Accounting Equation and Major Types of Accounts
Parts of an Information System
1. People.
These are the end users who use
hardware and software to increase
their productivity and solve
information-related problems.
2. Procedures.
These are manuals and guidelines that
instruct end users on how to use the
software and hardware effectively.
3. Software.
This includes programs that tell the
computer how to process data. There
are two main types:
➢ System Software.
Background software that helps
manage a computer's internal
resources, such as operating
systems like Windows or Linux.
➢ Application Software.
Performs useful work on general-
purpose problems. The two types of
application software are:
• Basic Applications:
Browsers- navigate, explore, find
information on the Internet.
Word processor- prepare written
documents.
Spreadsheet- analyze and summarize
numerical data.
Database management system-
organize and manage data and
information.
Presentation graphics-communicate a
message or persuade other people.
• Advanced Applications:
Multimedia- integrate video, music,
voice, and graphics to create
interactive presentations.
Web publishers- create interactive
multimedia Web pages.
Graphics programs- create
professional publications, draw, edit,
and modify images.
Virtual reality- create realistic three-
dimensional virtual or simulated
environments.
Artificial intelligence- simulated human
thought processes and actions.
Project managers- plan projects,
schedule, people, and control
resources.
4. Hardware.
The physical components of the
system, including:
➢ Input Devices.
Translate human-readable data into a
format the computer can process, like
keyboards, mice, scanners, digital
cameras, and microphones.
➢ System Unit
Contains the CPU that controls data
processing and memory (primary
storage) for temporarily holding data
and instructions.
➢ Secondary Storage
Stores data and programs using media
like flash drives, hard disks, and
optical disks.
➢ Output Devices.
Display processed information, such
as monitors and printers.
➢ Communication Devices.
Transmit and receive data between
computers, including modems.
5. Data:
Raw material for processing,
consisting of numbers, letters, and
symbols.
Data describes facts, events, and
transactions and is often stored
electronically in files. Common types
of files include documents, worksheets,
and databases.
Accounting Information System
An accounting information system
provides reliable financial data for
decision-makers. The system's design
considers who will use it and the
decisions they need to make, taking
into account factors like the
company's size, operations, data
volume, structure, and etc.
A good accounting information system
should:
1. Process information efficiently at
the lowest cost (cost-benefit
principle).
2. Ensure data reliability, and minimize
waste, theft, or fraud (control
principle).
3. Be compatible with the company's
structure and human factors
(compatibility principle).
4. Adapt to growing transaction
volumes and organizational changes
(flexibility principle).

The diagram illustrates how economic
activities feed into the accounting
process, producing financial
information used by decision-makers to
make choices and take actions,
ultimately leading to more economic
activities in a continuous cycle.
Types of Accounting Information
System
Accounting Information Systems aim to
capture accounting event information
for preparing financial statements.
Companies employ three types of
accounting information systems to
record transactions which are:
1. Manual Systems.
➢ Rely on paper-based journals
and ledgers. They are labor-
intensive and can be prone to
errors due to manual
processing.
2. Computer-Based Transaction
Systems.
➢ These replace paper records
with computer records,
maintaining accounting data
separately from operational
data. This system offers
advantages like quick posting
of transactions, detailed
transaction listings, internal
controls, error prevention, and
various report generation
options.
3. Database Systems.
➢ Relational database systems,
like SAP, Oracle, and
PeopleSoft, organize data
differently from the traditional
accounting equation method.
They capture both financial
and non-financial data and
store it in a data warehouse.
Database systems reduce
inefficiencies and redundancies
often present in transaction-
based systems.
Each system has its advantages and
is suited to different business needs.
 Stages of Data Processing
1. Input.
Raw data is collected and entered into
the accounting system. Each
transaction should be supported by
source documents like invoices, deposit
slips, checks, and memos, which serve
as evidence and provide essential
details.
2. Processing.
Computers, aided by accounting
software, process the input data. This
process includes tasks like
journalizing, posting, preparing trial
balances, and updating accounts. In
computerized systems, these steps
are often completed almost instantly.
3. Output.
The results of the processing are
presented as output. This can include
financial statements and other
accounting reports, which can be
viewed on a screen or printed as
documents.
➢ Manual systems are inferior to
computerized systems in terms
of productivity, speed,
accessibility, quality of output,
incidence of errors and bulk.
Elements of Financial Statements
Financial Position
Assets are valuable resources owned
by the entity. According to the
framework, an asset is something the
enterprise controls because of past
events, and it's expected to bring
future economic benefits.
Assets can be used in various ways:
- In making goods or services to sell.
- Exchanged for other assets.
- Used to pay off a debt.
- Given to the owners of the
enterprise.
Liabilities are what the entity owes to
outsiders who provided resources.
They come from past events and can
be legal or not. Liabilities involve
transferring economic benefits, which
could be cash, property, services, or
refraining from profitable activities.
Liabilities complement assets and can
be settled by paying with cash,
transferring assets, providing
services, replacing one obligation with
another, or converting it to equity.
Equity is what's left of the
enterprise's assets after subtracting
all its debts (liabilities). What equity
represents depends on the type of
business:
- In a sole proprietorship, there's just
one owner, so it's called owner's
equity.
- In a partnership, there's an owner's
equity account for each partner.
- In a corporation, it's called owners'
equity or stockholders' equity, and it
includes share capital, retained
earnings, and reserves, among other
things.
Performance
Income is when the enterprise gets
economic benefits during the
accounting period, like getting more
assets or reducing debts, which
increases equity. This excludes
contributions from equity participants.
Income covers both revenue (from
regular activities like sales, fees,
interest) and gains (other increases
in economic benefits).
Expenses are when the enterprise
loses economic benefits during the
accounting period, like spending
assets or taking on liabilities, which
decreases equity. Expenses include
regular ones like the cost of goods
sold, selling expenses, administrative
expenses, and other operating
expenses, as well as losses (other
decreases in economic benefits).
Gains and losses are not treated
separately in this framework.
The Account
In accounting, we use something
called an "account" to keep track of
various financial elements like assets,
liabilities, equity, income, and
expenses. Each element gets its own
separate account.
An account is like a detailed record
that shows how these elements change
over time. Imagine it looks a bit like the
letter "T," and that's why it's often
called a "T" account. It helps us see
the increases, decreases, and
balances for each financial element in
a company's financial statements.
Example of T-Account:
The Accounting Equation
Financial statements show how well a
business is doing, but how do we
figure out the numbers for those
statements? We use a basic tool
called the accounting equation.
This equation helps us understand
what the company owns (assets),
what it owes (liabilities), and what's
left over (owner's equity). It's like a
balance scale where assets must
always equal liabilities plus owner's
equity:
Assets = Liabilities + Equity
Assets are on the left side of the
equation, and they change in the
opposite way compared to liabilities
and owner's equity. This is why we
use debits and credits in accounting,
and it's all about keeping things
balanced. So, in any transaction, we
might add or subtract from both sides
of the equation to make sure it stays
in balance.
Typical Account Titles Used
Statement of Financial Position
Assets are things a business owns,
and they fall into two categories:
current assets and noncurrent
assets. According to accounting
standards, an asset is classified as
current if:
A. It will be used, sold, or consumed
within the business's normal operating
cycle.
B. It's mainly held for trading
purposes.
C. It will be used up or realized within
twelve months after the reporting
period.
D. It's cash or a cash equivalent
(defined in PAS No. 7) unless it's
restricted from being used for at
least twelve months after the
reporting period.
All other assets are considered non-
current. The operating cycle is the
time from acquiring assets to turning
them into cash or equivalents. If the
normal operating cycle isn't clear, it's
assumed to be twelve months.
Current Assets
These are assets that are expected to
be turned into cash or used up within
a year. They include:
Cash
- Actual money, checks, and bank
deposits.
Cash Equivalents
- Short-term investments that are
easily convertible to cash and have
low risk.
Notes Receivable
- Written promises from customers to
pay a fixed amount by a specific date.
Accounts Receivable
- Money owed by customers for goods
or services sold on credit.
Inventories
- Goods held for sale, in production, or
for use in providing services.
Prepaid Expenses
- Costs paid in advance, like
insurance and rent, which are
considered assets until they benefit
the business.
Noncurrent Assets
These are assets expected to be used
over more than a year. They include:
Property, Plant and Equipment.
- Tangible assets like land, buildings,
machinery, and vehicles.
Accumulated Depreciation
- To obtain book value of large assets
Intangible Assets
- Non-physical assets like goodwill,
patents, copyrights, and trademarks
used in business activities.
Liabilities are what a business owes,
and they are classified as either
current or non-current based on
Philippine Accounting Standards
(PAS) No. 1. A liability is considered
current if:
A. It will be settled in the business's
normal operating cycle.
B. It's mainly held for trading.
C. It will be settled within twelve
months after the reporting period.
D. The business can't defer settling
the liability for at least twelve months
after the reporting period.
Current Liabilities
Liabilities that will be dealt with soon.
These include:
Accounts Payable
- Money owed for goods or services
already received.
Notes Payable
-Promises to pay a specified amount
by a certain date.
Accrued Liabilities
-Unpaid expenses like salaries,
utilities, interest, and taxes.
Unearned Revenues
-Payments received for goods or
services not yet provided. When
provided, unearned revenue decreases,
and income goes up.
Current Portion of Long-Term Debt
- Parts of long-term debts due within
a year.
Non-Current Liabilities
What a business owes for an
extended period, typically longer than
a year. These include:
Mortgage Payable
- Money owed for a loan where
assets like property are pledged as
security. If the loan isn't paid, the
creditor can sell the assets to
recover the debt.
Bonds Payable
- Businesses often borrow large
sums by issuing bonds. Bonds are
contracts between the borrower
(issuer) and the lender.
Owner's Equity
Capital
- This is what the owner originally
invested plus any additional
contributions. It increases with profits
and decreases with losses or owner
withdrawals.
Withdrawals
- When the owner takes money or
assets out of the business, it's
recorded here instead of directly
reducing capital.
Income Summary
- This is a temporary account used to
calculate the profit or loss for the
period before it's transferred to the
capital account.
Income Statement Depreciation
Income - Spreading out the cost of assets
over time.
Service Income
Uncollectible Accounts
- Revenues earned by performing
services for a customer or client - Money expected but unlikely to be
received.
Sales
Interest
- Revenues earned as a result of sale
of merchandise - Expense for using borrowed money.
Expenses Books of Accounts and Double Entry
System
Cost of Sales
- The cost to buy or make the General Journal
products sold. - The most basic type.
Salaries/Wages - Used for recording any kind of
business transaction.
- Payments to employees, including
bonuses and allowances. - The act of recording a transaction
is called "journalizing."
Utilities
- Expenses for things like phone, Special Journal
electricity, fuel, and water. - Used to simplify and speed up
recording.
Rent
- Each one is designed for a specific
- Payments for space or equipment.
type of transaction.
Supplies
- Examples include the Cash Receipts
- Costs for things like office supplies. Journal (for recording received cash),
Insurance Cash Disbursements Journal (for cash
payments), Sales Journal (for credit
- Premiums for various types of sales), and Purchase Journal (for
insurance. credit purchases).
General Ledger How an account is affected depends
on its type:
- This accumulates all information
about changes in accounts like - Increases in assets are recorded as
assets, liabilities, equity, income, and debits and decreases as credits.
expenses.
- Increases in liabilities and owner's
equity are recorded as credits and
decreases as debits.
- Often referred to as a "T-Account"
because it looks like the letter T. For income and expense accounts, the
- A T-Account is a simplified version rules are based on their impact on
of a general ledger. owner's equity:
- Income increases owner's equity
and is recorded as credits.
- Expenses decrease owner's equity
and are recorded as debits.
Debits and Credits - The Double-
Entry System
In accounting, we use a double-entry
system, meaning every business
transaction has two effects: a debit
and a credit.
- Debit entries are on the left side of
an account, and credit entries are on
the right side.
- Debits are abbreviated as "Dr." (from
the Latin "debere"), and credits are
abbreviated as "Cr." (from the Latin
"credere").
 Normal Balance of an Account
The normal balance of an account is
the side (debit or credit) where we
record increases.
- Assets, owner's withdrawals, and
expense accounts typically have debit
balances.
- Liabilities, owner's equity, and
income accounts typically have credit
balances.
Accounting Events and Transactions
- An accounting event is something
that affects a business's assets,
liabilities, or equity. It can be internal
or external.
- A transaction is a specific type of
event involving the exchange of value
between two entities. Examples
include buying/selling goods,
borrowing money, or receiving assets
from owners.
Types and Effects of Transactions
1. Source of Assets (SA)
- When an asset increases, and a
corresponding (liabilities or owner’s
equity) account increase.
2. Exchange of Assets (EA)
- When one asset increases, and
another asset decreases.
3. Use of Assets (UA)
- When an asset decreases, and a
corresponding claims (liabilities or
equity) account decreases.
4. Exchange of Claims (EC)
- When one claims (liabilities or
owner's equity) account increases,
and another decreases
9 Possible Effects
1. Increase in A= Increase in L (SA)
2. Increase in A= Increase in Eq (SA)
3. Increase in one Asset = Decrease
in another Asset (EA)
4. Decrease in A= Decrease in L (UA)
5. Decrease in A= Decrease in Eq (UA)
6. Increase in L = Decrease in Eq (EC)
7. Increase in Eq= Decrease in L (EC)
8. Increase in one L = Decrease in
another L (EC)
9. Increase in one Eq= Decrease in
another Eq (EC)