THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
PARTS OF AN INFORMATION SYSTEM
Information System – collection of people,
procedures, software, hardware, and data which
works together to provide information essential to
running an organization.
Parts:
● People – competent end users working to
increase their productivity
- they use hardware and software
to solve information-related or
decision-making problems
● Procedures – manuals, guides or
instructions on how to use the software
and hardware
● Software – also called as “programs”
- instructions that tell computers
how to process data
❖ System Software – background
software that helps a computer
manage its internal resources
Ex: operating systems like Windows
and Linux
❖ Application Software – performs
useful work on general-purpose
problems
> Basic Applications
- browsers
- database management
system
- word processor
- presentation graphics
- spreadsheet
> Advanced Applications
- multimedia
- virtual reality
- web publishers
- artificial intelligence
- graphics programs
- project managers
● Hardware – input devices, the system
unit, secondary storage, output devices,
and communication devices or
infrastructure
❖ Input Devices – translate data
and programs that humans can
understand into a form the
computer can process
Ex: keyboard, muse, scanner, digital
camera, and microphone
Padayon!
❖ The System Unit – consist of
electronic circuitry with 2 parts
> Central processing unit (CPU)
> Memory (primary storage)
❖ Secondary Storage – stores data
and programs
Ex: flash drive, hard disk, and optical
disk
❖ Output Devices – output
processed information from the
CPU
Ex: monitor and printer
❖ Communication Devices – these
send and receive data and
programs from one computer to
another
Ex: modem – it connects a
microcomputer to a telephone
● Data – raw material for data processing
- consist of numbers, letters, and
symbols and relates to facts,
events and transactions
- describes something
- stored in a file
* File – a collection of characters
organized as a single unit
Ex: document, worksheet, and
database
THE ACCOUNTING INFORMATION SYSTEM
Accounting Information System – combination
of personnel, records and procedures that a
business uses to meet its need for financial
information for decision-making
- it must consider the users of the information and
the types of decisions to be made
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
Accounting information systems have three basic
functions:
1. Efficient and effective collection and
storage of data concerning an
organization’s financial activities, including
getting the transaction data from source
documents, recording the transactions in
journals, and posting data from journals to
ledgers
2. Supply information useful for making
decisions, including producing managerial
reports and financial statements
3. Make sure controls are in place to
accurately record and process data
An effective accounting information system should
achieve the following objectives:
● Cost-Benefit Principle – to process
information efficiently at least cost
● Control Principle – to protect entity’s
assets, to ensure reliable data, to
minimize waste and fraud
● Comparability Principle – to be in
harmony with the entity’s organizational
and human factors
● Flexibility Principle – to be able to
accommodate growth in the volume of
transactions for any organizational
changes
3 Types of Accounting Information Systems:
● Manual Systems – utilize paper-based
journals (general and special) and ledgers
(general and subsidiary)
- rely on human processing or is labor
intensive
- may be inefficient in today’s business
environment
- prone to error
● Computer-based Transactions – replace
paper records with computer records
- accounting records are kept separately
from the records required for the
expenditure, revenue and conversion
- greater degree of compartmentalization
of work to preserve the integrity of the AIS
(not as ideal as the database system)
- treats information in the same manner as
a manual system
the user is simply filling in a computer
screen that looks like a source doc
Padayon!
Advantages:
> Transactions can be quickly
posted to the appropriate
accounts, bypassing the
journalizing process
> Detailed listings of transactions
can be printed for review at any
time
> Internal controls and edit checks
can be used to prevent and detect
errors
> A wide variety of reports can be
prepared
Accounting packages come with several
modules
* Module - program which deals with one
particular part of a business accounting
system
> Stand-alone module – a simple
accounting package with one
module
> Suite - accounting package with
several modules
● Database Systems – embed accounting
data within the business event data on
which they are based
Advantages:
> The system recognizes business
rather than just accounting events
> The system supports reduction in
operating inefficiencies
> The system eliminates redundant
data
Stages of Data Processing:
> Data Processing - refers to the
transformation of raw data into meaningful
output
> Input-Processing-Output
Progression – processing of raw data into
useful accounting information then finally
into summarized reports
a.) Each transaction entered into
the accounting system should be
supported by source documents
* these documents serve as evidence that a
particular transaction occurred
* they provide necessary details and supports
b.) The computer (with the use of
accounting software) then processes the
inputs
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
c.) The manual system (steps of the
accounting cycle) are done almost
instantaneously
d.) When required, the financial
statements and other accounting reports
can be viewed on the screen or printed as
output documents
THE ACCOUNT
Account – basic summary device of accounting
- detailed record of the increases, decreases, and
balance of each element in the financial
statements
* a separate account is maintained for each element
(A-L-E-R-E) that appears in the balance sheet and
income statement
The simplest form of the account is the T-account
THE ACCOUNTING EQUATION
Financial Statements – means by which the
information accumulated & processed in financial
accounting is periodically communicated to users
Padayon!
– tell us how a business is performing
– end or main product of the financial accounting
process
● Statement of Financial Position
(Balance Sheet)
- shows the financial position or condition
by listing its assets, liabilities and equity
(owner’s equity) of the entity as of a given
date
● Statement of Financial Performance /
Statement of Comprehensive Income
(Income Statement)
- shows the results of operations at a
given date or during a period
● Statement of Changes in Equity
- summarizes the changes that occurred
in owner’s equity
● Statement of Cash Flows
- provides information about the cash
receipts (provided) & cash payments
(uses) of the entity during a period
● Notes to Financial Statements
- comprises a summary of the significant
accounting policies and other explanatory
information
Accounting Equation – most basic tool of
accounting
- presents the assets, liabilities, and equity of
an entity
The logic of debiting and crediting is related to the
equation as all cases must maintain the equality of
both sides
* additions to both sides, subtractions to both sides, or an
addition and subtraction on the same side
THE DOUBLE-ENTRY SYSTEM
Accounting Double-Entry System – dual
effects of a transaction are recorded
- a debit entry must have a corresponding credit
side entry
- each transaction affects at least 2 accounts
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022 Padayon!

NORMAL BALANCE OF AN ACCOUNT

Normal Balance (of an account) – refers to the

* for every transaction, there must be one or more
accounts debited and one or more accounts credited
side of the account where increases are recorded
an entity has to part away something of value (ex.
cash) in order to receive something (ex. computer).

● BALANCE SHEET ACCOUNTS

● INCOME STATEMENT ACCOUNTS

ACCOUNTING EVENTS AND

TRANSACTIONS

An entity as always engages in various economic

activities

● Accounting Event – economic

occurrence that causes changes in an
● ACCOUNTS entrepreneur’s assets, liabilities, and/or
equity
- may be internal or external events

● Business Transaction – an accounting

event that involves the transfer of
something of value between 2 or more
entities/parties

TYPES AND EFFECTS OF TRANSACTIONS

* The rules of debit and credit for income and Every accountable event has a dual but
expenses accounts are based on the relationship of self-balancing effect on the accounting equation
these accounts to owner’s equity

● Income increases equity = increases in ● Source of Assets (SA) – an asset

income are recorded as credits account increases and a corresponding
(decreases as debits) claim (L or E) account increases
Ex: purchases of supplies on account
● Expenses decreases equity =
increases in income are recorded as
debits (decreases as credits)

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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
● Exchange of Assets (EA) – one asset
account increases and another asset
account decreases
Ex: acquired equipment for cash
● Use of Assets (UA) – an asset account
decreases and a corresponding claim (L
or E) account decreases
Ex: settled/paid accounts payable
Paid salaries of employees
● Exchange of Claims (EC) – one claim
(L or E) account increases and another
claim (L or E) account decreases
ELEMENTS OF FINANCIAL STATEMENTS
AND THEIR ACCOUNTS
Assets, Liability, and Equity = Financial
Position or Balance Sheet
Income and Expenses = Financial
Performance or Income Statement
Financial Position or Balance Sheet
Asset – present economic resource controlled by
the entity as a result of past events
1. Rights – power/rights that have the
potential to produce economic benefits
take the following forms:
a.) Rights that correspond to an
obligation of another party
- receive cash
- exchange resources with another party
- receive goods or services
Padayon!
- benefit from an obligation of another
party
b.) Rights that do not correspond to an
obligation of another party
- over physical objects
- to use intellectual property
2. Produce Economic Benefits
a.) Receive contractual cash flows or
another economic resource
b.) Exchange economic resources with
another party
c.) Produce cash inflows or avoid cash
outflows
d.) Receive cash or other resources by
selling the economic resource
e.) Extinguish liabilities by transferring
economic resource
3. Control – ability to direct the use of the
economic resource and obtain the benefits that
flow from it
* if one party controls an economic resource, no other
party can
Types of Asset Accounts:
1. Current Assets
- to be realized, consumed, sold within the normal
operating cycle of 12 months (1 year)
- primarily used for the purpose of trading
- is cash or a cash equivalent (unless restricted
from being exchanged or settled for a liability for
at least 12 months)
* Operating Cycle - is the time between the
acquisition of assets for processing and their
realization in cash or cash equivalents
- When the entity’s normal operating cycle is
not clearly identifiable, it is presumed to be 12 months.
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
● Cash – any medium of exchange that a
bank will accept for deposit at face value
Ex: coins, currency, checks, money orders,
bank deposits, and drafts
● Cash Equivalents – short-term, highly
liquid investments that are readily
convertible to cash
- subject to an insignificant risk of changes
in value
● Notes Receivables – written pledge that
the customer will pay the entity a fixed
amount on a certain date
- may be current or non-current depending
on when it is realized
● Accounts Receivable – claims against
customers arising from the sale of
services/goods on credit
- less security than a promissory note
● *Allowance for Uncollectible Accounts
– contra account of Accounts Receivable
● Inventories – assets that are:
❖ held for sale in the ordinary course
of business
❖ in the process of production for
such sale
❖ in the form of materials or supplies
to be consumed in the production
process or rendering of services
● Accrued Revenue (Other Receivables)
– amounts owed by other parties for
unpaid goods/service
- goods/service have been given and
performed
● Prepaid/Deferred Expenses – expenses
paid by the business in advance
- represent future economic benefits
(assets) until they contribute to the earning
process (expenses)
Ex: insurance and rent
* it is an asset because the business avoids
having to pay cash in the future for a
specific expense
Padayon!
2. Non-Current Assets
● Property, Plant, and Equipment (PPE) –
tangible assets that are used in the:
❖ production or supply of
goods/services
❖ rental to others
❖ administrative purposes
= expected to be used for more
than 1 period
Ex: land, building, machinery, equipment,
furnitures and fixtures, and vehicles
● *Accumulated Depreciation – contra
account of PPE
- contains the sum of periodic depreciation
charges
the balance in this account is deducted from
the cost of the related asset to obtain book
value
● Intangible Assets – identifiable,
non-monetary assets without physical
substance held for use in the production of
goods/services, rental to others, and
administrative purposes
Ex: goodwill, patents, copyrights, licenses,
franchises, trademarks, brand names, secret
processes, subscription lists, and
non-competition agreements
Liability – present obligation to transfer an
economic resource as a result of past events
All 3 criteria must satisfied:
1. Obligation – a duty or responsibility that
an entity has no practical ability to avoid
- owed to another party
If one party has an obligation to transfer an
economic resource, another party has the right
to receive such
2. Obligation is to Transfer an Economic
Resource
a.) to pay cash
b.) to deliver goods or provide services
c.) to exchange economic resources with
another party on unfavorable terms
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
d.) to transfer an economic resource if a
specified uncertain event occurs
e.) to issue financial instrument (if such
will oblige the entity to transfer an
economic resource)
3. Obligation is a Present Obligation that
Exists as a Result of Past Events
a.) the entity has already obtained
economic benefits or taken an action
b.) as a consequence, the entity will or
may have to transfer an economic
resource that it would not otherwise have
had to transfer
Types of Liability Accounts:
1. Current Liabilities
- to be settled within the normal operating cycle of
12 months (1 year)
- primarily used for the purpose of trading
- the entity does not have an unconditional right to
defer settlement of the liability for at least 12
months after reporting period
● Accounts Payable – reverse relationship
of accounts receivable
- the buyer agrees to pay
goods/services in the near future
● Notes Payable – reverse relationship of
notes receivable
- the business entity makes the note to
promise to pay the other party a specified
amount in the future
● Accrued Expenses (Other Payables) –
amounts owed to others for unpaid
expenses
- expenses have been incurred or used
Ex: salaries payable, utilities payable, interest
payable, and taxes payable
● Unearned/Deferred Revenues – receipt
of payment before providing the
goods/services
* receipt of cash without rendered/given
Padayon!
service or goods = unearned or deferred
revenue (liability)
* goods/services are now provided =
income/revenue
● Current Portion of Long-Term Debt –
portions of mortgage notes, bonds and
other long-term debts which are to be paid
within 1 year from the balance sheet date
2. Non-Current Liabilities
● Mortgage Payable – records long-term
debt in terms of pledged certain assets as
security to the creditor
* in the event when debt payments are not
made, the creditor can foreclose or cause the
mortgaged asset to be sold to enable
settlement of the claim
● Bonds Payable – obtaining of money
from lenders to finance the acquisition of
equipment and other assets (they obtain
funds by issuing bonds)
* Bond – contract between the issuer and the
lender specifying the terms of repayment and
the interest to be charged
Equity – residual interest in the assets of the
entity (after deducting all its liabilities)
- claims against the entity that do not meet the
for
definition of a liability
> Sole Proprietorship – 1 owner’s equity
because there is only 1 owner
> Partnership – an owner’s equity exists for each
partner
> Corporation – owner’s equity or stockholder’s
equity consists of:
* share capital
* retained earnings
* reserves representing appropriations of
retained earnings among others
Types of Equity Accounts:
● Capital – used to record the original
(balance) and additional investments of
the owner
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022
- cash or other assets that the owner
withdraws reduce it
- this account title bears the name of the
owner
* increased by the amount of profit earned or
is decreased by a loss
● Withdrawals/Drawings – when the
owner withdraws cash or other assets
- not expenses, but a reduction of equity
● Income Summary (Net Income/Net
Loss) – temporary account used at the
end of the accounting period
- used to close income and expenses
- shows the profit or loss for the period
before closing to the capital account
Financial Performance or Income Statement
Income – increase in assets or decrease in
liabilities = increase in equity other than those
relating to contributions from holders of equity
claims
* contributions from holders of equity are not income
Types of Equity Accounts:
● Service Income – revenues earned by
performing services for a customer or
client
● Sales – revenues earned as a result of
sale of merchandise
● Gains
Expenses – decrease in assets or increase in
liabilities = decrease in equity other than those
relating to contributions from holders of equity
claims
* distribution to holders of equity are not expenses
Types of Expenses Accounts:
● Cost of Sales/Cost of Goods Sold – cost
incurred to purchase or to produce the
products sold during the period
● Salaries or Wages Expense – all
payments as a result of an
employer-employee relationship
Padayon!
Ex: salaries/wages, 13th month pay, cost of
living allowances and other benefits
● Telecommunications, Electricity, Fuel,
and Water Expenses
● Rent Expense – expense for space,
equipment and other asset rentals
● Supplies Expense – expense of using
supplies in the conduct of daily business
● Insurance Expense – portion of
premiums paid on insurance coverage
● Depreciation Expense – portion of the
cost of a tangible asset allocated or
charged as an expense during an
accounting period
● Uncollectible Accounts Expense –
amount of receivables estimated to be
doubtful of collection and charged as an
expense during an accounting period
● Interest Expense – expense related to
borrowed funds
● Loss
ADDITIONAL INFORMATION
The Accounting Process
> Identification - Select economic events
(transactions)
> Recording - Record, classify, and summarize
> Communication – Prepare accounting reports
> Analyze and interpret for users
Questions asked by Internal Users
- Is cash sufficient to pay bills?
- What is the cost of trading/manufacturing each
unit of product?
- Can we afford to give employees pay raises this
year?
- Which product line is the most profitable?
Questions asked by External Users
- Is the company earning satisfactory income?
- How does the company compare in size and
profitability with its competitors?
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THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
ACFAR 1130, 2 - 009
BS Accountancy 1I | PROF. Cleofe Arib | SEM 1 2022 Padayon!

- Will the company be able to pay its debts as

they come due?

The Accounting Equation

Assets as a Building Block

> Assets - resources owned by a business
- things of value used in carrying out such
activities as production and exchange
Liabilities as a Building Block
> Liabilities - claims against assets
- existing debts and obligations
> Account – individual accounting record of the
movements (increases and decreases) in a
specific account
> T-Account - a basic accounting device use to
summarize the increases & decreases

Investments by Owners as a Building Block

> Investments by Owner – assets put into the
business by the owner
- increase owner’s equity

Drawings As Building Block

> Drawings - withdrawals of cash or other assets
by the owner for personal use
- decrease total owner’s equity

Revenue As Building Block

> Revenue – gross increases in owner’s equity
resulting from business activities entered into for
the purpose of earning income
- result from sale of merchandise, performance of
services, rental of property, or lending of money
- usually result in an increase in an asset

Expenses As Building Block

> Expenses – decreases in owner’s equity that
result from operating the business
- cost of assets consumed or services used in the
process of earning revenue
- e.g., utility expense, rent expense, and supplies
expense

Owner’s Equity as Building Block

> Owner’s Equity – Assets minus Liabilities
- represents the ownership claim on total assets
* Increase by Capital (Investments)
* Decrease by Drawings
* Increase by Revenues
* Decrease by Expenses