable financial information needed by the
decision make in a timely manner. A system that starts from the economic activities
that are inputted to the systems and transformed into a useful accounting information
and keep the information for future use. The financial information then be given to the
decision makers and then, go back to where the process starts.

Types of Accounting Information System

1
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Generally, business firms uses three types of accounting information systems to

record the transactions of the business. This will serve as the database of information
of the entity.
Manual Accounting Information System
This is a system processing information using human processing abilities and skills
using papers and pen. This uses labor intensive and became inefficient in today’s
complexity of accounting and business environment.

Computer-Based Accounting Information System

The system that process business transactions using machine like computers and
calculators to make it more easy to achieve output that are more reliable and accurate
than manual system.

Database Accounting Information System

The system are advanced in the since that in this system the information are
processed in an accounting software such as enterprise resource planning (e.g. SAP,
Oracle, QuickBooks and PeopleSoft. This is a less labor intensive and become
efficient in recording and preparing financial statements as you will just encode the
data and just quickly you can create reports.

Stages of Data Processing

This process follows the input-processing-output progression as the raw data are
transformed into summarized reports.

2. ELEMENTS OF FINANCIAL STATEMENTS

The financial statements are compose of Five (5) complete set.

1. Statement of Financial Position or Balance Sheet
2. Statement of Comprehensive Income or Income Statement
3. Statement of Cash Flows
4. Statement of Changes in Owner’s Equity
5. Notes to Financial Statements

The financial statements are composed of five (5) elements namely: Assets, Liabilities,
Owner’s Equity, Income and Expenses.

Three (3) of the elements will be presented in the Statement of Financial Position or
Balance Sheet namely: Assets, Liabilities and Owner’s Equity.

Two (2) of the elements will be presented in the Statement of Comprehensive Income
or Income Statement namely: Income and Expenses.

Financial Position
Assets
This is a present economic resource (a right that has the potential to produce economic
benefits) controlled by the entity as a result of past transactions or events.
In the definition it states about the three (3) aspects
1. Rights can have potential economic benefits in a various ways

2
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

o Rights that correspond to an obligation of another party (e.g. rights to

receive cash, to receive goods and services, to exchange economic
resources with another party on a favourable terms and to benefit from
an obligation of another party to transfer an economic resources if a
specified uncertain future events occurs)

o Rights that do not corresponds to an obligation of another party (e.g.

rights over physical object and right to use intellectual property).

2. Potential to produce economic benefits the entity is entitle to do one or more

of the following:
o Receive contractual cash flows or another economic resources;
o Exchange economic resources with another party on a favourable
terms;
o Produce cash inflows or avoiding cash ouflows;
o Receive cash or other economic resources by selling the economic
resources; and
o Extinguish liabilities by transferring the economic resources.

3. Control that result to a present ability to direct the use of the economic
resources and obtain the economic benefits that may flow from the resources.

Liability
This is a present obligation of the entity to transfer economic resources as a result of
past transactions or events. The existence of liability must met all the criteria.
a. The entity has an obligation;
b. The obligation is to transfer economic resources; and
c. The obligation is a present obligation that exist as a result of past events.

The transfer of economic resources includes the following obligation:

a. To pay cash;
b. To deliver goods or provide services;
c. To exchange economic resources with another party on unfavourable terms.
d. To transfer economic resources if a specified uncertain future event occurs.
e. To issue a financial instrument if that financial instrument will oblige the entity
to transfer economic resources

The present obligation exists as a result of past events only if:

a. The entity has already obtained economic benefits or taken an action; and
b. As a consequence, the company will or may have to transfer an economic
resource that it would not otherwise have had to transfer.

Equity
This is the residual interest after deducting all the liabilities from the total assets this
pertains to the following dependent on what type of business organization.
1. Sole Proprietorship = Owner’s Equity
2. Partnership = Partner’s Equity
3. Corporation = Stockholders’ Equity or Shareholders’ Equity
4. Cooperatives = Member’s Equity

3
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Financial Performance
Income
This increases in assets, or decreases in liabilities that resulted to an increase in equity
other than those relating to contributions from the holders of equity claims.

Expenses
This decreases in assets, or increases in liabilities that resulted to a decrease in equity
other than those relating to distributions to the holders of equity claims.

3. THE ACCOUNT, ACCOUNT TITLES AND THE ACCOUNTING EQUATION

The Account
This is the basic summary device in accounting. A separate account per elements that
appears to the financial statements. This is known as “T” accounts and this is the
detailed record of the increases, decreases and balance of each elements.

Account Title

Left side Right side

or Or
Debit (Dr) side Credit (Cr) side

The Accounting Equation

The financial statements will tell us how business is performing. The basic tool to
present the amounts in the statements is the use of accounting equation that states
assets is always equal to the total liabilities and equity this is known as “mirror image”
and the basic accounting model is

Assets = Liabilities + Owner’s Equity

The assets are the left side and consider as the debit and the mirror image which is
the liabilities are the right side and consider as the credit. Therefore, every business
transaction requires a debit and credit sides.

4. THE DOUBLE ENTRY SYSTEM AND THE RULES OF DEBIT AND CREDIT

The Double-Entry System

This means that the business has dual effect to the account as it has effect on both
the debit side and credit side. The account debited are entered in the left side and the
account credited are entered in the right side

4
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

The Normal Balances of an Account

The increase of an assets are recorded in the left side (Dr. side) and decrease in
recorded in the right side (Cr. side). While, it is reversed for the liabilities and owner’s
equity.

BALANCES

Accounts Normal Increases Decreases

Assets Dr. Dr. Cr.
Contra Assets Cr. Cr. Dr.
Liabilities Cr. Cr. Dr.
Owner’s Equity Cr. Cr. Dr.
Owner’s Withdrawals Dr. Dr. Cr.

Income/Gain/Revenue Cr. Cr. Dr.

Expenses/Losses Dr. Dr. Cr.

Accounting Events and Transactions

Accounting events are those economic occurrence that causes changes to the
elements of financial statements. Transactions are particular event that involving
transfer of something of value between two entities.

Types and Effects of Transactions

1. Sources of Assets (SA). An increase in an asset account with the
corresponding liabilities and equity account increases. An asset account is
debited and liability or equity account is credited.
2. Exchange of Assets (EA). One asset account increases and another asset
account decreases. A two different assets accounts are debited and credited.
3. Use of Assets (UA). An asset account decreases with the corresponding
liabilities and equity account decreases. An asset account is credited and
liability or equity account is debited.
4. Exchange of Claims (EC). One liability or owner’s equity account increases
and another liability or owner’s equity decreases. A two different liability or
owner’s equity account are debited and credited.

The Account Titles

Assets are classified into two: current assets and non-current assets. Per revised PAS
1 (Philippine Accounting Standards No. 1). The entity shall classify assets as current
when:
1. It is expected to realize the asset, or intends to sell or consume it, in its normal
operating cycle;
2. It holds the assets for the purpose of trading;
3. It expects to realize the assets within twelve months after the reporting period;
or
4. The asset is a cash or a cash equivalent (as defined in PAS no. 7) unless the
asset is restricted from being exchanged or used to settle a liability for at least
twelve months after the reporting period.

5
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Those assets that are not classified as current shall be recognized as non-current
assets. Operating cycle is the time between the acquisitions of the assets for
processing and their realization in cash or cash equivalents. The entity’s normal
operating cycle is considered to be 12 months if not clearly identified.

Current Assets
Cash. This includes coins, currency, checks, money orders, bank deposits and drafts.
That are used as medium of exchange that a bank will accept for deposits at face
value.
Cash Equivalents. An account used for short-term, highly, liquid investments that are
readily convertible to known amount of cash that are subject to an insignificant risks
of change in values.
Notes Receivables. The account used to account written pledged from customer that
will pay the business at a fixed amount of money at a certain date.
Accounts Receivables. These are claims against customers arising from sale of
service or goods on credit.
Inventories. These are assets that are held for sale in the ordinary course of business,
still in the process of production for such sale, or in the forms of materials or supplies
to be consumed in the production of goods or rendering service.
Prepaid Expenses. These are expenses paid for by the business in advance.

Noncurrent Assets
Property, Plant and Equipment. The account use for tangible assets that are held
by an enterprise for use in supply or production of goods or services, for rental to
others, or for administrative purposes that are to be used for more than one (1) period.
Accumulated Depreciation. A contra asset account used to accumulate all the
depreciation charges.
Intangible Assets. An asset that has no physical substance, but identifiable and
nonmonetary assets held for use in the production or supply of goods and services,
for rental to others or for administrative purpose.

Liabilities are classified into two: current liabilities and non-current liabilities. Per
revised PAS 1 (Philippine Accounting Standards No. 1). The entity shall classify
liability as current when:
1. It is expected to settle the liability in its normal operating cycle;
2. It holds the liability primarily for the purpose of trading;
3. It liability is due to be settled within twelve months after the after the reporting
period; or
4. The entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.

Those liabilities that are not classified as current shall be recognized as non-current
liabilities.

Current Liabilities
Accounts Payable. An account used for obligation that are lend by accepting goods
from suppliers and the company agrees to pay the amount in the future.
Notes Payable. An account of obligation that are used for amount lend from the
debtors in exchange of a promissory note.

6
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Accrued Liabilities. This account is used when there are unpaid expenses incurred
by the company.
Unearned Revenues. This is the account used when payment is receive before
providing services or before the products or goods are delivered.
Current Portion of Long-term Debt. This are portion of the mortgage notes, bonds
and other long-term obligations that are payable within 1 year after the reporting period
or the balance sheet date..

Non-current liabilities
Mortgage payables. This is to account a long-term debt of the entity that has pledged
certain assets as security to the creditor. If the loan are not paid the creditor will
foreclose the mortgage asset to be sold to enable the entity to settle the claim.
Bonds Payables. Substantial amount of money from lenders to finance the business
organizations acquisition of equipment and other needed assets. This is a contract
between the issuer and the lender specifying the terms of repayment of the principal
and interest to be charged accordingly.

Owner’s Equity
Capital. From Latin word “Capitalis”, means “property”. This is the investment account
used to record original and additional investment of the owner of the business entity.
Increase by the amount of profit earned during the year and decrease with a loss.
Withdrawals. When the owner of a business entity withdraws cash or other assets
rather than directly reducing the owner’s equity account.
Income Summary. The temporary account used to close the income and expenses
at the end of the accounting period. This accounts shows the profit if the balance is
credit but if the balance of this account is debit then it signifies loss.

Income
Service Income. This are revenue earned by performing services for a customer or
client.
Sales. This are revenues that are earned as a result of selling merchandise.

Expenses
Cost of Sales. The cost of the sold goods and products as incurred from the purchase
or produce of product during the period. Also known Cost of Goods Sold.
Salaries and Wages. The payments to the labor force as a result of employee-
employer relationship
Utilities Expense. Expenses related to the use of telecommunications facilities,
consumption of electricity, fuel and water.
Rent Expense. The amount of used supplies in the conduct of business operation.
Insurance Expense. The portion of premiums paid on insurance coverage that has
already expired.
Depreciation Expense. The portion of the costs of tangible assets allocated or
charged as expense during an accounting period.
Uncollectible Accounts Expense. An amount of receivables estimated to be doubtful
of collection and charge as an expense during an accounting period.
Interest Expense. An expense related to the use of borrowed funds.

7
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Self-Help: You can also refer to the sources below to help you
further understand the lesson.

You can also refer to the sources below to help you further understand the
lesson:
Ballada, W. and Ballada, S. (2018). Basic finacial accounting and repoting (21st
ed.). Manila: DomDane Publishers.
Ballada, W .and Ballada, S. (2015). Basic accounting: made easy (2015 ed.).
Manila: DomDane Publishers.
Lopez, R. M. (2016). Basic accounting for non-accountants: simplified
approach.(2016 ed., Vol. 1). Ma-a, Davao City: MS Lopez Printing & Pub.

Note:

The content of this manual is based on the textbook for ACC 111 titled “Basic Financial
Accounting and Reporting” by Ballada, Win, CPA, CBE, MBA and Ballada, Susan,
CPA

Let’s Check!
I. Questions:
1. What is accounting information system?
________________________________________________________
________________________________________________________
________________________________________________________

2. What is financial statements and what are the complete set?

________________________________________________________
________________________________________________________
________________________________________________________

3. What are the elements of financial statements?

________________________________________________________
________________________________________________________
________________________________________________________

II. True or False

1. The basic accounting equation is A = L + OE is the same with L = A + OE.
2. Business transactions are expressed in terms of money
3. Capital represents the owner’s investments in the business
4. Liabilities represents amounts owed to creditors
5. Assets are things of value owned by a business entity.

8
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

III. Multiple choice theories

1. The following accounts are found in the balance sheet, except;
A. Liabilities B. Assets C. Owner’s Equity D. Withdrawal
2. Which of the following is not a satisfactory statement of the accounting
equation?
a. Assets = Liabilities – Owner's Equity
b. Assets – Liabilities = Owner's Equity
c. Assets = Liabilities + Owner's Equity
d. Assets – Owner's Equity = Liabilities
3. When expense is debited, a typical credit is to
a. Accounts receivable b. capital c. cash d. withdrawals
4. Statement 1 The left side of an account is always the debit side and the
right side is always the credit side.
Statement 2 Assets, expenses, and capital accounts are debited for
increases.
a. Only statement 1 is correct c. Both statements are true
b. Only statement 2 is correct d. Both statements are false
5. The following are examples of liabilities, except;
a. Accounts Payable c. Note Receivable
b. Loans Payable d. Note Payable
6. Accounts that normally have debit balance are:
a. assets, expenses and owner’s equity
b. assets, expenses and revenues
c. assets, owner’s drawing and expenses
d. assets, liabilities and owner’s drawing
7. The following are assets of the company which of them are current assets?
a. A second hand computer
b. P 40,000.00 cash
c. A building bought by the entity
d. A van purchased for delivering products to customers
8. Which of the following is correct under the double entry system?
a. The asset amount is equal to the liability amount.
b. A change in asset must be accompanied with a change in liability
c. The increase in asset must be compensated with a decrease in asset
d. A change in debit side entry is compensated with credit side entry.
9. Under double entry system, which of the following is incorrect?
a. An increase in asset means a credit entry in asset account.
b. A decrease in noncurrent asset means a credit entry in asset account.
c. A decrease in liability means a debit entry in liability account.
d. An increase in drawings means a debit entry in capital account.
10. Which of the following is an example of exchange of asset transaction?
a. Increase in one asset account and decrease in another asset
b. Decrease in an asset account and a liability account
c. Increase in liability and decrease in equity account
d. Increase in one liability account and decrease in another.
11. When the owner of the company withdrew cash for personal use, what type
of transaction is this?
a. Exchange of Claims c. Use of Assets

9
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

b. Exchange of Assets d. Source of Assets

Let’s Analyze!
I. Identification: Identify each account title if it is,
a. Asset, Liabilities, Equity, Income, Expense
b. If it is assets or liability, indicate if it is CURRENT or NONCURRENT
c. What is the normal Balance? (Debit or Credit)

Ex. Prepaid Advertising:

a. Asset,
b. Current,
c. Debit

1. Supplies Used 6. Income Summary

2. Accumulated Depreciation 7. Inventories
3. Accounts Receivable 8. Jose P. Delgado, Capital
4. Unearned Revenue 9. Bonds Payable
5. Franchise 10. Utilities Payable

II. Find the Missing Elements from the accounting equation:

1. JohnNoah Brill Enterprises has a total assets of 300,000 and the owners’ equity
is twice the amount of liabilities. What is the Owner’s Equity?

2. Christian Lafayette Cooling Industries had a total Capital of 750,000 and the
liability is ½ of the capital. What is the total assets of the company?

3. Princess Tailoring Shop had a total liabilities of 76,500 and the total liabilities is
1/5 of the total assets. How much is the total assets?

4. At the beginning of the year, the total assets of Jewel Jewelry Shop had a total
assets of 475,000 which is 45% of liability. If the equity increase by 10,000.00
and decrease the liability is 25,000.00. What is the asset at the end of the year?

5. At the beginning of the year, Precious Sarong refilling station had a liabilities of
40,000 and owner’s equity twice as the amount of liabilities. If assets increase
to 125% and the owner’s equity increase by 25,000. What is the total liabilities
at the end of the year?

In a Nutshell
Activity 1. Indeed, the double entry bookkeeping help us to analyze transactions.
Based from the discussion and the learning exercises that you have done, please feel

10
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

free to write your arguments or lessons learned below. I have indicated my arguments
or lessons learned.

1. ________________________________________________________________
________________________________________________________________
__________________________________________________________

2. ________________________________________________________________
________________________________________________________________
__________________________________________________________

3. ________________________________________________________________
________________________________________________________________
__________________________________________________________

4. _______________________________________________________________
________________________________________________________________
__________________________________________________________

5. ________________________________________________________________
________________________________________________________________
__________________________________________________________

6. ________________________________________________________________
________________________________________________________________
__________________________________________________________

7. ________________________________________________________________
________________________________________________________________
__________________________________________________________

8. ________________________________________________________________
________________________________________________________________
__________________________________________________________

9. ________________________________________________________________
________________________________________________________________
__________________________________________________________

10. ________________________________________________________________
________________________________________________________________
__________________________________________________________

Q&A List
Do you have any question for clarification?
Questions/Issues Answers

11
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

1.
2.
3.
4.
5.

Keywords index
Financial Statement Double Entry Bookkeeping
Assets Liabilities
Equity Normal Balances
Debit Credit

12