Identifying

John V. Balanquit

Objectives

Student will be able to :• Discuss the concept of identifying• Summarize the identifying process• Distinguish the elements of financial

statements and the accounts related to each element

Objectives

Student will be able to :• Summarize the normal balance concept

and the concept of debit and credit• Relate elements and accounts with their

normal balance

Definition of Identifying

It is the process of determining accountable events from among various business transactions entered into by an entity

Definition of Accountable Events

They are business transactions that affect any element of the financial statements.

Financial Statement Elements

Assets• An asset is a resource controlled by the

entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Financial Statement Elements

Liabilities• A liability is a present obligation of the

entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Financial Statement Elements

Equity• Equity is the residual interest in the assets

of the entity after deducting all its liabilities.

Financial Statement Elements

Income• Income is increases in economic benefits during

the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Financial Statement Elements

• Revenue– Revenue arises in the course of the ordinary activities

of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent.

Financial Statement Elements

• Gain– Gains represent other items that meet the

definition of income and may, or may not, arise in the course of the ordinary activities of an entity.

Financial Statement Elements

Expense• Expenses are decreases in economic benefits

during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Financial Statement Elements

• Expense– Expenses that arise in the course of the

ordinary activities of the entity include, for example, cost of sales, wages and depreciation.

Financial Statement Elements

• Losses– Losses represent other items that meet the

definition of expenses and may, or may not, arise in the course of the ordinary activities of the entity.

Let’s have a one minute break so that we can absorb the concepts of the previous topic.

The Debit and The Credit

DEBIT• The left side of an

account• Value received

CREDIT• The right side of

an account• Value parted with

The Normal Balance

Each element or account has a debit side and a credit side. The normal balance is the side of an element of account, whether Debit of Credit, where it increases.

The Normal Balance

DEBIT• Asset• Withdrawal• Expense

CREDIT• Liability• Capital• Income

WHY?

The Normal Balance

If A = L + C – W + I – Ex, then:

A + W + Ex = L + C + I

The Normal Balance

Therefore, increases in assets, withdrawal and expenses are recorded in the debit side while increases in the liability, capital and income are recorded in the credit side.

Let’s have a one minute break so that we can absorb the concepts of the previous topic.

The Account Titles

Assets• Cash• Accounts Receivable• Accrued Income• Notes Receivable• Supplies

The Account Titles

Assets• Prepaid Expenses• Land• Building• Machinery and Equipment• Furniture and Fixtures

The Account Titles

Liabilities• Accounts Payable• Notes Payable• Unearned Income• Accrued Expense

The Account Titles

Liabilities• Loans Payable• Mortgage Payable

The Account Titles

Equity• X, Capital• X, Withdrawal• Service Income• Professional Fees• Rent Income

The Account Titles

Equity• Interest Income• Salaries Expense• Utilities Expense• Depreciation Expense• Rent Expense

The Account Titles

Equity• Advertising Expense• Supplies Expense• Bad Debts Expense• Interest Expense

Let’s have a one minute break so that we can absorb the concepts of the previous topic.

Identifying Process

1. Determine the element of account title affected by the transaction

2. Determine whether the said element of account title increased or decreased

3. Determine whether the said elements should be debited or credited

Identifying Process

4. Determine the amount by which each element or account should be increased or decreased

Note: In the identifying process, the Separate Entity Theory must be observed.

Separate Entity Theory

The business and the owner are two separate and distinct entities. Therefore, transactions of the business must not be mixed with transactions of the owner.

Separate Entity Theory

Investment

WithdrawalBusiness Owner

Basic Application

Debit or Credit?

1. Asset decreased2. Capital increased3. Accounts Payable increased4. Supplies increased

Advanced Example

• Clark invested cash to the business, P1,000.

• The business rendered professional services on account, P3,000.

End of Lecture

Thank You!