THE ACCOUNTING EQUATION (Module 5, Camerino, D.) b.

Giving up of resources (or Outflow of economic

The most basic tool of accounting is the benefits)- This means that settling an obligation
accounting equation. This equation presents the necessarily would require you to pay cash, to
resources controlled by the enterprise (assets), the transfer other non-cash assets, or to render a
present obligation of the enterprise (liability), and the service.
residual interest in the assets (equity). It states that asset
must ALWAYS equal liabilities and owner’s equity. The Equity
basic accounting model is: Equity has a residual definition. It is simply assets
minus liabilities. Other terms for equity are capital, net
Assets = Liabilities + Equity assets, and net worth. This account is used to record the
original and additional investments of the owner of the
ELEMENTS OF FINANCIAL STATEMENTS entity. It is increased by the income earned during the
The major elements of financial statements include: year. On the other hand, Equity is decreased by
 Assets withdrawals of the business owner. It is also reduced by
 Liabilities expenses incurred during the year.
 Equity
 Income THE EXPANDED ACCOUNTING EQUATION
 Expense
Assets = Liabilities + Equity + Income – Expense
Assets
Assets are the resources that the entity control Notice that income is added while expenses are
that have resulted from past events and can provide you deducted in the equation. These are because income
with future economic benefits. increases equity while expenses decrease equity.
Essential elements in the definition of asset:
a. Control- the entity must have the exclusive right Income
to enjoy those benefits or it can prevent others Income are increases in economic benefits
from enjoying those benefits. during the period in the form of inflows or enhancements
b. Past events- the control over a resource have of assets or decreases of liabilities that result in increases
resulted from past event or transaction. in equity, other than those relating to investments by the
Therefore, resources for which control is yet to business owners.
be obtained in the future do not qualify as asset
in the present. Expenses
c. Future economic benefit- “Future” means that Expenses are decreases in economic benefits
resource is expected to provide economic during the period in the form of outflows or depletions
benefits over more than one accounting period. of assets or increases of liabilities that result in decreases
“Economic benefits” means the potential of the in equity, other than those relating to distributions to the
resource to provide the entity, directly or business owners.
indirectly, with cash.
The difference between income and expense
Liability represents profit or loss.
Liabilities are the entity’s present obligations  If Income > Expenses, the difference is profit.
that have resulted from past events and can require the  If Income < Expenses, the difference is loss.
company to give up resources when settling them.
Essential elements in the definition of liability:
a. Present obligation- This means that the entity, at
present, has a responsibility to pay someone
because of an obligating event that has already
transpired. An obligating event is an event that
creates either legal or constructive obligation.
THE FIVE MAJOR ACCOUNTS (Module 9, Camerino, D.) oMachineries and other factory
equipment
Statement of Financial Statement of Profit or o Transportation equipment
Position (Balance Sheet) Loss (Income Statement) o Office equipment
Accounts Accounts o Computer equipment
Assets Income o Furniture and fixtures
Liabilities Expenses  Accumulated depreciation- the total amount of
Equity depreciation expenses recognized since the
asset was acquired and made available for use.
COMMON ACCOUNT TITLES
LIABILITIES
Balance Sheet Accounts 1. Current Liabilities- liabilities that fall due (paid,
recognized as revenue) within one year after
ASSETS year-end date.
1. Current Assets- are assets that can be realized Examples:
(collected, sold, used up) one year after year-end date.  Accounts payable- obligations supported by
Examples: oral or informal promises to pay the debtor.
 Cash- includes money or its equivalent that is  Interest payable- interest incurred but not
readily available for unrestricted use, e.g., cash yet paid. Interest payable arises from
on hand, cash in bank interest-bearing liabilities.
 Accounts receivable- receivables supported by  Salaries payable-salaries already earned by
oral or informal promises to pay. employees but not yet paid by the business.
 Allowance for bad debts- the aggregate of  Utilities payable- utilities (e.g., electricity,
estimated losses from uncollectible accounts water, telephone, internet, etc.) already
receivable. Another term is “Allowance for used but not yet paid.
doubtful accounts”.  Unearned income- items related to income
 Notes receivable- receivables supported by that were collected in advance before they
written or formal promises to pay in the form of earned. After the earning process is
promissory notes completed, these items are transferred to
 Inventory- represents the goods that are held for income.
sale by a business. For a manufacturing business, 2. Non-current Liabilities- are liabilities that do not
inventory also includes good undergoing the fall due (paid, recognized as revenue) within one
process of production and raw materials that will year after year-end date.
be consumed in the production process. Examples:
 Prepaid supplies- represents the cost of unused  Notes payable- obligations supported by
office and other supplies. written or formal promises to pay by the
 Prepaid rent- rent paid in advance debtor in the form of promissory notes.
 Prepaid insurance- cost of insurance paid in  Loans payable
advance  Mortgage payable
2. Non-current Assets- are assets that cannot be realized
(collected, sold, used up) one year after year-end date.
Examples:
 Land-the lot on which the building of the
business has been constructed or a vacant lot
which is to be used as future plant site. Land is
not depreciable.
 Building- the structure owned by a business for
use in its operation.
 Equipment- consists of various assets such as:
EQUITY  Supplies expense- represents the cost of supplies
that have been used during the period.
 Owner’s capital/equity- the residual amount
after deducting liabilities from asset. The THE ACCOUNT
owner’s capital account is: An account is the basic storage of information in
accounting. It is a record of the increases and decreases
Increased by: Decreased by: in a specific item of asset, liability, equity, income, or
Investments or Withdrawals or expense. The simplest form of the account is known as
contributions by the distributions to the the “T” account because of its similarity to the letter “T”.
owners owners
Income or Profit Expenses or Loss Account Title
earned by the incurred by the
business business.
Left side or Right side or
 Owner’s drawings- this account is used to record
Debit side Credit side
the temporary withdrawals of the owner during
the period.

INCOME STATEMENT ACCOUNTS

INCOME

 Service fees- revenues earned from rendering

services (e.g., services of a spa, services of a
beauty salon, etc.)
 Sales- revenues earned from the sale of goods
(e.g., sale of clothes, sale of canned goods)
 Interest income- revenues earned from the
issuance of interest-bearing receivables
 Gains- income earned from the sale of assets
(except inventory) or from enhancements of
assets or decreases in liabilities that are not
classified as revenues.

EXPENSES

 Cost of Sales (Cost of Goods Sold)- represents the

value of inventories that have been sold during
the accounting period.
 Freight-out- represents the seller’s costs of
delivering goods to customers.
 Salaries expense- represents the salaries earned
by employees for the services they have
rendered during the accounting period.
 Rent expense- represents the rentals that have
been used up during the accounting period.
 Utilities expense- represents the cost of utilities
that have been used during the accounting
period.
CHART OF ACCOUNTS

A chart of accounts is list of all the accounts used by the company.

Example:

___________________________CHART OF ACCOUNTS_______________________________

Account No. Account No.

ASSETS INCOME
110 Cash 410 Service Fees
120 Accounts Receivable 420 Sales
125 Allowance for bad debts 430 Interest Income
130 Notes Receivable 440 Gains
140 Inventory
150 Prepaid Insurance EXPENSES
160 Land 510 Cost of sales
170 Building 520 Freight-out
175 Accumulated Depreciation- Building 530 Salaries expense
180 Equipment 540 Rent Expense
185 Accumulated Depreciation- Equipment 550 Depreciation Expense
560 Insurance Expense
LIABILITIES 570 Interest Expenses
210 Accounts Payable
220 Notes Payable
230 Salaries Payable
240 Interest Payable

EQUITY
310 Owner’s capital
320 Owner’s drawings

Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and retrieval of
information. Although there is no standard way of assigning account numbers, they should be assigned in a manner that
the accounts are categorized logically.
The account titles in the chart of accounts shown above are numbered in the following manner:
1. The first digit in the3-digit numbering refers to the major types of accounts.
 Assets 1
 Liabilities 2
 Equity 3
 Income 4
 Expenses 5
2. The second digit in the 3-digit numbering refers to the account titles in the sequence on how they are listed in the
chart of accounts.
3. The third digit in the 3-digit numbering, if not zero, signifies that the account is a contra account or an adjunct
account to a related account.
Illustration 1:

July 1 Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during the
month of July. He invested PHP800,000 cash and Cars amounting to PHP200,000
July 2 Reyes borrowed PHP100,000 cash from PNB for use in his business.
July 7 Bought tables and chairs from Orocan and paid PHP45,000 cash
July 15 Various equipment were purchased on account from Fortune for PHP55,000
July 18 Reyes made a cash withdrawal of PHP5,000 for personal use
July 20 The account due to Fortune was paid in cash.
July 21 A customer hired the services of Reyes. Cash of PHP15,000 was received from the customers.
July 22 Cash was paid for the following: gas and oil, PHP500 and car repairs, PHP1,000.
July 24 Another customer hired the services of Reyes and promised to pay PHP16,000 on July 31.
July 25 Paid PHP500 for telephone bill.
July 27 Another customer hired the services of Reyes. A bill was issued to them for PHP20,000, 50% of which
was collected.
July 30 The customer on July 24 paid 50% of his account in cash.
July 31 Paid PHP10,000 for rental of office space, and salaries of PHP9,000.

Date Description Assets Liabilities Equity

Assets invested by the owner

Borrowings from the bank

Asset purchased for cash

Assets purchased on account

Cash withdrawal by the owner

Payment of liability

Received cash for revenue

earned

Paid cash for expenses incurred

Revenue rendered on account

 Paid for expenses incurred

Revenue earned with a down

payment, balance on account.

Customer’s account collected in

cash

Paid cash for expenses incurred

TOTAL ASSETS=LIABILITIES + EQUITY

Illustration 2:

Ludivina Victorino, a veteran photographer, opened a studio for her professional practice on July 1. Transactions
completed during the month follow:

a. Deposited P146,200 in a bank account in the name of the business, Victorino Photo Profiles.
b. Bought new photography equipment on account from Canon Equipment, P71,210.
c. Invested personal photography equipment into the business, P51.620.
d. Paid office rent for the month, P5,500.
e. Bought photography supplies for cash, P7,960.
f. Paid premium for insurance cover on photography equipment, P1,240.
g. Received P8,960 as professional fees for service rendered.
h. Paid salary of part-time assistant, P6,000.
i. Received and paid bill for telephone service, P640
j. Paid Canon Equipment part of the amount owed on the purchase of photography equipment, P4,200.
k. Received P15,480 as professional fees for services rendered.
l. Paid for minor repairs to photography equipment, P760
m. Victorino withdrew cash for personal use, P9,600.

Required:
1. Record the transactions for the month of July.
2. Compute for the profit/loss.
 Equity
Transaction Assets Liabilities
Investments Withdrawals Revenue Expenses

Total
BOOK OF ACCOUNTS (Module 8, Camerino, D.)

THE TWO MAJOR BOOK OF ACCOUNTS o Purchase journal- is used to track all
In monitoring and tracking the daily transactions purchases that are made ON ACCOUNT
in a business, the two major books of accounts are from suppliers.
required by law, specifically by the Bureau of Internal o Payroll journal- is used tot rack expenses
Revenue (BIR). These books are: related to staffing costs.
 Journal; and  General Journal- All other transactions that
 Ledger cannot be recorded in the special journals are
recorded in the general journal. Example of
Journal which is recording of a depreciation of an asset.
The journal, also called the book of original
entries, is where business transactions are first recorded. Ledger
Different transactions are recorded in the journal The ledger is the systematic compilation of a
through journal entries. This recording process is called group of accounts. It is used to classify the effects of
journalizing. business transactions on the accounts. The ledger is also
Types of Journals: called as book of secondary entries or the book of final
 Special Journal- is used to record transactions of entries because it is used only after business transactions
a similar nature. Special journals simplify the are first recorded in the journals. The process of
recording process, thus providing an efficient recording in the ledger is called posting.
way of recording and retrieving of information.
Common example of Special Journals: Kinds of Ledgers:
o Sales journal- is used to record sales ON  General ledger- contains all the accounts
ACCOUNT. appearing in the trial balance
o Cash receipts journal- is used to record  Subsidiary ledger- provides a breakdown of the
all transactions involving receipts of balances of controlling accounts.
cash. This involves sales made in cash *A controlling account is one which consists of a
and any collection of receivables that group of accounts with similar nature. The
has been paid in cash. balance of the controlling account is shown in
o Cash disbursements journal- is used to the general ledger while the balances of the
record all transactions involving group of accounts that comprise the controlling
payments of cash. account are shown in the subsidiary ledger.
Formats of the Book of Accounts

General Journal

GENERAL JOURNAL

Date Account Titles Ref. No. Debit Credit

08/03/2018 Depreciation Expense ₱ 10,000.00

Accumulated Depreciation- Building ₱ 10,000.00
to record depreciation expense for the
building.

08/07/2018 Bad debt expense ₱ 3,000.00

Allowance for Bat debts ₱ 3,000.00
to record the bad debts expense for the
period.

 Date column- indicates the recording dates of the transactions. Transactions are recorded in the journal
chronologically, meaning arranged by dates.
 Account titles column- The accounts affected by a business transaction are recorded in this column.
 Reference No. column- This column is left blank when the journal entry is made. It is used later when the
journal entries are transferred to the ledger accounts.
 Debit and Credit Columns- the monetary effects of the transaction to the accounts are recorded here.

Special Journal

SALES JOURNAL
Invoice Sales Accounts
Date Customer Sales- Credit
number Receivable- Debit

08/04/2018 SI-001 Customer 3 ₱6,000.00 ₱6,000.00

08/04/2018 SI-002 Customer 6 ₱320.00 ₱320.00

08/05/2018 SI-003 Customer 7 ₱240.00 ₱240.00

08/06/2018 SI-004 Customer 8 ₱200.00 ₱200.00

CASH RECEIPTS JOURNAL

Debit Credit Credit Credit
Ref.
Date Description (Particulars) Accounts
No.
Cash Sales Receivable Sundry
General and Subsidiary Ledger

GENERAL LEDGER

ACCOUNTS RECEIVABLE 120

Reference
Date Debit Credit Balance
No.
Balance Forwarded ₱ 40,000.00

08/06/2018 ₱ 6,720.00 ₱ 46,720.00

CUSTOMER 3
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/04/2018 SI-001 ₱6,000.00 ₱6,000.00

CUSTOMER 6
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/04/2018 SI-002 ₱320.00 ₱320.00

CUSTOMER 7
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/05/2018 SI-003 ₱240.00 ₱240.00

CUSTOMER 8
Invoice
Date Debit Credit Balance
Number
Balance Forwarded ₱-
08/06/2018 SI-004 ₱200.00 ₱200.00