Accounts

Debit Credit
Increase in Increase in
Assets Liabilities
Expenses Owner’s Capital
Income
Decrease in
Liabilities Decrease in
Owner’s Capital Assets
Income Expenses

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 expense accounts 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 decreases.

Increases Recorded by Normal Balance

Account Category Debit Credit Debit Credit
Assets / /
Liabilities / /
Owner’s Equity:
Owner’s Capital / /
Withdrawals / /
Income / /
Expenses / /

Balance Sheet Accounts

Assets Liabilities and Owner’s Equity
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

Income Statement Accounts

Debit for Credit for
Decreases in owner’s equity Increase in owner’s equity

Expenses Income
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

(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.
Examples; (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 transaction 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)

Illustration: Galicano Del Mundo decided to establish a sole proprietorship business and named it as Del Mundo Graphic
Design. Del Mundo is a graphic designer who has extensive experience in drawing, layout, typography, lettering, diagramming
and photography. He possesses the talent to visually communicate to a target audience with the right combination of words,
images and ideas.
Del Mundo Graphic Design can do layout and production design of newspapers, magazines, corporate reports, journals and
other publications. The entity can create promotional displays; marketing brochures for services and products; packaging design
for products; and distinctive logos for businesses. He also enters into agreements with clients for the progressive development
and maintenance of their web sites. His initial revenue stream comes from web designing.
The owner, Galicano Del Mundo, makes the business decisions. The assets of the company belong to Del Mundo and all
obligations of the business are his responsibility. Any income that the entity earns belongs solely to Del Mundo.
When a specific asset, liability or owner’s equity item is created by a financial transaction, it is listed in the financial transaction
worksheet using the appropriate accounts. The worksheet that follows shows the first transaction of the Del Mundo Graphic
Design. The dates are enclosed in parentheses.
During March 2019, the first month of operations, various financial transaction took place. These transactions are described
and analyzed as follows:
March 1.
Del Mundo started his new business by depositing P350,000 in a bank account in the name of Del Mundo Graphic
Design at BPI Población Branch.

Del Mundo Graphic Design

Financial Transaction Worksheet
Month of March 2019

Assets (=) Liabilities (+) Owner’s

Equity
Cash Del Mundo,
Capital
(1) P350,000 P350,000

The financial transaction is analyzed as follows:

• An entity separate and distinct from Del Mundo’s personal financial affairs is created.
• An economic resource – cash of P350,000 is invested in the business entity. The source of this asset is the contribution
made by the owner, which represents owner’s equity. The owner’s equity account is Del Mundo, Capital.
• The dual nature of the transaction is that cash is invested and owner’s equity created. The effects on the accounting
equation are as follows: increase in asset - cash from zero to P350,000 and increase in owner’s equity from zero to
P350,000.
• At this point, the entity has no liabilities, and assets equal owner’s equity.
March 5.
Computer equipment costing P145,000 is acquired on cash basis. The effect of the transaction on the basic equation is:
 Assets (=) Liabilities (+) Owner’s
Equity
Cash (+) Computer Equipment (=) Del Mundo,
Capital
Bal P350,000 (=) P350,000
(5) (145,000) P145,000 (=)
Bal P205,000 (+) P145,000 (=) P350,000
P350,000 (=) P350,000

This transaction did not change the total assets but it did change the composition of the assets – it decreased one asset – cash
and increased another asset – computer equipment by P145,000. Note that the sums of the balances on both sides of the equation
are equal. This equality must always exist.
March 9.
Computer supplies in the amount of P25,000 are purchased on account.

Assets (=) Liabilities (+) Owner’s

Equity
Cash (+) Computer (+) Computer (=) Accounts (+) Owner’s
Supplies Equipment Payable Equity
Bal P205,000 P145,000 (=) P350,000
(9) P25,000 (=) P25,000
Bal P205,000 P25,000 (+) P145,000 (=) P25,000 (+) P350,000
P375,000 (=) P375,000

Assets don’t have to be purchased in cash. It can also be purchased on credit. Acquiring the computer supplies with a promise
to pay the amount due later is called buying on account. The transaction increases both the assets and the liabilities of the
business. The asset affected is computer supplies and the liability created is an accounts payable.
March 11.
Del Mundo Graphic Design collected P88,000 in cash for designing interactive web sites for two exporters based inside
the Ortigas Ecozone.

Assets (=) Liabilities (+) Owner’s

Equity
Cash (+) Computer (+) Computer (=) Accounts (+) Del
Supplies Equipment Payable Mundo,
Capital
Bal P205,000 P25,000 P145,000 (=) P25,000 P350,000
88,000 (=) 88,000
P293,000 (+) P25,000 (+) P145,000 (=) P25,000 (+) P438,000
P463,000 (=) P463,000

The entity earned service income by designing web sites for clients. Del Mundo rendered his professional services and collected
revenues in cash. The effect on the accounting equation is an increase in the asset – cash and an increase in owner’s equity.
Income increases owner’s equity. This transaction caused the business to grow, as shown by the increase in total assets from
P375,000 to P463,000.
March 17.
The entity has service agreements with several Netpreneurs to maintain and update their web sites weekly. Del Mundo
billed these clients P35,000 for services already rendered during the month.

Assets = Liabilities + Owner’s

Equity
Cash + Accounts + Computer + Computer = Accounts + Del
Receivable Supplies Equipment Payable Mundo,
Capital
Bal P275,000 P25,000 P145,000 = P25,000 P420,000
(17) P35,000 = P35,000
 Bal P275,000 + P35,000 + P25,000 + P145,000 = P25,000 + P455,000
P480,000 = P480,000

The entity has performed services to clients so income should already be recognized. Del Mundo is entitled to receive payment
for these but the clients did not pay immediately. Performing the services creates an economic resource, the client’s promise to
pay the amount which is called accounts receivable. This transaction resulted to an increase in an asset – accounts receivable
and an increase in owner’s equity of P35,000.