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Chapter 3 Accounting Equation and The Double Entry System Part 1

The document discusses key accounting concepts including the accounting equation, elements of financial statements, the double-entry system, and T-accounts. It explains that the accounting equation represents that assets of a business equal its liabilities plus owner's equity. It also describes debits and credits as the fundamental booking mechanisms in double-entry accounting to ensure the accounting equation remains in balance. Finally, it outlines the key parts of an accounting information system for tracking financial activities and reporting.

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Maria Lourdez Bayan
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
239 views

Chapter 3 Accounting Equation and The Double Entry System Part 1

The document discusses key accounting concepts including the accounting equation, elements of financial statements, the double-entry system, and T-accounts. It explains that the accounting equation represents that assets of a business equal its liabilities plus owner's equity. It also describes debits and credits as the fundamental booking mechanisms in double-entry accounting to ensure the accounting equation remains in balance. Finally, it outlines the key parts of an accounting information system for tracking financial activities and reporting.

Uploaded by

Maria Lourdez Bayan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Topics discussed last meeting…

n  IASB
n  Necessity for IAS/IFRSs
n  Conceptual framework
n  Objective of general purpose financial statements
n  Users of accounting information
n  Qualitative characteristics of useful financial information
n  Elements of financial statements
n  Measuring the elements of financial statements
+

The Accounting Equation and the


Double-Entry System
Noel Sales
Learning Objectives:
n  Describe the parts of an information system
n  Explain how an accounting information system helps the
decision makers.
n  Define the elements of financial statements
n  Describe the account (the simple T-Account) and its uses.
n  Understand what is meant by the accounting equation
n  Understand what is meant by the double-entry system
n  Explain how the double-entry system follow the rules of the
accounting equation
n  Define debits and credits
Learning Objectives
n  Summarize the rules of debit and credit as applied to balance
sheet and income statement accounts.
n  Describe the nature of the typical account titles used in
recording transaction
n  Analyze and state the effects of business transactions on the
entity financial statement
n  Distinguish between revenue and receipts
Parts of an Information System
Information system
n  Collection of people, procedures, software, hardware and data
which works together to provide information essential to
running an organization.
Accounting Information System
n  Combination of personnel, records and procedures that a business
uses to meet its need for financial information.
n  Accounting manual: specifies the policies and procedures to be
followed in accumulating information within the accounting
information system.

Effective accounting information system:


n  Cost-benefit
n  Control
n  Compatibility
n  Flexibility
Accounting Information System
Accounting
Process

Economic Accounting
Activities Information

Decision
Makers
Types of Accounting Information System
Manual systems
n  Utilize paper-based journals and ledgers
n  Rely on human processing; prone to error

Computer-based transaction systems


n  Replace paper records with computer records
n  Maintains accounting data separately from other operating data

Database systems
n  Embed accounting data within the business event data on which they
are based.
n  ERP capture data (financial and non-financial) and store that
information into a data warehouse
Elements of Financial Statements
Financial Position
n  Asset – a resource controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to the
enterprise

Examples:
- Cash - Cash equivalents
- Notes receivables - Accounts receivables
- Inventories - Prepaid expense
- PPE - Investments
- Intangible assets - Other assets
Elements of Financial Statements
Financial Position
n  Liabilities – present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits

Settlement of a present obligation:


- Payment of cash - Transfer of other assets
- Provision of services - Replacement with another obligation

Examples:
- Notes payable - Accounts payable
- Accrued liabilities - Unearned revenues
- Mortgage payable - Bonds payable
- Other debts
Elements of Financial Statements
Financial Position
n  Equity – residual interest in the assets of the enterprise after
deducting all its liabilities

n  Sole proprietorship: only one equity account

n  Partnership: equity account exist for each partner

n  Corporation: Share capital, retained earnings and reserves (representing


appropriations of RE)
Elements of Financial Statements
Performance
n  Income – Increase in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases
of liabilities that result in increases in equity (other than those
relating to contributions from equity participants).

n  Gain – represent other items that meet the definition of income and
may, or may not, arise in the course of the ordinary activities of an
enterprise.
Elements of Financial Statements
Performance
n  Expense – Decreases in economic benefits during the accounting
period in the form of outflows or depletion of assets or incurrences of
liabilities that result in decreases in equity (other than those relating
to contributions from equity participants)
n  Losses – represent other items that meet the definition of expense
and may, or may not, arise in the course of the ordinary activities of
an enterprise
The Account
n  Basic summary device of accounting.

n  Detailed record of increases, decreases and balance of each element


in the financial statements.

n  Separate account is maintained for each element that appears in the


balance sheet and income statement.

n  Simplest form of the account is “T” account.


Accounting Equation
n  The most basic tool of accounting
n  Presents the resource controlled by the enterprise, the present
obligations of the enterprise and the residual interest in the
assets.

Assets = Liabilities + Owner’s Equity

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