Accounting equation and information systems

• The chapter covers basic financial accounting and reporting, focusing on the accounting equation and the double-entry system.

Learning Objectives

• Describe the components of an information system.
• Explain how an accounting information system assists decision-makers.
• Define the elements found in financial statements.
• Describe the account with the simple T-Account and its uses.
• Explain the accounting equation and prove the validity of the "mirror image" concept.
• Describe the double-entry system.
• Explain how the double-entry system adheres to the rules of the accounting equation.
• Define debits and credits.
• Summarize debit and credit rules for balance sheet and income statement accounts.
• Describe typical account titles used in recording transactions.
• Analyze business transactions' effects on assets, liabilities, and owner's equity, recording these effects on the financial transaction worksheet and T-Accounts.
• Differentiate between revenue and receipts.

Companies Using EnGage 2.0

• Companies such as Microsoft and Deloitte & Touche use Vervex's EnGage 2.0 to manage large projects involving employees, subcontractors, and consultants worldwide.
• The software enables team members to report progress and generate invoices/timesheets accessible at corporate headquarters via the corporate intranet.
• Intranet is a version of the Internet internal and privately controlled within a specific company.

Vervex Technologies

• Vervex Technologies, founded in 1994 and owned by Price Givens, develops database and corporate intranet applications.
• It helps project managers track offsite workers' projects
• Vervex software products help ensure accurate and relevant data is available for timely accounting reports.

Parts of an Information System

• An information system comprises people, procedures, software, hardware, and data.
• These work together, providing essential information for running an organization.

People

• Competent end-users increase productivity and utilize hardware/software to address information-related or decision-making problems.

Procedures

• Procedures are manuals and guidelines instructing end-users on software and hardware use.

Software

• Software refers to programs that instruct computers on how to process data
• Two types of software: System Software and Application Software.

System Software

• System software is background software aiding a computer in managing internal resources, like the operating system (e.g., Windows, Linux).

Application Software

• Application software performs useful tasks on general-purpose problems, including basic (browsers, word processors, spreadsheets, database management, presentation graphics) and advanced applications (multimedia, web publishers, graphics programs, virtual reality, AI, project managers).

Hardware

• Hardware includes input devices, the system unit, secondary storage, output devices, and communication devices.

Input Devices

• Input devices translate human-understandable data into a computer-processable format.
• Common examples: keyboard, mouse, scanner, digital camera, microphone.

The System Unit

• Consists of electronic circuitry with the:
  • Central Processing Unit (CPU): Controls and manipulates data to produce information.
  • Memory (primary storage): Temporarily stores data, program instructions, and processed data.

Secondary Storage

• Stores data and programs long term.
• Common media: flash drive, hard disk, optical disk.

Output Devices

• Output devices present processed information from the CPU, examples are: monitor and printer.

Communications Devices

• Send and receive data and programs between computers with a modem (connects a microcomputer to a telephone).

Data

• Raw material for data processing.
• Data consists of numbers, letters, and symbols that relates to facts, events, and transactions
• Data typically stored electronically in a file is a collection of characters organized as a single unit.
• Common file types are: document, worksheet, and database.

Accounting Information System

• Every business needs an accounting information system to generate reliable and timely financial information for decision-makers.
• System design must consider users and decision types, depending on the firm's size, operations, data volume, structure, form, and regulations which affects information accumulation/reporting in financial statements.
• An accounting information system combines personnel, records, and procedures, specified in an accounting manual that details what events to record, classify, and accumulate.

Accounting Process Flow

• Economic activities feed into the accounting process, yielding accounting information that is used by decision-makers to take specific actions, which then result again in economic activities.

Effective Accounting Information System Objectives

• Process information efficiently at the least cost (cost-benefit principle).
• Protect entity assets, ensure reliable data, minimal waste/theft/fraud (control principle).
• Harmonize with entity's organization and human factors (compatibility principle).
• Accommodate transaction volume growth and organizational changes (flexibility principle).

Types of Accounting Information Systems

• Three record transaction results: Manual systems, computer-based transaction systems, and database systems.
• All designed to capture accounting events' information for financial statements preparation
• Manual systems, computer-based transaction systems use paper-based journals/ledgers, or computer records, respectively.
• Database systems embed accounting data with business event data.

Computer-Based Transaction Systems

• Manual systems are labor-intensive and error-prone
• Computerized systems overcome these deficiencies.
• A computer-based system maintains accounting data separately from operating data for expenditure, revenue, and conversion processes.
• The user fills in a computer screen resembling a source document.

Advantages of Computer-Based Transaction Systems

• Quick posting to accounts, bypassing journalizing.
• Detailed transaction listings available for review.
• Internal controls and edits prevent and detect errors.
• Wide report variety.
• Accounting packages contain modules (programs for specific parts of business accounting), simple packages (stand-alone module), and complex packages (suites), exemplified by QuickBooks and Peachtree.

Database Systems

• Relational database systems, such as enterprise resource planning (ERP), capture both financial and non-financial data and stores data in a warehouse.
• A database system reduces inefficiencies and redundancies compared to transaction-based systems
• Customer information (name, address, phone, credit limit) is often separately maintained from customer account information
• There are special information handling requirements between separate departments when a database system is not used.
• Database systems recognize business events (not just accounting events) with reduced operating inefficiencies, and eliminates redundant data.

Stages of Data Processing

• Raw data processes into useful accounting information and further summarized in reports following input-processing-output progression.
• Every entry is supported by source documents.

Source Documents

• Source documents like customer/vendor invoices, deposit slips, checks, time cards, and memos, evidence that a specific transaction occurred while providing details/support
• Computers use accounting software to process inputs for journalizing, posting, preparing a trial balance, and instantaneously updating accounts.
• Financial statements/reports can be viewed or printed on the screen, due to manual systems being inferior in speed, productivity, accessibility, quality, and size.

Elements of Financial Statements

• Defined in the March 2018 Conceptual Framework for Financial Reporting:
  • Assets, liabilities, and equity relate to a reporting entity's financial position.
  • Income and expenses relate to the entity's financial performance.

Elements Defined

• Asset: A present economic resource controlled by the entity as a result of past events.
• Liability: A present obligation of the entity to transfer an economic resource as a result of past events.
• Equity: The residual (assets - liabilities) interest in the assets of the entity after deducting all its liabilities.
• Income: Increases in assets, or decreases in liabilities that result in increases in equity, ifrom somethingother than those relating to contributions from equity claims.
• Expenses: Decreases in assets, or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity claims.

Financial Position

• 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 via forms including rights to: -Receive cash, goods, or services. -Exchange resources on favorable terms. -Benefit from another party's obligation.

Further Financial Position Details

• Rights that do not correspond to an obligation of another party.
• Rights to physical objects (property, plant and equipment, or inventories.
• Rights to use intellectual property.

Economic Resource

• The economic resource has the potential to offer benefits if it entitles an entity to receive contractual cash flows or to exchange resources on favorable terms.

Liability Defined

• Liability is a present obligation of the entity to transfer an economic resource as a result of past events; three criteria must be satisfied to exist. -The entity has an obligation to give an economic resource. -The responsibility is a duty that cannot be avoided. -Obligations are always owed to another party, the obligation can be to pay cash, deliver goods/services, exchange resources on unfavorable terms, issue a financial instrument, or transfers an economic resource if a specified uncertain future event occurs. -Obligation exists if the entity already obtained economic proceeds from an action

Equity Defined

• The Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.
• Equity may be in the form of a sole proprietorship, partnership or corporation

Financial Performance Explained

• 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, other than those relating to distributions to holders of equity claims.
• Income and expenses are the components of a financial statement

The Account Explained

• The basic summary device of accounting an account is maintained for the balance sheet and income statement.
• This account represents the increases, decreases and amounts that are shown in the statements
• The Simplest form is the T-Account

The Accounting Equation

• Financial statements show how the business is performing
• The accounting equation represents the resources controlled by the enterprise = their obligations + residual interest in the assets
• The Basic accounting Model is Assets = Liabilities = Owner's Equity
• Liabilities and Owner's Equity can also be represented as Assets - Liabilities = Owner's Equity
• The Left side of the equation must equal the right side of the equation and requires additions, or subtractions from both sides while maintaining the equality.

Debits and Credits

• A double entry system means a business transaction is recorded
• A debit side must have a credit side
• An account when debited is entered on the left side with (Dr.) while a credited account is entered on the right side with (Cr.)
• Increase in assets are recorded as Debit while decrease in assets are recorded as credit while liabilities and owner's equity recorded by creditors
• Income and expenses and expenses decrease in owner's equity and income which both increases in owner's equity.

Normal Balance of An Account

• The increase side if the account is an assets, withdrawal and expense, owner's equity and income.
• This account is used and occurs because increases in account are usually greater than decreases

Accounting Events and Transactions

• Accounting events and transactions creates changes in an enterprises' assets, liabilities or equity
• Events are internalized and can also be external
• Transactions include Acquiring assets, borrowing funds, and purchasing/selling goods
• Examples are to understand a classification approach

Types and Effects of Transactions

• Source of Assets (SA): The asset and corresponding claims increase
• Exchange of Assets (EA): The asset increases while the asset decreases
• Use of Assets (UA): An asset decreases while the corresponding claims decreases
• Exchange of Claims(EC): One claim and liabilities and owner's equity decrease, while the liabilities or the expenses increase.

Statement of Financial Position Explained

• Assets are classified as current and non-current

Current Assets

• Consists of cash (accepted bank deposits), cash equivalents(Convertible values and insignificant changes.), notes Receivable (Written payments of money), accounts receivable (sale of services or goods), Inventories (assets or sale in ordinary course of business), and prepaid expenses (avoiding future expense payments).

Non-Current Assets

• Includes property, plant and equipment (production , supply rentals), depreciation (periodic charges subtracted by asset cost), Assets (production supply rentals).

Liabilities Explained

• Classified when settlements are trading liabilities within a 12 month period
• Accounts Payable (Reverse relationship), Notes Payable (The buyer agrees to pay back), Accrued Liabilities (Unpaid expense), Unlearned revenues(Amounts received)
• Portions of long term debt of the mortgage notes.

Owner's Equity Explained

• Capital (Original investments), Withdrawals (Reduced amount of cash or assets), Income Summary (profit or loss shows the capital)
• Types of Incomes include Service and Sales

Income Statement Explained

• The cost of the goods or services can increase expense account - telecommunications, rent and insurance can deplete.
• Some accounts can have Uncollectible Items or interest.
• Events affect the financial position/financial position while business transactions affect financial position.

Financial Transactions Workflow

• Worksheets analyzes or expresses in terms of its affect on accounting.
• Economic services can be offered by Del Mundo in Graphics Design for advertising or maintenance of website.
• Initial Investment cash transaction is a P350,000 deposit.

Business Cash Equipment

• Business cash is an equipment worth P15,000
• Business can be paid in expenses for expenses.
• Owner's equity is decreased in the transactions if its been paid for.
• Accounts can be useful showing transactions.
• Illustration of rules will reflect increased and decreased affects.
• Cash and Owner's equity are a 350,00 Transaction with debiting Cash and Creditting Owner's equity.

Computer Equipment

• Computer equipment acquired is P50,000 with a note. An increased is liability when it will credit a computer.

Month-to-Month Expense

• Every Month there will be a expense in the business to pay. A 15,000 expense has to debit it to prepaid the credit of the asset.

Recurring Service Income

• Recurring service income will be a part of revenue in the long run for months. As a Liability it is decreased, debit is credited.
• The recurring income will deplete the cash. Cash account reduces credit while liabilities are debit.
• When to reduce an entity's asset
• Received Totaling checks can assist revenue.
• Accounts should debit cash and credit accounts that pay back.
• A personal event should credit and credit Owner's investment.
• All the liabilities should be payed by the company based on invoices.
• It needs to find the right accounts and increases decrease with the rules of double entries.
• Distinction needs to occur between revenue and receipt for a cash transaction that will be paid back after time.