*

PARTS OF AN INFORMATION SYSTEM

An information system is a collection of people, procedures, software, hardware and
data which works together to provide information essential to running an
organization.
People
People are competent end users working to increase their productivity. End users
use hardware and software to solve information-related or decision-making problems.
Procedures
Procedures are manuals and guidelines that instruct end users on how to use the
software and hardware.
Software
Software is another name for programs-instructions that tell the computer how to
process data. There are basically two kinds of software:
System Software
System software is background software that helps a computer manage its internal
resources. An example is the operating system. Windows and Linux are popular
operating systems.
Application Software
Application software performs useful work on general-purpose problems. The two
types of applications software are basic applications and advanced applications.
Basic applications include:
Browsers--navigate, explore, and find information on the Internet. Word processor--
prepare written documents.

Spreadsheet--analyze and summarize numerical data.

Database management system--organize and manage data and information. Presentation
graphics -communicate a message or persuade other people.
Advanced applications include:
Multimedia--integrate video, music, voice, and graphics to create interactive
presentations.
•
Web publishers--create interactive multi-media web pages.
•
Graphics programs--create professional publications, draw, edit, and modify images.
•
Virtual reality--create realistic three-dimensional virtual or simulated
environments.
•
Artificial intelligence-simulated human thought processes and actions.
•
Project managers--plan projects, schedule, people, and control resources.
Hardware
Hardware consists of input devices, the system unit, secondary storage, output
devices, and communication devices.
Input Devices
Input devices translate data and programs humans can understand into a form the
computer can process. The more common are the keyboard, mouse, scanner, digital
camera, and microphone.
The System Unit
The system unit consists of electronic circuitry with two parts:
Central processing unit (CPU)-controls and manipulates data to produce information.
Memory (primary storage)-temporarily holds data, program instructions, and
processed data.
Secondary Storage
Secondary storage stores data and programs. The three most common storage media are
flash drives, hard disks and optical disks.
Output Devices
Output devices output processed information from the CPU. Two important output
devices are: monitor and printer.
Communications Devices
These send and receive data and programs from one computer to another. A device
that connects a microcomputer to a telephone is a modem.
Data
Data is the raw material for data processing. Data consists of numbers, letters and
symbols and 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. Common types of files are: document, worksheet and
database.
*

ACCOUNTING INFORMATION SYSTEM

Every business organization must have an accounting information system which wil
generate reliable financial information needed by the decision-makers in a timely
manner. The design and operation of a system must consider the anticipated users of
the information and the types of decisions they are expected to make. The design of
the system to meet the information requirement depends on the firm's size, nature
of operations, volume of transaction data, organizational structure,form of
business and extent of government regulation. These will influence the way in which
information is accumulated and reported in the financial statements.
An accounting information system is the combination of personnel, records, and
procedures that a business uses to meet its need for financial information. Most
firms have an accounting manual that specifies the policies and procedures to be
followed in accumulating information within the accounting information system. This
manual details what events are to be recorded in the accounts and when and how the
information is to be classified and accumulated.

An effective accounting information system should achieve the following objectives:

To process the information efficiently at the least cost (cost-benefit principle).
To protect an entity's assets, to ensure that data are reliable, and to minimize
waste and the possibility of theft or fraud (control principle).
To be in harmony with the entity's organizational and human factors (compatibility
principle).
To be able to accommodate growth in the volume of transactions and for
organizational changes (flexibility principle).
*

TYPES OF ACCOUNTING INFORMATION SYSTEMS

In general terms, companies use three types of accounting information systems to
record the results of transactions: manual systems, computer-based transaction
systems and database systems. All of these systems are designed to capture
information regarding accounting events to prepare financial statements. In a
nutshell, manual systems utilize paper-based journals (general and special) and
ledgers (general and subsidiary). Computer-based transaction systems replace paper
records with computer records. Database systems embed accounting data within the
business event data on which they are based.
Computer-Based Transaction Systems
Manual systems rely on human processing so they are labor intensive and may be
inefficient in today's complex business environment. Because manual systems rely on
human processing, they may be prone to error. To overcome these deficiencies, many
companies have computerized their accounting processes.
A computer-based transaction system maintains accounting data separately from other
operating data. That is, the accounting records are kept separately from the
records required for the expenditure, revenue and conversion processes. Suffice it
to say, at this point, that there is a greater degree of compartmentalization of
work to preserve the integrity of the accounting information system but not as
ideal as the database system.
This system treats information in the same manner as a manual system. The user is
simply filling in a computer screen that looks and oftentimes acts like a source
document. Some of the advantages of this system are as follows:
• Transactions can be quickly posted to the appropriate accounts, bypassing the
journalizing process.
Detailed listings of transactions can be printed for review at any time.
Internal controls and edit checks can be used to prevent and detect errors.
• A wide variety of reports can be prepared.
Accounting packages consist of several modules. A module is a program that deals
with one particular part of a business accounting system. A simple accounting
package might consist of only one module, in which case it is called a stand-alone
module. But more often, it will consist of several modules, in which case, it will
then be called a suite. Examples include QuickBooks and Peachtree.
*

Database Systems
Relational database systems such as enterprise resource planning (ERP) depart from
the "accounting equation" method of organizing data. These ERP systems such as SAP,
Oracle and PeopleSoft capture data, both financial and non-financial, and store
that information in a data warehouse. Database systems reduce inefficiencies and
redundancies that often exist in transaction-based systems.
For example, in transaction-based systems, customer information (like name,
address, phone, credit limit) si often maintained separately from customer account
information. Thus, a salesperson who does not know a customer's balance might
inadvertently encourage a customer to purchase items that exceed that credit limit.
Also, separate departments have special information needs such that when a database
system is not used then the same customer information may be recorded several
times. Advantages of database systems include:

The system recognizes business rather than just accounting events.

The system supports the reduction in operating inefficiencies.
The system eliminates redundant data.
*

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. The computer, with the use of
the accounting software, then processes the inputs. As will be discussed later, the
manual system of journalizing, posting, preparing the trial balance and updating
the accounts are done almost instantaneously. When required, the financial
statements and other accounting
reports can be viewed on the screen or printed as output documents.
in many situations, manual systems are inferior to computerized systems in terms of
productivity, speed, accessibility, quality of output, incidence of errors and
bulk.
*

ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements defined in the March 2018 Conceptual Framework
for Financial Reporting (2018 Conceptual Framework) are:
assets, liabilities and equity - relate to a reporting entity's financial position;
and
income and expenses - relate to the reporting entity's financial performance.
*
Financial Position Asset
Per March 2018 Conceptual Framework
For financial Reporting (Conceptual Framework), 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. There are three
aspects to these definitions: "right"; "potential to produce economic benefits";
and "control".
Rights that have the potential to produce economic benefits take many forms,
including:
(a) rights that correspond to an obligation of another party, for example:
(i) rights to receive cash.
(it) rights to receive goods or services.
(ili) rights to exchange economic resources with another party on favorable terms.
Such rights include, for example, a forward contract to buy an economic resource on
terms that are currently unfavorable or an option to buy an economic
resource.
(iv) rights to benefit from an obligation of another party to transfer an economic
resource if a specified uncertain future event occurs.
(b) rights that do not correspond to an obligation of another party, for example:
() rights over physical objects, such as property, plant and equipment or
inventories. Examples of such rights are a right to use a physical object or a
right to benefit from the residual value of a leased object.
(ii) rights to use intellectual property.
An economic resource could produce economic benefits for an entity by entitling or
enabling it to do, for example, one or more of the following:
(a) receive contractual cash flows or another economic resource;
(b) exchange economic resources with another party on favorable terms;

c) produce cash inflows or avoid cash outflows by, for example:

(i) using the economic resource either individually or in combination with other
economic resources to produce goods or provide services;
(il) using the economic resource to enhance the value of other economic resources;
or
(iii) leasing the economic resource to another party;
(d) receive cash or other economic resources by selling the economic
resource; or
(e) extinguish liabilities by transferring the economic resource. An entity
controls an economic resource if it has the present ability to direct the use of
the economic resource and obtain the economic benefits that may flow from it.
Control includes the present ability to prevent other parties from directing the
use of the economic resource and obtaining the economic benefits that may flow from
it. It follows that if one party controls an economic resource, no other party
controls that resource.
*

Liability
A liability is a present obligation of the entity to transfer an economic resource
as a result of past events. For a liability to exist, three criteria must all be
satisfied:
(a) the entity has an obligation;
(b) The obligation is to transfer an economic resource; and •
(c) The obligation is a present obligation that exists as a result of past events
An obligation is a duty or responsibility that an entity has no practical ability
to avoid. An obligation is always owed to another party (or parties). The other
party (or parties) could be a person or another entity, a group of people or other
entities, or society at large. It is not necessary to know the identity of the
party (or parties) to whom the obligation is owed. If one party has an obligation
to transfer an economic resource, it follows that another party (or parties) has a
right to receive that economic resource.
Obligations to transfer an economic resource include, for example:
(a) obligations to pay cash.
(b) obligations to deliver goods or provide services.
(c) obligations to exchange economic resources with another party on unfavorable
terms. Such obligations include, for example, a forward contract to sell an
economic resource on terms that are currently unfavorable or an option that
entitles another party to buy an economic resource from the entity.
(d) obligations to transfer an economic resource if a specified uncertain future
event occurs.

e) obligations to issue a financial instrument if that financial instrument will

oblige the entity to transfer an economic resource.
A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits or taken an action; and (b)
as a consequence, the entity will or may have to transfer an economic resource that
it would not otherwise have had to transfer.
*

Equity
Equity is the residual interest in the assets of the enterprise after deducting all
its liabilities. In other words, they are claims against the entity that do not
meet the definition of a liability.
Equity may pertain to any of the following depending on the form of business
organization:
•
In a sole proprietorship, there is only one owner's equity account because there is
only one owner.
In a partnership, an owner's equity account exists for each partner.
In a corporation, owners' equity or stockholders' equity consists of share capital,
retained earnings, and reserves representing appropriations of retained earnings,
among others.
Financial Performance
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.
It follows from these definitions of income and expenses that contributions from
holders of equity claims are not income, and distributions to holders of equity
claims are
not expenses. Income and expenses are the elements of financial statements that
relate to an entity's financial performance. Users of financial statements need
information about both an entity's financial position and its financial
performance. Hence, although income and expenses are defined in terms of changes in
assets and liabilities, information about income and expenses is just as important
as information about assets and liabilities.
*

THE ACCOUNT
The basic summary device of accounting is the account. A separate account is
maintained for each element that appears in the balance sheet (assets, liabilities,
and
equity) and in the income statement (income and expenses). Thus, an account may be
defined as a detailed record of the increases, decreases, and balances of each
element that appears in an entity's financial statements. The simplest form of the
account is known as the " ' account because of its similarity to the letter "T."
*
THE ACCOUNTING EQUATION
Financial statements tell us how a business is performing. They are the final
products of the accounting process. But how do we arrive at the items and amounts
that make up the financial statements? The most basic tool of accounting is the
accounting equation.
This equation presents the resources controlled by the enterprise, the present
obligations of the enterprise, and the residual interest in the assets. It states
that assets must always equal liabilities and owner's equity. The basic accounting
model is:
ASSETS = LIABILITIES + OWNER'S EQUITY

Note that the assets are on the left side of the equation, opposite the liabilities
and owner's equity. This explains why increases and decreases in assets are
recorded in the opposite manner ("mirror image") as liabilities and owner's equity
are recorded. The equation also explains why liabilities and owner's equity follow
the same rules of debit
and credit.
*

DEBITS AND CREDITS--THE DOUBLE-ENTRY SYSTEM

Accounting is based on a double-entry system which means that the dual effects of a
business transaction si recorded. Adebit 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 the total credits.
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. (from the Latin debere) and Cr. (from the Latin credere),
respectively.
The account type determines how increases or decreases in it are recorded.
Increases in assets are recorded as debits (on the left side of the account), while
decreases in assets are recorded as credits (on the right side). Conversely,
increases in liabilities and owner's equity are recorded by credits and decreases
are entered as debits.
The rules of debit and credit for income and expense accounts are based on the
relationship of these accounts to owner's equity. Income increases owner's equity
and
expense decreases owner's equity. Hence, increases in income are recorded as
credits and decreases as debits. Increases in expenses are recorded as debits and
decreases as
credits.
These are the rules of debit and credit.
*

NORMAL BALANCE OF AN ACCOUNT

The normal balance of any account refers to the side of the account--debit or
credit- where increases are recorded. Asset, owner's withdrawal and expenses
normally have debit balances; liability, owner's equity and income accounts
normally have credit balances. This result occurs because increases in an account
are usually greater than or equal to decreases.
*

ACCOUNTING EVENTS AND TRANSACTIONS

Increases Recorded by
Normal Balance
An accounting event is an economic occurrence that causes changes in an
enterprise's
assets, liabilities, and/or equity. Events may be internal actions, such as the use
of equipment for the production of goods or services. It can also be an external
event, such as the purchase of raw materials from a supplier. A transaction is a
particular kind of event that involves the transfer of something of value between
two entities. Examples of transactions include acquiring assets from owners),
borrowing funds from creditors, and purchasing or selling goods and services.
*

TYPES AND EFFECTS OF TRANSACTIONS

It will be beneficial in the long term to be able to understand a classification
approach that emphasizes the effects of accounting events rather than the recording
involved. This approach is quite pioneering. Although procedures numerous
transactions, all transactions can be classified as business entities engaging in
numerous transactions; all transactions can be classified into one of four types,
namely:

1 Source of Assets (SA). An asset account increases and a corresponding claims

(liabilities or owner's equity) account increases. Examples: (1) Purchase of
supplies on account; (2) Sold goods on cash on delivery basis.
2. Exchange of Assets (EA). One asset account increases, and another asset account
decreases. Example: Acquired equipment for cash.
3. Use of Assets (UA). An asset account decreases, and a corresponding claims
(liabilities or equity) account decreases. Example: (1) Settled accounts payable;
(2) Paid salaries of employees.
4.
Exchange of Claims (EC). One claims (liabilities or owner's equity) account
increases, and another claims (liabilities or owner's equity) account decreases.
Example: Received utilities bill but did not pay.

Every accountable event has a dual but self-balancing effect on the accounting
equation. Recognizing these events will not in any manner affect the equality of
the basic accounting model. The four types of transactions above may be further
expanded into nine types of effects as follows:

1. Increase in Assets = Increase in Liabilities(SA)

2. Increase in Assets = Increase in Owner's Equity (SA) 3. Increase in one Asset =
Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets= Decrease in Owner's Equity (UA)
6. Increase in Liabilities = Decrease in Owner's Equity (EC)
7. Increase in Owner's Equity= Decrease in Liabilities (EC)
8. Increase in one Liability= Decrease in another Liability (EC)
9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC)
*

TYPICAL ACCOUNT TITLES USED

STATEMENT OF FINANCIAL POSITION
Assets
Assets should be classified only into two: current assets and non-current assets.
Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify
assets as current when:

a. it expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle;
b. it holds the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve months after the reporting period;
or
d. the asset is cash or a cash equivalent (as defined in PAS No. 7) unless the
asset is restricted from being exchanged or used to settle a liability for at least
twelve
months after the reporting period.

All other assets should be classified as non-current assets. Operating cycle is the
time between the acquisition of assets for processing and their realization in cash
or cash equivalents. When the entity's normal operating cycle is not clearly
identifiable, it is assumed to be twelve months.
*

Current Assets
Cash- is any medium of exchange that a bank wil accept for deposit at face value.
It includes coins, currency, checks, money orders, bank deposits and drafts.
Cash Equivalents- Per PAS No. 7, these are short-term, highly liquid investments
that are readily converted to known amounts of cash and which are subject to an
insignificant risk of changes in value.
Notes Receivable- A note receivable is a written pledge that the customer will pay
the business a fixed amount of money on a certain date.
Accounts Receivable- These are claims against customers arising from sale of
services or goods ok credit . This type of receivable offers less security than a
promissory note.
Inventories- Per PAS No. 2, these are assets which are (a) held for sale in the
ordinary course of business; (b) in the process of production for such sale; or (c)
in the form of materials or supplies ot be consumed in the production process or in
the rendering of
services.
Prepaid Expenses- These are expenses paid for by the business in advance. It is an
asset because the business avoids having to pay cash in the future for a specific
expense. These include insurance and rent. These prepaid items represent future
economic benefits-assets-until the time these start to contribute to the earning
process; these, then, become expenses.

Non-current Assets
Property, Plant and Equipment- Per PAS No. 16, these are tangible assets that are
held by an enterprise for use in the production or supply of goods or services, or
for rental to others, or for administrative purposes and which are expected to be
used during more than one period. Included are such items as land, building,
machinery and equipment, furniture and fixtures, motor vehicles, and equipment.
Accumulated Depreciation- It is a contra account that contains the sum of the
periodic depreciation charges. The balance in this account is deducted from the
cost of the related asset--equipment or buildings--to obtain book value.
Intangible Assets- Per PAS No. 38, these are identifiable, nonmonetary assets with
physical substance held for use in the production or supply of goods or services
without rental to others, or for administrative purposes. These incl es, for
copyrights, licenses, franchises, trademarks, brand ude goodwill, patents,
subscription lists and
names,
secret processes, non-competition agreements.
*

Liabilities
Per revised Philippine Accounting Standards (PAS) No. 1, an entity should classify
a liability as current when:

a. it expects to settle the liability in its normal operating cycle;

B. it holds the liability primarily for the purpose of trading;
C. the liability is due to be settled within twelve months after the reporting
period; or
D. the entity does not have an unconditional right to defer settlement ofthe
liability for at least twelve months after the reporting period
All other liabilities should be classified as non-current liabilities.
Current Liabilities
Accounts Payable- This account represents the reverse relationship of the accounts
receivable. By accepting the goods or services, the buyer agrees to pay for them in
the near future.
Notes Payable- A note payable is like a note receivable but in a reverse sense. In
the case of a note payable, the business entity is the maker of the note; that is,
the business entity is the party who promises to pay the other party a specified
amount of money on
a specified future date.
Accrued Liabilities- Amounts owed to others for unpaid expenses. This account
includes salaries payable, utilities payable, interest payable and taxes payable.
Unearned Revenues- When the business entity receives payment before providing its
customers with goods or services, the amounts received are recorded in the unearned
revenue account (liability method). When the goods or services are provided to the
customer, the unearned revenue is reduced and income is recognized.
Current Portion of Long-Term Debt- These are portions of mortgage notes, bonds and
other long-term indebtedness which are to be paid within one year from the balance
sheet date.

Non-current Liabilities
Mortgage Payable- This account records the long-term debt of the business entity
for which the business entity has pledged certain assets as security to the
creditor. In the event that the debt payments are not made, the creditor can
foreclose or cause the mortgaged asset to be sold to enable the entity to settle
the claim.
Bonds Payable- Business organizations often obtain substantial sums of money from
lenders to finance the acquisition of equipment and other needed assets. They
obtain these funds by issuing bonds. The bond is a contract between the issuer and
the lender specifying the terms of repayment and the interest to be charged.
*

Owner's Equity

Capital- (from the Latin capitalis, meaning "property"). This account is used to
record the original and additional investments of the owner of the business entity.
It is increased by the amount of profit earned during the year or is decreased by a
loss. Cash or other assets that the owner may withdraw from the business ultimately
reduce it. This account title bears the name of the owner.
Withdrawals- When the owner of a business entity withdraws cash or other assets,
such are recorded in the drawing or withdrawal account rather than directly
reducing
the owner's equity account.
Income Summary- It is a temporary account used at the end of the accounting period
to close income and expenses. This account shows the profit or loss for the period
before closing to the capital account.
*

INCOME STATEMENT

Income:
Service Income- Revenues earned by performing services for a customer or client;
for example, accounting services by a CPA firm, and laundry services by a laundry
shop.
Sales- Revenues earned as a result of sale of merchandise; for example, sale of
building materials by a construction supplies firm.

Expenses:
Cost of Sales- The cost incurred to purchase or to produce the products sold to
customers during the period; also called cost of goods sold.
Salaries or Wages Expense- Includes all payments as a result of an employer-
employee relationship, such as salaries or wages, 13th-month pay, cost of living
allowances and other related benefits.
Telecommunications, Electricity, Fuel and Water Expenses- Expenses related to use
of telecommunications facilities, consumption of electricity, fuel and water.
Rent Expense- Expense for space, equipment or other asset rentals.
Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct
of daily business.
Insurance Expense- Portion of premiums paid on insurance coverage (e.g. on motor
vehicle, health, life, fire, typhoon, or flood) which has expired.
Depreciation Expense- The portion of the cost of a tangible asset (e.g. buildings
and equipment) allocated or charged as expense during an accounting period.
Uncollectible Accounts Expense- The amount of receivables estimated to be doubtful
of collection and charged as expense during an accounting period.
Interest Expense- An expense related to use of borrowed funds.
*

ACCOUNTING FOR BUSINESS TRANSACTIONS

Accountants observe many events that they identify and measure in financial terms.
A business transaction is the occurrence of an event or a condition that affects
the financial position and can be reliably recorded.

Financial Transaction Worksheet

Every financial transaction can be analyzed or expressed in terms of its effects on

the accounting equation. The financial transactions will be analyzed by means of a
financial transaction worksheet which is a form used to analyze increases and
decreases in the assets, liabilities, or owner's equity of a business entity.