Bookkeeping (1)

Accounting Equation

ASSETS = LIABILITIES + OWNER'S EQUITY

The accounting equation forms the foundation of accounting. It states that assets are financed by liabilities and owner's equity. The equation ensures the financial position of a company is balanced. The extended accounting equation also includes revenue and expenses.

Definitions of the Five Major Accounts

• Assets: Resources owned and controlled by a firm.
  • Examples: Cash, computer systems, patents.
• Liabilities: Obligations of the company that must be settled in the future.
  • Examples: Mortgages, loans, vehicles.
• Owner's Equity: The owner’s claims in the business.
  • Example: Capital.
• Revenue (Income): Earnings from the sale of goods or services.
  • Examples: Sale of building materials, accounting services.
• Expenses: Money spent to produce goods or services.
  • Examples: Rent expense, supplies expense, salaries expense.

Types of Assets

• Current Assets: Assets that can be used, sold, or collected within a year.
  • Examples: Cash, accounts receivable, inventories, prepaid expenses, short-term investments.
• Non-Current Assets: Assets that cannot be used, sold, or collected within a year.
  • Examples: Property, plant, and equipment; long-term investments.

Tangible vs. Intangible Assets

• Tangible Assets: Physical assets like cash, furniture, and fixtures.
• Intangible Assets: Non-physical assets like trademarks and patents.

Types of Liabilities

• Current Liabilities: Obligations due within one year.
  • Examples: Accounts payable, notes payable, accrued expenses, unearned income.
• Non-Current Liabilities: Obligations due after one year.
  • Examples: Loans payable, mortgage payable.

Owner's Equity

• Capital: The value of cash and other assets invested in the business.
• Drawing: Withdrawals made by the owner for personal use.

Income and Expense Accounts

• Income: Increases in resources from business operations.
  • Examples: Service revenue, sales, interest income.
• Expense: Decreases in resources due to business operations.
  • Examples: Salaries expense, interest expense, utilities expense.

Effects of Transactions on Financial Position

• Increase in Assets = Increase in Owner's Equity
  • Example: Deposit of Php 350,000 to bank account.
• Increase in Assets = Increase in Liabilities
  • Example: Acquiring computer equipment via a Php 40,000 note payable.
• Increase in One Asset = Decrease in Another Asset
  • Example: Payment of Php 10,000 for rent.
• Decrease in Assets = Decrease in Liabilities
  • Example: Partial payment of Php 15,000 for supplies.
• Decrease in Assets = Decrease in Owner's Equity
  • Example: Payment of Php 5,000 for utilities.
• Increase in Liabilities = Decrease in Owner's Equity
  • Example: Billed Php 25,000 for ads to be paid next month.

Normal Balance of Accounts

• Assets: Debit increases, Credit decreases.
• Liabilities: Credit increases, Debit decreases.
• Owner's Equity: Credit increases, Debit decreases.
• Owner's Capital and Withdrawals: Debit withdrawals, Credit capital.
• Income: Credit increases, Debit decreases.
• Expenses: Debit increases, Credit decreases.

Rules of Debits and Credits

The basis of the rules of debits and credits is how the effects of the transaction on the accounting elements are treated. The left side of an account is called the debit side, and the right side is called the credit side. Postings are made to T-Accounts to separate debit from credit.

T-Account Example

Account Title	Debit	Credit
Asset Account	+	-
Liability Account	-	+
Owner's Equity	-	+

Summary of Debit and Credit Rules

• Assets: Increases are debits, decreases are credits.
• Liabilities: Increases are credits, decreases are debits.
• Owner's Equity: Increases are credits, decreases are debits.
• Income: Increases are credits, decreases are debits.
• Expenses: Increases are debits, decreases are credits.