THE-ACCOUNTING-EQUATION-AND-THE-DOUBLE-ENTRY-SYSTEM.pptx

THE ACCOUNTING EQUATION AND THE DOUBLE ENTRY SYSTEM BY: JAN MARK P. CAHILIG, CPA, MBA  LEARNING OBJECTIVES: After studying this chapter, you should be able to: 1. Describe the parts of an information system 2. Explain how an accounting information system helps the dec...

THE ACCOUNTING EQUATION AND THE DOUBLE ENTRY SYSTEM BY: JAN MARK P. CAHILIG, CPA, MBA  LEARNING OBJECTIVES: After studying this chapter, you should be able to: 1. Describe the parts of an information system 2. Explain how an accounting information system helps the decision maker. 3. Define the elements of financial statements. 4. Describe the account and its uses 5. Understand what is meant by the accounting equation and prove the validity of the mirror image concept 6. Understand what is meant by the double entry system 7. Explain how the double entry system follows rules of the accounting equation 8. Define debits and credits 9. Summarize the rules of debit and credit as applied to balance sheet and income statement accounts 10. Describe the nature of the typical account titles used in recording transactions 11. Analyze and state the effects of business transactions on an entity’s assets, liabilities and owner’s equity and record these effects in accounting equation form using the financial transaction worksheet and the T-accounts 12. Distinguish between revenue and receipts  INFORMATION SYSTEM Is a collection of people, procedures, software, hardware and data which works together to provide information essential to running an organization.  PARTS OF AN INFORMATION SYSTEM PEOPLE PROCEDURES SOFTWARE HARDWARE DATA  PEOPLE competent end users working to increase their productivity uses the hardware or the software to solve information related or decision making problems  PROCEDURES are manual or guidelines that instruct end users on how to use the software or hardware Example: Accounting manuals and Work guidelines  SOFTWARE another name for Programs - instructions that tell the computer how to process data. System software - backgroud software that helps a computer manage its internal resources. Example is the Operating software. Windows and Linux are popular operating systems. Application software - performs useful work on general purpose problems  APPLICATION SOFTWARE Basic - browsers, word processor, spreadsheets,database management system Advanced -multimedia -video, music, voice, web publishers,graphics programs, virtual reality, artificial intelligence, project managers  HARDWARE consists of input devices, the system unit, secondary storage, output devices, and communication devices  INPUT DEVICES translate data and programs that humans can understand into a form the computer can process. Example: keyboard, mouse, scanner, digital camera, microphone  SYSTEM UNIT consists of electronic circuitry with two parts: Central processing unit - controls and manipulates data to produce information Memory (primary storage) - temporarily holds data, program instructions, and processed data  SECONDARY STORAGE stores data and programs Example: flashdrive,hard disk, optical disk  OUTPUT DEVICES process information from the CPU. Example: monitor, printer  COMMUNICATION DEVICES these send and receive data and programs from one computer to another Example: modem  DATA aw material for data processing numbers, letters, symbols relates to facts, events and transactions. Data describes something and is typically stored electronically in a file. A file is a collection of characters organized as a single unit. Example of file: document, worksheet, database  ACCOUNTING INFORMATION SYSTEM is the combination of personnel, records, and procedures that a business uses to meet its need for financial information. TYPES OF ACCOUNTING INFORMATION SYSTEM Manual systems -paper based journals Computer Based Transaction Systems-computer based journals Database systems- uses Enterprise Resource planning - SAP, Oracle, MYOB, Quickbooks, Xero  STAGES OF DATA PROCESSING processing of raw data into useful accounting information then finally into summarized reports follows the usual input processing output progression. each transaction entered into the accounting system should be supported by source documents like customer invoices, vendor invoices, deposit slips, checks, timecards and memos. these documents serve as evidence that a particular transaction occurred, they also provide the necessary details and support.  FINANCIAL STATEMENTS Complete Set of Financial Statements BALANCE SHEET Income Statement Statement of Cash Flows Statement of Changes in Equity Notes to Financial Statements  Balance Sheet Known as statement of financial position 3 elements in the Balance sheet a. Assets b. Liabilities c. Equity  ASSETS Assets –resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise EXAMPLES: A. Inventory B. Investment C. Cash D. Equipment E. Account receivable F. Prepaid expenses G. Furniture H. Intangible assets (trademark, patents, copyrights) I. Building J. Machineries K. Land L. Notes Receivable M. Marketable Securities N. Accrued Income  Liabilities Are present obligations of the entity to outside parties 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 present obligation may occur in a number of ways, for example, by: a. Payment of cash b. Transfer of other assets c. Provision of services d. Replacement of that obligation with another obligation –Accounts payable to Notes Payable (promissory note) e. Conversion of the obligation to equity  Liabilities Examples: a. Accounts payable –relation to trade, merchandise purchase on account b. Income tax payable - c. Bank overdraft- d. Warranties payable or estimated liabilities e. Loan payable f. Bank debts g. Payroll tax payable/withholding tax payable h. Salaries payable/Wages payable i. Mortgage payable j. Unearned income/deferred revenues- income already received but not yet earned k. Interest payable l. Customer deposits m. Accrued liabilities/Accrued expense /bills payable –expenses already incurred but not yet paid n. Bonds payable  Equity Residual definition What is left after deducting the liabilities from assets Sole proprietorship – owner’s equity Beginning Capital balance Add: Additional investment Add: Net income Less: Withdrawals Less: Net loss = Ending Capital balance Partnership – partner’s equity Corporation – stockholder’s equity  Statement of Financial Performance or Income Statement Elements of income statement = Income, Expenses, Net income Income = encompasses revenue and gains Income > Expenses = Net income Net income < Expenses = Net loss Net income = Expenses --- Breakeven  INCOME Income Encompasses revenues and gains Revenues = arises in the course of the ordinary activities of an enterprise – sales, fees, interest, dividends, royalties, rent.  Expenses Are decreases in economic benefits during accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity. Includes losses Classification – Cost of goods sold, selling expenses, administrative expenses.  Cost of Goods Sold Major part of your expenses Merchandising business: Merchandise inventory beginning Add: Net Purchases = Cost of Goods Available for Sales Less: Merchandise Inventory ending = Cost of goods sold  Selling Expenses Sales commission Marketing expenses Advertising expense Delivery expense/freight out Distribution cost Sales salaries expense Depreciation expense –delivery equipment Store supplies expense  Administrative expense Utilities expenses (electricity, water, gas) Consulting expenses Rent expense Insurance expense Office salaries and wages Office supplies Bonuses, 13th month Taxes and licenses expenses Subscriptions expense Losses (fire loss, storms, earthquake)  DOUBLE ENTRY SYSTEM Accounting is based on a double entry system which means that the dual effects of a business transaction is recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must be one or more accounts debited and one or more accounts credited. Each transaction affects at least two accounts. The total debits for a transaction must always equal to the total credits.  DOUBLE ENTRY SYSTEM 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. The abbreviations for debit and credit are Dr. and Cr. Dr = debere (Latin) Cr = credere (Latin) Rules of Debit and Credit – Balance Sheet Accounts 1. Increase in Assets – Debit 2. Decrease in Assets – Credit 3. Increase in Liabilities – Credit 4. Decrease in Liabilities – Debit 5. Increase in Owner’s Equity – Credit 6. Decrease in Owner’s Equity - Debit  Rules of Debit and Credit – Income Statement Accounts 1. Increase in Expenses – Debit 2. Decrease in Expenses – Credit 3. Increase in Income – Credit 4. Decrease in Income - Debit  NORMAL BALANCE OF AN ACCOUNT Refers to the side of an account –debit or credit- where increases are recorded. Assets, owner’s withdrawal, expense accounts – normal balance is –DEBIT balance. Liabilities, owner’s equity and income accounts normally is – CREDIT balance