ACCOUNTING EQUATION AND DOUBLE

ENTRY SYSTEM
ACCOUNTING EQUATION

 It is considered as the most basic tool of

accounting.
Assets= Liabilities + Owner’s Equity

*The increase and decrease in assets are recorded in the

opposite manner (mirror image) as liabilities and
owner's equity are recorded.
 Owner’s
assets liability
equity
EXAMPLE:

 Mr. Medina has liabilities of P147,000

and owner’s equity of P236,500. How
much is his assets?
SOLUTION
 Given: L= P147,000
O.E= P236,500
A=?
Formula: Assets=Liabilities+Owner’s Equity
A= 147,000+236,500
A= 383,500
Substitute now the value of asset to verify if the
equation is balance:
A=L+OE
383,500=147,000+236,500
383,500=383,500
DOUBLE- ENTRY SYSTEM
 Accounting is based on a double-entry system
which means that the dual effects of a business
transaction is recorded.
 Each transaction affects at least two accounts.
 For every debit side entry must have a
corresponding credit side entry and therefore
must be equal to each other.
 An account is debited when an amount is entered
on the left side of the account and credited when
an amount is entered on the right side.

Debit (Dr.) Credit (Cr.)

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

ASSETS LIABILITIES AND

OWNER’S EQUITY

Debit Credit Debit Credit

(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Normal
Balance Balance
INCOME STATEMENT ACCOUNTS

Debit for decreases in owner’s Credit for increases in owner’s

equity equity
Expenses Income

Debit Credit Debit Credit

(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Normal
Balance Balance
NORMAL BALANCE OF AN ACCOUNT
 It refers to the side of the account (debit or credit)
where increases are recorded.

Debit balance - Asset, owner's withdrawal and

Expenses accounts
Credit balance – Liability, owner's equity and
Income accounts