ACCOUNTING PRINCIPLES

Analyzing and Summarizing Business Transactions

Normal Balance of Statement of Financial Position Accounts (Balance Sheet)

• Debit = Credit

  • Assets

  • Debit means the value received.

    • Assets are initially recorded on the debit side of the equation.

    • To debit an asset is to increase an asset.

    • To credit an asset is to decrease an asset.

  • Credit means the value parted with.

  • Liabilities and capital accounts are initially recorded on the credit side.

  • To credit a liability and capital account is to increase them.

  • To debit liability and capital accounts is to decrease them.

Normal Balance of Statement of Comprehensive Income (Income Statement)

• Debit = Credit

  • Expenses

  • Expenses are initially recorded on the debit side.

  • To debit an expense means to increase an expense.

  • To credit an expense means to decrease it.

  • Revenue

  • Revenues are initially recorded on the credit side.

  • To credit revenue means to increase an income.

  • To debit revenue means to decrease it.

The Rules of Debit and Credit

Asset Account

• Debit = Credit

  • Increases :

  • Debit to increase the amount of asset.

  • Decreases :

  • Credit to decrease its amount.

Liability Account

• Debit = Credit

  • Increases :

  • Credit to increase the amount of liability.

  • Decreases :

  • Debit to decrease its amount.

Owner’s Equity Account

• Debit = Credit

  • Decreases :

  • Debit to decrease the amount of equity.

  • Increases :

  • Credit to increase the amount of equity.

Revenue Account

• Debit = Credit

  • Decreases :

  • Debit to decrease the amount of revenue.

  • Increases :

  • Credit to increase the amount of revenue.

Expense Account

• Debit = Credit

  • Increases :

  • Debit to increase expense account.

  • Decreases :

  • Credit to decrease its amount.

Illustrative Examples

Example 1: Supplies Transaction

• Assumption: January 5, Manila Services bought worth of supplies on account 3,000.

  • Manila used worth of supplies during the month.

• Unused Supplies

  • Debit Entries

    • 1/5: 3,000

  • Credit Entries

    • 1/3: 2,500

    • 1/30: 500

• Result:

  • Increase: Unused Supplies

  • Decrease: Remaining Balance of unused supplies

Example 2: Liability Transactions - Accounts Payable

• Assumption: January 5, bought supplies worth of 3,000 on account

• January 18: Paid 1,800 for said obligation.

• Accounts Payable

  • Debit Entries

  • 1/18: 1,800

  • Credit Entries

  • 1/5: 3,000

  • 1/30: 1,200

• Result:

  • Decrease: Accounts Payable

  • Increase: Remaining Balance of Accounts Payable

Example 3: Owner's Equity Transactions - Capital Account

• Assumption: January 1, Manila invested 90,000 cash into his business.

• June 1: Manila withdrew permanently 60,000 cash from the business.

• Manila, Capital

  • Debit Entries

  • 6/1: 60,000

  • Credit Entries

  • 1/1: 90,000

• Result:

  • Decrease: Capital account

  • Increase: Remaining balance of capital account

Accounting Elements

• Debit = Credit

  • Increases in:

  • Assets

  • Expenses

  • Losses

  • Decreases in:

  • Liabilities

  • Capital

  • Revenue

Extended Accounting Equation

• Formula:
  $ext{ASSETS} = ext{LIABILITIES} + ext{CAPITAL} + ext{Additional Investment} + ext{Revenue or Income} - ext{Withdrawals} - ext{Expenses or losses}$

• Owner’s Equity Decreased by:

  • Permanent Withdrawals

  • Initial investments

• Owner’s Equity Increased by:

  • Temporary Withdrawals

  • Additional investments

  • Losses/expenses

  • Income/Revenue

Analyzing and Accounting for Business Transactions

Questions to Ask:

1. What is the value received? (Debit)

2. What is the value parted with? (Credit)

3. What accounting elements are affected? (Assets, Liabilities or Owner’s Equity)

4. What are their effects to the affected accounting elements? (Increase or Decrease in Assets, Liabilities or Owner’s Equity)

5. What appropriate account title will describe the effect of transactions?

6. How much is the amount to be recorded for a particular account title?

Detailed Examples of Transactions

Example 4: Purchase of Office Equipment

• Assumption: LA Services bought on account a computer for 25,000.

  • Particulars

  • Debit Entries

  • Value Received: Computer

  • Credit Entries

  • Value Parted With: Obligation to pay (Accounts Payable)

  • Accounting Elements Affected:

  • Assets

  • Liabilities

  • Effects to Accounting Elements: Increase

  • Account Titles: Store Equipment, Accounts Payable

  • Amount: 25,000

Further Illustrations of Business Transactions (LA Services)

• Investment in Business

  • Amount: 500,000

  • Debit: Cash

  • Credit: LA, Capital

• Depositing Cash

  • Amount: 500,000

  • Debit: Cash in Bank

  • Credit: Cash on Hand

• Hiring Staff

  • Hired Ms. Ana agreed on P280 daily wage

  • No journal entry is made until payment occurs.

• Supplies Payment

  • Amount: 5,000

  • Debit: Supplies Expense

  • Credit: Cash in bank

• Utilities Payment

  • Amount: 1,500

  • Debit: Utilities Expense

  • Credit: Cash in bank

• Acquisition of Computers

  • Amount: 50,000 (5,000 Cash, 45,000 Note Payable)

  • Debit: Office Equipment

  • Credit: Cash in bank / Notes Payable

• Service Income Received

  • Amount: 150,000

  • Debit: Cash on Hand

  • Credit: Service Income

• Transporting Cash to the Bank

  • Amount: 150,000

  • Debit: Cash in Bank

  • Credit: Cash on Hand

• Payroll Payment

  • Amount: 8,508

  • Deductions: SSS: 450; Tax: 1,550

  • Debit: Salaries Expense

  • Credit: Cash in Bank / SSS Payable / Tax Payable

• Billing Customer

  • Amount: 50,000

  • Debit: Accounts Receivable

  • Credit: Service Income

• Bank Service Charges

  • Amount: 100

  • Debit: Bank Charges

  • Credit: Cash in Bank

• Paying Notes Payable

  • Amount: 45,000

  • Debit: Notes Payable

  • Credit: Cash in Bank

• Owner Withdrawn for Personal Use

  • Amount: 500

  • Debit: LA, Drawing

  • Credit: Cash on Hand

END