Saint Ferdinand College

College of Information Technology

IT Electives: Basic Accounting

 The accounting process of identifying, measuring and communicating ids effected through an entity’s
accounting information system

Accounting Information System – is the system of collecting and processing transaction data and disseminating
financial information to interested parties. Accounting information system is a subsystem of Management Information
System.

Management Information System – is a set of data gathering, analyzing and reporting functions designed to provide
management with the information it needs to carry out its functions.

Parts of an Information System

1. People – are competent end users working to increase their productivity. End users use hardware and software
to solve information related or decision-making problems.
2. Procedures – are manuals and guidelines that instruct the end users on how to use the software and hardware.
3. Software – is another name for programs – instructions that tell the computer how to process data. There are
basically two types of software
a. System software – is background software that helps a computer manage its internal resources. An
example is the operating system.
b. Application software – performs useful work on general purpose problems. The two types of application
software are basic applications and advance applications.
4. Hardware – consist of input devices, the system unit, secondary storage, output devices and communication
devices.
5. Input devices – translate data and programs that human can understand into a form the computer can process.
6. The system unit – consist of electronic circuitry with 2 parts: 1. Central processing unit and 2. Memory
7. Secondary storage – stores data and programs.
8. Output devices – output processed information from the CPU.
9. Communication devices – these send and receive data and programs from one computer to another. A device
that connects a microcomputer to a telephone is a modem.
10. Data – are the raw materials for data processing. Data consist of numbers, letters and symbols and relates to
facts, events and transactions. Data describes something and is typically stored electronically in a file. A file is
a collection of character organized as a single unit. Common types of files are: document, worksheet and
database.

Types of Accounting Information System

A. Manual System – utilize paper-based journals and ledgers.
B. Computer-Based Transaction System – maintains accounting data separately from other operating data. That
is, the accounting records are kept separately from the records required for the expenditure, revenue and
conversion processes.
C. Database System – captures data, both financial and non-financial, and stores that information in a data
warehouse. It reduces inefficiencies and redundancies that often exist in transaction-based systems.

Stages of Data Processing

Input – Process – Output

Account – is the basic summary device of accounting.

T-Account – simplest form of the account. It has three parts.

1. Account Title
2. Debit 3. Credit
Basic Elements of Accounting
A. Financial position
1. Assets – 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.
2. Liabilities – a present obligation of the entity to transfer an economic resource as a result of past events.
3. Owner’s Equity or Capital – residual interest or claims held by the owner against the assets after the total
liabilities are deducted.
B. Results of Operations
1. Income – increase in asset or decrease in liabilities, that result in increase in owner’s equity other than
relating to the distributions from holder of equity claims.
2. Expenses – decrease in asset or increase in liabilities that result to a decrease in an equity other than those
relating to the distribution to holders of equity claims.
3. Net income – the amount by which total revenues exceeds total expenses.
4. Net Loss – amount by which total expenses exceeds total revenues.

The accounting Equation

 Assets must always equal liabilities and owner’s equity
 ASSETS = LIABILITIES + OWNER’S EQUITY

Debits and Credits

 Double Entry Bookkeeping – means that the dual effects of business transactions must be recorded. A debit
side entry must have a corresponding credit side. Each transaction affects at least two accounts. The total
debits must equal the total credits.
 An account is debited when the amount is entered on the left side of the account and credited when the
amount is entered on the right side.

Rules on Debit and Credit

BALANCE SHEET ACCOUNT

ASSETS LIABILITIES AND OWNER’S
EQUITY

Debit side Credit side Debit side Credit side

+ (-) (-) +
Increase Decrease Decrease Increase

Normal Balance Normal Balance

INCOME STATEMENT ACCOUNT

DEBIT FOR DECREASE IN EQUITY CREDIT FOR INCREASE IN EQUITY

EXPENSES AND WITHDRAWAL REVENUES

Debit side Credit side Debit side Credit side

+ (-) (-) +
Increase Decrease Decrease Increase

Normal Balance Normal Balance

 Increases Recorded By Normal Balance
Account Category Debit Credit Debit Credit
Asset  
Liability  
Owner’s Equity
Owner’s Capital  
Withdrawals  
Income  
Expenses  

Accounting Events and Transactions

Accounting Event – is an economic occurrence that causes changes in an enterprise’s assets, liabilities, and/or equity.
It may be an internal action, 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.

Transaction – is a particular kind of event that involves the transfer of something of value between two entities,
creditors, and purchasing or selling goods and services.

Types and Effects of transactions

1. Source of assets – an asset account increases and a corresponding claims (liability or owner’s equity) account
increases.
2. Exchange of asset – one asset account increases and another asset account decreases
3. Use of asset – an asset account decreases and a corresponding claim (liability or owner’s equity) account
decrease.
4. Exchange of claims – one claim (liability or owner’s equity) account increases and another claim (liability or
owner’s equity) decreases.

TYPICAL ACCOUNT TITLES USED

BALANCE SHEET
I. Assets
A. Current Assets
1. Cash – currency, checks, bank deposits, etc.
2. Cash equivalents – short term highly liquid investment acquired three months before maturity.
3. Notes receivable – are claims supported by a formal promise to pay usually in the form of notes.
4. Accounts Receivable – are open accounts arising from the sale of goods and services in the ordinary
course of business and not supported by promissory notes.
5. Inventory – held for sale or in the process of production for such sale or to be consumed for the
production of goods or services.
6. Prepaid expenses – expenses paid in advance such as insurance or rent.
B. Noncurrent assets
1. Property Plant and Equipment – these are tangible assets that are held by the enterprise for use in the
production 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.
2. Accumulated Depreciation – it is a contra account that 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.
3. Intangibles – these are identifiable, nonmonetary assets without physical substance held for use in the
production of goods/services, for rental to others or for administrative purposes.

II. Liabilities
A. Current Liabilities
1. Accounts Payable – this account represents the reverse relationship of the accounts receivable.
2. Notes Payable – it is like a notes receivable but in a reverse sense. The business entity promises to
pay a specified amount of money at a specific future date.
3. Accrued liabilities – amount owed to others for unpaid expenses.
4. Unearned revenues – when the business entity receives payment before providing the customer
goods or services.
 5. 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.
B. Noncurrent Liabilities
1. Mortgage Payable – this account records for long term debt of the business for which the entity
has pledged certain assets as security to the creditor. In the event that the debt payment are not
made, the creditor can foreclose or cause the mortgaged asset to be sold to enable the entity to
settle the claim.
2. Bonds Payable – business organizations often obtain substantial sum of money from lenders to
finance the acquisition of equipment and other needed assets. It is the amount owed to bond
holders by the issuer.
III. Owner’s Equity
1. Capital – it is used to record the original and additional investments of the owner of the business
entity. It is increase by a share in net profit and decreased by a share in net losses. Cash or other assets
withdrawn by the owner also decreases the capital.
2. Withdrawals – when the owner of the business withdraws cash or other assets, such are recorded in
the withdrawal account rather than directly reducing the owner’s capital account,
3. 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
I. Income
1. Service Income – revenues earned by performing services for a customer or client.
2. Sales – revenues earned for the sale of goods or merchandise.
II. Expense
1. Cost of sales – the cost incurred to purchase or to produce the products sold to a customer during the
period. Also called the cost of goods sold.
2. Salaries or wages expense – includes all payments as a result of an employer-employee relationship.
3. Utilities expense – expenses related to the use of telecommunication, electricity and water.
4. Rent expense – expense for space, equipment or other asset rental.
5. Supplies expense – expense of using supplies to conduct daily business.
6. Insurance expense – portions of premiums paid on insurance coverage.
7. Depreciation expense – the portion of the cost of a tangible asset allocated or charge as expense
during an accounting period.
8. Uncollectible account expense – the amount of receivables estimated to be doubtful of collection.
9. Interest expense – an expense related to a borrowed fund.

Financial Transaction Worksheet

 It is a form used to analyze increases and decreases in the assets, liabilities or owner’s equity of a business
entity.