MODULE 2-Accounting Equation and Double Entry System

Isabela State University-CBAPA 1
FINANCIAL ACCOUNTING & REPORTING

MODULE 2: The Accounting Equation and the Double Entry System
Jeanette.i.gonzales-1st SEM SY 2023-2024
MODULE 2
The Accounting Equation and the Double Entry System
Introduction
The module, The Accounting Equation and the Double Entry System, contains materials and
activities related to defining the elements of financial statements and understanding the
concept of accounting equation and the double-entry system, applying the rules of debit and
credit and identifying the typical accounts used in recording transactions.
In this module you are required and expected to go through a series of learning activities in
order to complete each learning outcomes/objectives. In each learning outcomes/objectives
are Task/Activity Sheets. Follow and perform the activities on your own. If you have questions,
do not hesitate to ask for assistance from your professor. You are required to submit and
compile these activities (Student Portfolio).
Learning Objectives
After studying this module, you shoud be able to
1. Define the elements of financial statements.
2. Describe the account (simple T-account) and its uses.
3. Discuss what is meant by the accounting equation and prove the validity of the “mirror
image” concept.
4. Understand what is meant by the double-entry system.
5. Explain how the double entry system follows the rules of accounting equation.
6. Define debits and credits.
7. Summarize the rules of debits and credits as applied to balance sheet and income
statement accounts.
8. Describe the nature of typical account titles used in recording transactions.
Learning Contents
1. Elements of Financial Statements
2. The Account
3. The Accounting Equation
4. Debits & Credits-The Double Entry System
5. Typical Account Titles used
Lesson 1 Elements of Financial Statements

Every business has assets, liabilities, and owner’s equity—the elements in the basic accounting
equation that you will study in this lesson. A television studio’s assets include cameras and computers.
Its liabilities may include unpaid bills to videotape suppliers. The owner’s equity of a business is what
the business is worth.
ELEMENTS OF FINANCIAL STATEMENTS
The elements of financial statements defined in the March 2018 Conceptual Framework for
Financial Reporting (2018 Conceptual Framework) are: Assets, liabilities, and equity – which
relate to a reporting entity’s financial position; and Income and expenses – which relate to a
reporting entity’s financial performance.
In summary, the elements of financial statements are defined as follows:
Element Definition or Description
Asset A present economic resource controlled by the entity as a result of past

events. An economic resource is a right that has the potential to produce
economic benefits.
Liability A present obligation of the entity to the transfer an economic resource as a
result of past events.
Equity The residual interest in the assets of the entity after deducting all its liabilities.
Income Increases assets, or decreases in liabilities, that result in increases in equity,
other than those relating to contributions from holders of equity claims.
Expenses Decreases assets, or increases in liabilities, that result in decreases in equity,
FINANCIAL POSITION
Asset
Per March 2018 Conceptual Framework for Financial Reporting Conceptual Framework),
asset is a present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.
These are three aspects to these definitions: “right”; “potential to produce economic benefits”;
and “control”.
❖ Rights that have the potential to produce economic benefits take many forms,
including:
a) Rights that correspond to an obligation of another property, for example:
i. Rights to receive cash.
ii. Rights to receive goods or services.
iii. Rights to exchange economic resources with another party on favorable terms.
Such rights include, for example, a forward contract to buy an economic
resource on terms that are currently favorable or an option to buy an economic
resource.
iv. Rights to benefit from an obligation of another party to transfer an economic

resource if a specified uncertain future event occurs.
b) Rights that do not correspond to an obligation of another property, for example:
i. Rights over physical objects, such as property, plant and equipment or
inventories. Examples of such rights are a right to use a physical object or a
right to benefit from the residual value of a leased object.
ii. Rights to use intellectual property.
❖ An economic resource could produce economic benefits for an entity by entitling or

enabling it to do, for example, one or more of the following:
a) Receive contractual cash flows or another economic resource;
b) Exchange economic resources with another party on favorable terms;
c) Produce cash inflows or avoid cash outflows by, for example:
i. Using the economic resource either individually or in combination with other
economic resources to produce goods or provide services;
ii. Using the economic resource to enhance the value of other economic
resources; or
iii. Leasing the economic resource to another party
d) Receive cash or other economic resources by selling the economic resource; or
e) Extinguish liabilities by transferring the economic resource.
❖ An entity controls an economic resource if it has the present ability to direct the use
of the economic resource and obtain the economic benefits that may flow from it.
Control includes the present ability to prevent other parties from directing the use of
the economic resource and from obtaining the economic benefits that may flow from
it. It follows that, if one party controls and economic resource, no other party controls
that resource.
Liability
A liability is a present obligation of the entity to transfer an economic resource as a result of
past events. For a liability to exist, three criteria must all be satisfied:
1) The entity has an obligation;
2) The obligation is to transfer an economic resource; and
3) The obligation is a present obligation that exists as a result of past events
❖ An obligation is a duty or responsibility that an entity has no practical ability to avoid.

An obligation is always owed to another party (or parties). The other party (or parties)
could be a person or another entity, a group of people or other entities, or society at
large. It is not necessary to know the identity of the party (or parties) to whom the
obligation is owed. If one party has one obligation to transfer an economic resource,
it follows that another party (or parties) has a right to receive that economic resource.
❖ Obligations to transfer an economic resource include, for example:

a) Obligations to pay cash
b) Obligations to deliver goods or provide services
c) Obligations to exchange economic resources with another party on unfavorable
terms. Such obligations include, or example, a forward contract to sell an
economic resource on terms that are currently unfavorable or an option that
entitles another party to buy an economic resource from the entity.
d) Obligations to transfer an economic resource if a specified uncertain future
event occurs.
e) Obligations to issue a financial instrument if that financial instrument will oblige

the entity to transfer an economic resource.
❖ A 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 entity will or may have to transfer an economic
resource that it would not otherwise have had to transfer.
Equity
Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. In
other words, they are claims against the entity that do not meet the definition of a liability.
Equity may pertain to any of the following depending on the form of business organization:
▪ In a sole proprietorship, there is only one owner’s equity account because there is only
one owner.
▪ In a partnership, an owner’s equity account exists for each partner.
▪ In a corporation, owner’s equity or stockholder’s equity consists of share capital,
retained earnings and reserves representing appropriations of retained earnings
among others.
FINANCIAL PERFORMANCE
Income is increases in assets or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
Expenses are decreases in assets or increases in liabilities, that result in decreases in equity,
Lesson 2 The Account

THE ACCOUNT
The basic summary device of accounting is the account. Accounts are the basic storage units
for accounting data and are used to accumulate amounts from similar transactions. An
accounting system has a separate account for each asset, each liability, and each component
of owner’s equity, including revenues and expenses. Managers must be able to refer to
accounts so that they can study their company’s financial history and plan for the future. A
very small company may need only a few dozen accounts; a multinational corporation may
need thousands.
An account title should describe what is recorded in the account. However, account titles can
be rather confusing. For example, Wages Expense and Salaries Expense are both titles for
labor expenses. Moreover, many account titles change over time as preferences and practices
change.
A separate account is maintained for each element that appears in the balance sheet (assets,
liabilities and equity) and in the income statement (income and expenses). Thus, an account
may be defined as a detailed record of the increases, decreases and balance of each element
that appears in an entity's financial statements.
The T account is a good place to begin the study of the double-entry system. Such an
account has the following three parts:
▪ a title, which identifies the asset, liability, or owner’s equity account
▪ a left side, which is called the debit side
▪ a right side, which is called the credit side
The T account, so called because it resembles the letter T, is a tool used to analyze
transactions and is not part of the accounting records. It looks like this:
Account Title
Left side or Right side or
Debit side Credit side
Any entry made on the left side of the account is a debit, and any entry made on the right side
is a credit. The terms debit (abbreviated Dr., from the Latin debere) and credit (abbreviated
Cr., from the Latin credere) are simply the accountant’s words for “left” and “right” (not for
“increase” or “decrease”).
Lesson 3 The Accounting Equation

THE ACCOUNTING EQUATION
In accounting there are separate terms for owner’s claims and creditor’s claims. The owner’s
claims to the assets of the business are called owner’s equity. Owner’s equity is measured by
the amount of the owner’s claims to the total assets of the business. The creditor’s claims to
the assets of the business are called liabilities. Liabilities are the debts of a business. They
are measured by the amount of money owed by a business to its creditors. The relationship
between assets and the two types of equities (liabilities and owner’s equity) is shown in the
accounting equation
Financial statements tell us how a business is performing. They are the final products of the
accounting process. But how do we arrive at the items and amounts that make up the financial
statements? The most basic tool of accounting is the accounting equation. This equation
presents the resources controlled by the enterprise, the present obligations of the enterprise
and the residual interest in the assets. It states that assets must always equal liabilities and
owner's equity.
The basic accounting model is:
Assets = Liabilities + Owner's Equity
Note that the assets are on the left side of the equation opposite the liabilities and owner's
equity. This explains why increases and decreases in assets are recorded in the opposite
manner {"mirror image") as liabilities and owner's equity are recorded. The equation also
explains why liabilities and owner's equity follow the same rules of debit and credit.
The logic of debiting and crediting is related to the accounting equation. Transactions may
require additions to both sides (left and right sides), subtractions from both sides (left and right
sides), or an addition and subtraction on the same side (left or right side), but in all cases the
equality must be maintained as shown in the next page.
Effects of Transactions on the Accounting Equation
What Happens to the Accounting Equation?

When a business transaction occurs, an accounting clerk analyzes the transaction to see how
it affects each part of the accounting equation.
Analyzing business transactions is simple. Use the following steps.

BUSINESS TRANSACTION
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
+/- 3. Determine the amount of increase or decrease for each account
Balance affected.
4. Make sure the accounting equation remains in balance.
Lesson 4 Debits & Credits-The Double Entry System

Accountants use the double-entry accounting system to analyze and record a transaction.
Double-entry accounting recognizes the different sides of business transactions as debits and
credits. A debit is an entry on the left side of an account. A credit is an entry on the right side
of an account. This system is more efficient than updating the accounting equation for each
transaction.
DEBITS AND CREDITS—THE DOUBLE-ENTRY SYSTEM
Accounting is based on a double-entry system which means that the dual effects of a business
transaction are recorded.
▪ A debit side entry must have a corresponding credit side entry.

▪ For every transaction, there must be one of more accounts debited and one or
more accounts credited.
▪ Each transaction affects at least two accounts. The total debits for a transaction
must always equal the total credits.
An efficient tool for using double-entry accounting is a T account. The T account , so called
because of its T shape, shows the peso increase or decrease in an account that is caused by
a transaction. T accounts help the accountant analyze the parts of a business transaction.
THE RULES OF DEBIT and CREDIT
Debits and credits are used to record the increase or decrease in each account affected by a
business transaction. Under double-entry accounting, for each debit entry made in one
account, a credit of an equal amount must be made in another account. Debit and credit rules
vary according to whether an account is classified as an asset, a liability, or the owner’s capital
account. Regardless of the type of account, however, the left side of an account is always the
debit side and the right side is always the credit side.
Each account classification has a specific side that is its normal balance side. An account’s
normal balance is always on the side used to record increases to the account. The word
normal used here means usual.
The account type determines how increases or decreases in it are recorded.
▪ Increases in assets are recorded as debits (on the left side of the account) while
decreases in assets are recorded as credits (on the right side).
▪ Increases in liabilities and owner's equity are recorded by credits and decreases are
entered as debits.
The rules of debit and credit for income and expense accounts are based on the relationship
of these accounts to owner's equity.
▪ Income increases owner's equity and expense decreases owner's equity. Hence,
increases in income are recorded as credits and decreases as debits.
▪ Increases in expenses are recorded as debits and decreases as credits. These are the
rules of debit and credit.
The following summarizes the rules:

Balance Sheet Accounts
Assets Liabilities & Owner’s Equity
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases
NORMAL NORMAL
BALANCE BALANCE
Income Statement Accounts

Debit for Decreases in Owner’s Equity Credit for Increases in Owner’s Equity
Expenses Income
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases
NORMAL NORMAL
BALANCE BALANCE
The normal balance of any account refers to the side of the account-debit or credit-where
increases are recorded. Asset, owner’s withdrawal and expense accounts normally have debit
balances; liability, owner’s equity and income accounts normally have credit balances.
This result normally occurs because increases in an account are usually greater than or equal
to decreases.
Increases recorded by Normal Balance

Account Category Debit Credit Debit Credit
Assets
Liabilities
Owner’s Equity
Owner’s Capital
Withdrawals
Income
Expenses
Study Note: To remember the normal balances and the rules of debit and credit,
use the acronym AWE: Assets, Withdrawals, and Expenses are always increased by
debits. All other accounts are increased by credits.
ACCOUNTING EVENTS AND TRANSACTIONS
An accounting event is an economic occurrence that causes changes in an enterprise's

assets, liabilities, and/or equity. Events may be internal actions, such as the use of equipment
for the production of goods or services. It can also be an external event, such as the purchase
of raw materials from a supplier.
A transaction is a particular kind of event that involves the transfer of something of value
between two entities. Examples of transactions include acquiring assets from owner(s),
borrowing funds from creditors, and purchasing or selling goods and services.
TYPES AND EFFECTS OF TRANSACTIONS
It will be beneficial in the long-term to be able to understand a classification approach that

emphasizes the effects of accounting events rather than the recording procedures involved.
This approach is quite pioneering. Although business entities engage in numerous
transactions, all transactions can be classified into one of four types, namely:
1. Source of Assets (SA). An asset account increases and a corresponding claims
(liabilities or owner's equity) account increases. Examples: (1) Purchase of supplies
on account; (2) Sold goods on cash on delivery basis.
2. Exchange of Assets (EA). One asset account increases and another asset account
decreases. Example: Acquired equipment for cash.
3. Use of Assets (UA). An asset account decreases and a corresponding claims
(liabilities or equity) account decreases. Example: (1) Settled accounts payable; (2)
Paid salaries of employees.
4. Exchange of Claims (EC). One claims (liabilities or owner's equity) account increases
and another claims (liabilities or owner's equity) account decreases. Example:
Received utilities bill but did not pay.
Every accountable event has a dual but self-balancing effect on the accounting equation.
Recognizing these events will not in any manner affect the equality of the basic accounting
model. The four types of transactions above may be further expanded into nine types of effects
as follows:
1. Increase in Assets = Increase in Liabilities (SA)
2. Increase in Assets = Increase in Owner's Equity (SA)
3. Increase in one Asset = Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner's Equity (UA)
6. Increase in Liabilities = Decrease in Owner's Equity (EC)
7. Increase in Owner's Equity = Decrease in Liabilities (EC)
8. Increase in one Liability = Decrease in another Liability (EC)
9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC)
Lesson 5 Typical Account Titles Used

TYPICAL ACCOUNT TITLES USED
STATEMENT OF FINANCIAL POSITION (Balance Sheet)
ASSETS
Assets are should be classified only into two: current assets and non-current assets. Per
revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify assets as current
when:
a. it expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle;
b. it holds the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve months after the reporting period; or
d. the asset is 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.
All other assets should be classified as non-current assets. 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 assumed
to be twelve months.
Current Assets
Cash. Cash is any medium of exchange that a bank will accept for deposit at face value. A
Cash account shows a company’s cash balance. All increases and decreases in cash are
recorded in the Cash account. It includes money and any funds that a bank accepts for deposit
(coins, checks, money orders, and checking account balances).
Cash Equivalents. Per PAS No. 7, these are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an insignificant risk of
changes in value.
Notes Receivable. A note receivable is a written pledge that the customer will pay the
business a fixed amount of money on a certain date. A note receivable, or promissory note,
is a written promise of another entity to pay a specific sum of money on a specified future date
to the holder of the note; the holder has an asset recorded in a Note (or Notes) Receivable
account.
Accounts Receivable. These are claims against customers arising from sale of services or
goods on credit. This type of receivable offers less security than a promissory note. Accounts
receivable are held by a seller and are promises of payment from customers to sellers.
Accounts receivable are increased by credit sales or sales on account (or on credit). They are
decreased by customer payments. We record all increases and decreases in receivables in
the Accounts Receivable account. When there are multiple customers, separate records are
kept for each, titled Accounts Receivable—‘Customer Name’.
Inventories. Per PAS No. 2, these are assets which are (a) held for sale in the ordinary course
of business; (b) in the process of production for such sale; or (c) in the form of materials or
supplies to be consumed in the production process or in the rendering of services.
Prepaid Expenses. These are expenses paid for by the business in advance. It is an asset
because the business avoids having to pay cash in the future for a specific expense. Prepaid
accounts (or prepaid expenses) are assets from prepayments of future expenses (expenses
expected to be incurred in future accounting periods). When the expenses are later incurred,
the amounts in prepaid accounts are transferred to expense accounts.
Common examples of prepaid accounts are prepaid insurance, prepaid rent, and prepaid
services. Prepaid accounts expire with the passage of time (such as with rent) or through use
(such as with prepaid meal plans). When financial statements are prepared, (1) all expired
and used prepaid accounts are recorded as expenses and (2) all unexpired and unused
prepaid accounts are recorded as assets (reflecting future benefits).
Supplies Accounts Supplies are assets until they are used. When they are used up, their costs
are reported as expenses. Unused supplies are recorded in a Supplies asset account.
Supplies often are grouped by purpose—for example, office supplies and store supplies.
Office supplies include paper and pens. Store supplies include packaging and cleaning
materials.
Non-current Assets
Property, Plant and Equipment. Per PAS No. 16, these are tangible assets that are held by
an enterprise for use in the production or supply of goods or services, or for rental to others,
or for administrative purposes and which are expected to be used during more than one
period. Included are such items as land, building, machinery and equipment, furniture and
fixtures, motor vehicles and equipment.
✓ Equipment is an asset. When equipment is used and wears down, its cost is gradually
reported as an expense (called depreciation). Equipment often is grouped by its
purpose—for example, office equipment and store equipment. Office equipment
includes computers and desks. The Store Equipment account includes counters and
cash registers.
✓ Buildings such as stores, offices, warehouses, and factories are assets because they
provide expected future benefits. When a building is used and wears down, its cost is
reported as an expense (called depreciation). When several buildings are owned,
separate accounts are sometimes kept for each of them.
✓ Land The cost of land is recorded in a Land account. The cost of buildings located on
the land is separately recorded in building accounts.
Accumulated Depreciation. It is a contra account that contains the sum of the periodic
depreciation charges. The balance in this account is deducted from the cost of the related
asset—equipment or buildings—to obtain book value. (Its normal balance is Credit)
Intangible Assets. Per PAS No. 38, these are identifiable, nonmonetary assets without
physical substance held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes. These include goodwill, patents, copyrights, licenses,
franchises, trademarks, brand names, secret processes, subscription lists and non-
competition agreements.
LIABILITIES
Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify a liability as
current when:
a. it expects to settle the liability in its normal operating cycle;
b. it holds the liability primarily for the purpose of trading;
c. the liability is due to be settled within twelve months after the reporting period; or
d. the entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
All other liabilities should be classified as non-current liabilities.
Current Liabilities
Accounts Payable. This account represents the reverse relationship of the accounts
receivable. By accepting the goods or services, the buyer agrees to pay for them in the near
future. Accounts payable are promises to pay later. Payables can come from purchases of
merchandise-for-resale, supplies, equipment, and services. We record all increases and
decreases in payables in the Accounts Payable account. When there are multiple suppliers,
separate records are kept for each, titled Accounts Payable—‘Supplier Name’.
Notes Payable. A note payable is like a note receivable but in a reverse sense. A note payable
is a written promissory note to pay a future amount. In the case of a note payable, the business
entity is the maker of the note; that is, the business entity is the party who promises to pay the
other party a specified amount of money on a specified future date. It is recorded as either a
short-term note payable or a long-term note payable, depending on when it must be repaid.
Accrued Liabilities. Amounts owed that are not yet paid. This account includes salaries
payable, utilities payable, interest payable and taxes payable. These often are recorded in
separate liability accounts by the same title. If they are not a large amount, one or more ledger
accounts can be added and reported as a single amount on the balance sheet. (Financial
statements often report totals of several ledger accounts.)
Unearned Revenues. Unearned revenue is a liability that is settled in the future when a
company delivers its products or services. When customers pay in advance for products or
services (before revenue is earned), the seller records this receipt as unearned revenue
(liability method). When the goods or services are provided to the customer, the unearned
revenue is reduced and income is recognized. . Examples of unearned revenue include
magazine subscriptions collected in advance by a publisher, rent collected in advance by a
landlord, and season ticket sales by sports teams. The seller would record these in liability
accounts such as Unearned Subscriptions and Unearned Rent. When products and services
are later delivered, the earned portion of the unearned revenue is transferred to revenue
accounts such as Subscription Fees Revenue and Rent Revenue.
Current Portion of Long-Term Debt. These are portions of mortgage, notes, bonds and other
long-term indebtedness which are to be paid within one year from the balance sheet date.
Non-current Liabilities
Mortgage Payable. This account records long-term debt of the business entity for which the
business entity has pledged certain assets as security to the creditor. In the event that the
debt payments are not made, the creditor can foreclose or cause the mortgaged asset to be
sold to enable the entity to settle the claim.
Bonds Payable. Business organizations often obtain substantial sums of money from lenders
to finance the acquisition of equipment and other needed assets. They obtain these funds by
issuing bonds. The bond is a contract between the issuer and the lender specifying the terms
of repayment and the interest to be charged.
OWNER’S EQUITY
Capital. This account is used to record the original and additional investments of the owner of
the business entity. It is increased by the amount of profit earned during the year or is
decreased by a loss. Cash or other assets that the owner may withdraw from the business
ultimately reduce it. This account title bears the name of the owner.
When an owner invests in a company, it increases both assets and equity. The increase to
equity is recorded in the account titled Owner, Capital (where the owner’s name is inserted
in place of “Owner”). C. Taylor, Capital is used for FastForward. Owner investments are
recorded in this account.
Withdrawals. When the owner of a business entity withdraws cash or other assets, such are
recorded in the drawing or withdrawal account rather than directly reducing the owner's equity
account.
When an owner withdraws assets for personal use, it decreases both company assets and
total equity. The decrease to equity is recorded in an account titled Owner, Withdrawals. C.
Taylor, Withdrawals is used for FastForward. Withdrawals are not expenses of the business;
they are simply the opposite of owner investments.
Income Summary. It is a temporary account used at the end of the accounting period to close
income and expenses. This account shows the profit or loss for the period before closing to
the capital account.
INCOME STATEMENT
Income
Revenue Accounts. Amounts received from sales of products and services to customers are
recorded in revenue accounts, which increase equity. Examples of revenue accounts are
Sales, Commissions Earned, Professional Fees Earned, Rent Revenue, and Interest
Revenue. Revenues always increase equity.
Service Income. Revenues earned by performing services for a customer or client; for
example, accounting services by a CPA firm, laundry services by a laundry shop.
Sales. Revenues earned as a result of sale of merchandise; for example, sale of building
materials by a construction supplies firm.
Expenses
Expense Accounts. Amounts used for costs of providing products and services are recorded
in expense accounts, which decrease equity. Examples of expense accounts are Advertising
Expense, Salaries Expense, Rent Expense, Utilities Expense, and Insurance Expense.
Expenses always decrease equity. A variety of revenues and expenses are in the chart of
accounts at the end of this book. (Different companies use different account titles to describe
the same thing. For example, some use Interest Revenue instead of Interest Earned.)
Cost of Sales. The cost incurred to purchase or to produce the products sold to customers
during the period; also called cost of goods sold.
Salaries or Wages Expense. Includes all payments as a result of an employer-employee

relationship such as salaries or wages, 13th month pay, cost of living allowances and other
related benefits.
Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of

telecommunications facilities, consumption of electricity, fuel and water.
Rent Expense. Expense for space, equipment or other asset rentals.
Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct of daily
business.
Insurance Expense. Portion of premiums paid on insurance coverage (e.g. on vehicle, health,
life, fire, typhoon or flood) which has expired.
Depreciation Expense. The portion of the cost of a tangible asset (e.g. buildings and
equipment) allocated or charged as expense during an accounting period.
Doubtful Accounts Expense. The amount of receivables estimated to be doubtful of

collection and charged as expense during an accounting period.
Interest Expense. An expense related to use of borrowed funds.
References
• Ballada,W., Ballada,S. (2019). Basic Financial Accounting and Reporting. Philippines: DomDane
Publishers
• Millan, Z.V. (2018). Financial Accounting & Reporting (Fundamentals). Philippines: Bandolin
Enterprise
• Needle, B. & Powers, M. 2014 (12th Edition)-Ebook. Principles of Financial Accounting,
Cengage Learning
• Weygandt, Kimmel & Kieso. 2015 (19th Edition)-Ebook. Accounting Principles. John Wiley &
Sons.
Learning Activities/Tasks
AFTER YOU READ
Check Your Understanding
NAME: SCORE:
SECTION: DATE:
Activity 1: REVIEW QUESTIONS
1. Enumerate the elements of financial statements. Define each briefly.

2. What is the basic summary device of accounting? What does it contain?
3. What is the basic accounting model?
4. Discuss briefly the theory of the double-entry system.
5. State the rules of debit and credit.
6. Explain the concept of prepaid expenses.
7. Liability accounts are classified as either current or non-current. What are the criteria
used?
8. Cite a transaction that will decrease an asset and decrease a liability.
9. A transaction was recorded increasing a liability and decreasing another liability. What
transaction may have occurred?
10. How does the use of cash to acquire another asset affect the accounting equation? How
about cash to settle a liability?
Activity 2: TRUE OR FALSE

Instructions: Write TRUE if the statement is correct and write FALSE if the statement is wrong.
1. __________Expenses represent the cash paid for goods sold or services rendered in the
process of generating revenue.
2. __________Owner's equity is the excess of an entity's capital over its liabilities.
3. __________In a partnership, an owner's equity account exists for each partner.
4. __________According to the balance sheet equation, the assets of a business entity
must always equal the liabilities and owner's equity.
5. __________Payment of a liability will not affect total assets but will cause total
liabilities to decrease.
6. __________Accounts that appear on the left side of the accounting equation usually
have credit balances.
7. __________Expenses cause decreases in owner's equity and are recorded by credits.
8. __________A debit entry always decreases the balance of an account.
9. __________A cash acquisition of a laptop computer will cause total assets to increase.
10. __________For every transaction, there is at least one account affected.
Activity 3: Elements of Financial Statements

Using the accounting equation (A=L+E), complete the following table:
ASSETS LIABILITIES EQUITY
1 P457,000 P270,000
2 P1,006,000 P500,000
3 P 300,000 P 80,000
4 P730,000 345,000
5 P435,000 P224,250
6 P 74,000 P25,500
Activity 4: Elements of Financial Statements

Problem A
Assets Liabilities Owner’s Equity
a. 760,000 360,000 _________
b. 860,000 _________ 592,000
c. _________ 108,000 760,000
d. 626,600 376,240 _________
e. _________ 800,000 (100,000)
Required: Fill in the amount of the missing element of financial position
Problem B
a. A pest control company has assets of P600,000 and owner's equity of P400,000.
Answer:__________________________
b. A real estate agency has liabilities of P230,000 and owner's equity of P410,000.
Answer:__________________________
c. A plumbing contractor has assets of P473,000 and liabilities of P253,700.
Answer:__________________________
d. An aerobics company has liabilities of P147,000 and owner's equity of P236,500.
Answer:__________________________
e. A movie theater has assets of P324,000 and liabilities of P137,000.
Answer:__________________________
Required: Compute the amount of the missing element of financial position.
Problem C
a. At the beginning of the year, the assets of Lex Services were P360,000 and its owner's
equity was P200,000. During the year, assets increased by P120,000 and liabilities
increased by P30,000. What was the owner's equity at the end of the year?
Answer:__________________________
b. At the beginning of the year, Jay Calling Station had liabilities of P300,000 and owner's
equity of P120,000. If assets increased by P40,000 and liabilities decreased by P30,000,
what was the owner's equity at the end of the year?
Answer:__________________________
c. The liabilities of Hennie Company equal one-third of the total assets, and the owner's
equity is P240,000. What is the amount of the liabilities?
Answer:__________________________
Required: Use the accounting equation to answer each of the questions above.
Activity 6: Transaction Effects on the Basic Accounting Model
Problem A
The following are some transactions of Mary Services:
A = L + OE (I & E & W)
a. Received cash as additional investment + 0 +
b. Purchased supplies on account. __________ __________ __________
c. Charged customers for services made on
account. __________ __________ __________
d. Rendered services to cash customers. __________ __________ __________
e. Paid cash for rent on building. __________ __________ __________
f. Collected on account receivable in full. __________ __________ __________
g. Paid cash for supplies. __________ __________ __________
h. Returned supplies purchased on account. ___________ __________ __________
i. Paid cash to settle accounts. __________ __________ __________
j. Paid cash to owner for personal use. __________ __________ __________
Required: For each transaction, indicate whether the assets (A), liabilities (L) or owner's
equity (OE) increased (+), decreased (-) or did not change (0) by placing the appropriate sign
in the appropriate column.
Problem B: The following are some transactions of Labada Laundry Services:

Transaction A L OE
a. Bought equipment, paying cash
b. Paid the monthly rent expense
c. Purchased supplies on credit
d. Made an additional investment in the company
e. Charged customers for services provided on account.
f. Paid creditor on account
g. Received payment from customer on account
h. Received cash for services rendered today
i. Permanently reduced his investment in the business by taking out
cash
j. Paid salaries for the week
k. Acquired equipment, paying 50% down, the balance due in 30 days
Required:
For each transaction, indicate whether the assets (A), liabilities (L) or owner's equity (OE)
increased (+), decreased (-) or did not change (0) by placing the appropriate sign in the appropriate
column.

MODULE 2-Accounting Equation and Double Entry System

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MODULE 2-Accounting Equation and Double Entry System

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Isabela State University-CBAPA 1

FINANCIAL ACCOUNTING & REPORTING

Lesson 1 Elements of Financial Statements

ELEMENTS OF FINANCIAL STATEMENTS

In summary, the elements of financial statements are defined as follows:

Element Definition or Description

Asset A present economic resource controlled by the entity as a result of past

iv. Rights to benefit from an obligation of another party to transfer an economic

❖ An economic resource could produce economic benefits for an entity by entitling or

❖ An obligation is a duty or responsibility that an entity has no practical ability to avoid.

❖ Obligations to transfer an economic resource include, for example:

e) Obligations to issue a financial instrument if that financial instrument will oblige

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

Lesson 2 The Account

Lesson 3 The Accounting Equation

The basic accounting model is:

Assets = Liabilities + Owner's Equity

Effects of Transactions on the Accounting Equation

What Happens to the Accounting Equation?

Analyzing business transactions is simple. Use the following steps.

Lesson 4 Debits & Credits-The Double Entry System

DEBITS AND CREDITS—THE DOUBLE-ENTRY SYSTEM

▪ A debit side entry must have a corresponding credit side entry.

THE RULES OF DEBIT and CREDIT

The account type determines how increases or decreases in it are recorded.

The following summarizes the rules:

Income Statement Accounts

Increases recorded by Normal Balance

ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an enterprise's

TYPES AND EFFECTS OF TRANSACTIONS

It will be beneficial in the long-term to be able to understand a classification approach that

Lesson 5 Typical Account Titles Used

STATEMENT OF FINANCIAL POSITION (Balance Sheet)

Salaries or Wages Expense. Includes all payments as a result of an employer-employee

Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of

Rent Expense. Expense for space, equipment or other asset rentals.

Doubtful Accounts Expense. The amount of receivables estimated to be doubtful of

Interest Expense. An expense related to use of borrowed funds.

Activity 1: REVIEW QUESTIONS

1. Enumerate the elements of financial statements. Define each briefly.

Activity 2: TRUE OR FALSE

Activity 3: Elements of Financial Statements

Activity 4: Elements of Financial Statements

Activity 6: Transaction Effects on the Basic Accounting Model

Problem B: The following are some transactions of Labada Laundry Services:

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