TYPES OF ACCOUNTS AND THE ACCOUNT TITLES

Accounting concepts start from the basic equation: Assets = Liabilities + Equity.
But, what actually makes up assets? What compose liabilities and equity? Things such
as cash, plant and equipment, long-term debts would now enter into the picture. All of
these are components of one of the three parts of the accounting equation, called
accounts. In this chapter, we will discuss the major accounts that are contained in the
accounting equation. Later in this chapter, we will also explore revenues and expenses,
which are accounts representing some of the changes in equity.
The Types of Accounts
 Assets

1. Current Assets
2. Noncurrent Assets
 Liabilities

1. Current Liabilities
2. Noncurrent Liabilities
 Owner’s Equity
 Income
 Expenses

 
What are the classifications of assets and liabilities?
 ASSETS
Assets are resources controlled by the enterprise as a result of past events and
from which future economic benefits are expected to flow to the enterprise (per IFRS
Framework). These assets are used by the company in its normal operations such as
the manufacture of goods or delivery of services. The main feature of these assets is
their capability to give benefits to the entity. These benefits are usually in the form of
their ability to directly or indirectly increase the inflow of cash to the entity or a reduction
of its outflows. In simple terms, assets are valuable resources owned by the entity.
Assets should be classified only into two: current assets and noncurrent assets.
1. Current Assets
Current assets are all assets which are expected to be realized within the
ordinary course of business, or a span of 12 months, whichever is
longer. Realization here only means that these assets are expected to be converted into
cash, sold, or disposed after a certain time, or through the passage of time.
 
a.     Cash ●       Cash is any medium of exchange that a bank will accept for deposit at face v
●       This includes bills, coins, checks, bank accounts.
 Examples:
1.     Petty Cash Fund – cash used to pay petty or small amounts.
2.     Cash on Hand – cash in the possession and custody of the business.
3.     Cash in Bank – cash that are deposited in the banks.
b.     Accounts ●       These are claims against customers arising from sale of services or goods o
Receivable ●       This type of receivable offers less security than a promissory note.
●       A written pledge that the customer will pay the business a fixed amount of m
c.      Notes
●       Represented by a promissory note which ensures that in the case of default
Receivable
what has been lent.
●       These are assets which are:
1.     held for sale in the ordinary course of business;
d.     Inventories
2.     in the process of production for sale; or
3.     in the form of materials or supplies to be consumed in the production proces
●       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 fo
●       These represent future economic benefits – assets – until the time these sta

e.     Prepaid
Expenses Examples:
1.     Prepaid Advertising – advance payment of advertising in all media types and
2.     Prepaid Insurance – advance payment of insurance whether it is life insuran
3.     Prepaid Rent – advance payment of rent by the tenant or lessee.
4.     Prepaid Supplies – advance payment of office supplies and/or store supplies
 
2. Noncurrent Assets
All other assets which are not current, basically fall into the definition of
noncurrent assets. Take note that they do not need to have at least 12 months
remaining before their expected realization; as long as they do not meet current asset
classification, they are classified here.
 
●       These are tangible assets that are held by an enterprise for use in the p
administrative purposes and which are expected to be used during more tha

Examples:
a.     Property, Plant,
1.     Land – refers to the surface of the earth that is not covered by a body of wa
and Equipment
2.     Building – a structure with roof and walls that is constructed on land.
(PPE)
3.     Machinery – an equipment that has power to produce movements or forces
4.     Furniture and Fixture – furniture refers to movable things that are result of d
property such as walls (i.e., lightnings, toilet fixtures).
5.     Office Equipment – refers to business machines used in workplace (i.e., com
6.     Transportation Equipment – refers to vehicles whether land transport, sea t
b.     Accumulated ●       It is a contra account that contains the sum of the periodic depreciation cha
 Depreciation ●       The balance in this account is deducted from the cost of the related asset –
●       These are identifiable, nonmonetary assets without physical substance he
c.      Intangible others, or for administrative purposes.
Assets ●       These include goodwill, patents, copyrights, licenses, franchises, trade
competition agreements.
 

Take note:
Contra assets are those accounts that are presented in the asset portion of the statement of financi
accumulated depreciation).

 
 LIABILITIES
The present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits (per IFRS Framework). A plain definition would be – liabilities are
obligations of the entity to outside parties who have furnished resources.
1. Current Liabilities
An entity shall classify a liability as current when:

1. It expects to settle the liability in its normal operating cycle.

2. It holds the liability primarily for the purpose of trading.
3. The liability is due to be settled within twelve (12) months after the end of the reporting
period.
4. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the end of the reporting period.
Paying out does not necessarily mean payment through cash, but it can also
include conversion and/or refinancing.
 
a.     Accoun
●       This account represents the reverse relationship of the accounts receivable.
ts
●       By accepting the goods or services, the buyer agrees to pay for them in the near futu
Payable
b.     Notes ●       Notes payable are written promises of the entity to pay a sum certain in future determ
Payable ●       The business entity is the maker of the note; that is, the business entity is the party w
c.      Accrue ●       Amounts owed to others for unpaid expenses.
d ●       These refers to the benefits received by the company but not yet paid.
Liabilitie
s
Examples:
1.     Salaries/Wages Payable – unpaid salaries and wages of the employees.
2.     Utilities Payable – unpaid communication, electricity, and water bills
 3.     Interest payable – unpaid interest in a loan transaction.
4.     Rent Payable – unpaid rent.
5.     Taxes Payable – unpaid property and business taxes to be paid in the government.
d.     Unearn ●       This refers to cash received in advance but not yet earned.
ed ●       When the business entity receives payment before providing its customers with go
Revenu account (liability method).
es ●       When the goods or services are provided to the customer, the unearned revenue is
 
2. Noncurrent Liabilities
These are liabilities which the entity expects to settle after more than a year, or
have the legal or contractual capacity to defer payment accordingly.
 
●       This account records long-term debt of the business entity for which the b
a.     Mortgage Payable ●       In the event that the debt payments are not made, the creditor can forecl
claim.
●       The bond is a contract between the issuer and the lender specifying the te
b.     Bonds Payable ●       Business organizations often obtain substantial sums of money from len
obtain these funds by issuing bonds.
 
 EQUITY
The equity reflects the residual claims or net assets of the owners of an entity.
This is similar to the net worth of the SALN of our public servants. Take note that
these are residual interest in the assets of the enterprise after deducting all its
liabilities (per IFRS Framework). This is also why net worth of individuals is
computed by subtracting their liabilities from their assets.
 
Generally, equity comes from two sources. The first one comes directly from the
owners in the form of investments of capital. The other comes from the income of
the business from its normal operations. The net income or net loss of the business
from its operations can be determined by using the following equation:
 
Revenues – Expenses = Net Income or (Net Loss)
 
A business will have net income if its revenues exceed expenses and will have a
net loss if its revenues are less than its expenses.
 
The following are the accounts that affect the equity:

1. Capital
2. Withdrawal
3. Revenues/Income
4. Expenses
 In the different forms of business, what are the items included under the equity
account?
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 shareholders’ or stockholders’ equity, consists of
share capital or capital stock, retained earnings and reserves representing
appropriations of retained earnings among others.
●       This account is used to record the original and additional investments of th
●       It is increased by the amount of profit earned during the year or is decreas
a.     Capital
●       Cash or other assets that the owner may withdraw from the business ultim
●       This account bears the name of the owner.
●       When the owner of a business entity withdraws cash or other assets, su
b.     Withdrawals
reducing the owner’s equity account.
 
What are the items that increase/decrease equity?
 INCOME – Increases in Equity
Income increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in increase in
equity, other than those relating to contributions from equity participants (per IFRS
Framework).
 Service Income – the income derived from rendering or performing services for a
customer or client and is the primary income for a service business.
 Sales – revenues earned as a result of sale of tangible products.
Other type of income includes the following:

1. Interest Income – income earned as a result of investment in debt securities or

receivables from other entities.
2. Rent Income – income from the use of the land or unit space.
3. Dividend Income – income from shared investments as a result of dividend declaration
of a company.
 EXPENSES – Decreases in Equity

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 (per
IFRS Framework). Expenses include the costs of any material, labor, supplies, and
services used in an effort to produce revenue.
Examples of expenses are the following:
1. Cost of Sales (Cost of Goods Sold) – the cost incurred to purchase or to produce the
products sold to customers during the period.
2. Salaries or Wages Expense – includes all payments as a result of an employer-
employee relationship such as salaries or wages, 13 th month pay, cost of living
allowances, and other related benefits.
3. Utilities Expense – expenses related to use of telecommunications facilities,
consumption of electricity, fuel, and water.
4. Supplies Expense – expense of using supplies in the conduct of daily business.
5. Rent Expense – expense for space, equipment or other asset rentals.
6. Insurance Expense – portion of premiums paid on insurance coverage (e.g., on motor
vehicle, health, life, fire, typhoon or flood) which has expired.
7. Interest Expense – an expense related to use of borrowed funds.
8. Bad Debt Expense – the amount of receivables estimated to be doubtful of collection
and charged as expense during an accounting period.
Other expenses may also include the following:

1. Advertising Expense
2. Tax Expense
3. Repair and Maintenance Expense
4. Miscellaneous Expense

Week2

ACCOUNTING BOOKS – JOURNAL AND LEDGER

 
What is a journal?
A journal is a chronological record of the entity’s transactions listed by date. It is
often referred to as the book of original entry. This is because we first record the
business transaction in this book. Each transaction is initially recorded in a journal
rather than directly in the ledger. A journal entry shows all the effects of business
transactions in terms of debits and credits. The nature and volume of transactions of the
business determine the number and type of journals needed. The recording of financial
information into the journal is known as the process of journalizing.
In journalizing, transactions and events are recorded as the events happened
chronologically. The date when the event happened is the primary factor that
determines what transaction should be recorded first. The journal entry is primarily
based on the source document. The journalizing process implies that business
activities, regardless of their nature, are recorded in accordance with the time of
occurrence. The journal, therefore, is a mixture of several types of accounts.
 
Illustration:       Assume that on February 14, 2021, Mr. Nilo Co invested ₱1,200,000 to
open his business, Nilo Co Moving On Shipping. The journal entry follows:
 Date Account Titles and Explanation P.R.

2021

Cash
Co, Capital
Feb. 14 ₱1
To record the initial investment of Mr. Nilo
Co.
 
How is a simple entry different with a compound entry?
 SIMPLE ENTRY
It is a journal entry with only one debit and one credit entry. In other words, only two
account titles are affected by the transaction.
A simple journal entry appears as follows:
Date Account Titles and Explanation P.R. Debit

2021

Cash
January 2 Accounts Receivable ₱10,000
To record collection.
 
 COMPOUND ENTRY
It is a journal entry that has multiple debits or credits. It arises when some
transactions require the use of more than two accounts. A compound entry may
have the following combinations:

1. There is only one debit and two or more credits.

2. There are two or more debits and one credit.
3. There are two or more debits and credits.
A sample of compound entry appears as follows:
Date Account Titles and Explanation P.R. Debit

2021

Cash
Accounts Receivable ₱
January 2
Service Income ₱
To record service income.
 
What is the difference between general journal and special journals?
 
THE GENERAL JOURNAL
Most businesses, especially large companies, may adopt different kinds of
journal but all business organizations use the most basic and simplest type of journal
which is the general journal. The general journal typically displays the transaction’s
date, account titles and explanations, posting reference, and respective amounts of
corresponding accounts. A sample format of a journal is shown below:
Date Account Titles and Explanation P.R. D

2021

Cash
101
January 1 Shayne, Capital
301
Owner’s investment of cash in the business

Property, Plant and Equipment

140
2 Shayne, Capital
301
Owner’s investment of equipment in the business.

Inventory
Cash 121
3
Purchase of inventories from supplier through 101
cash
Accounts Receivable
111
Sales
400
Sales of inventories to customer on account.
4
Cost of Goods Sold
500
Inventory
121
Sale of inventories to customer
Inventory
121
8 Accounts Payable
201
Purchase of inventories from supplier on account.
Cash
101
12 Sale
400
Sale of inventories to customer
14 Cash 101
Accounts Receivable
 Collection of customer’s accounts receivable. 111
Sales Return
401
Accounts Receivable
111
Return of merchandise from customer.
15
Inventory
121
Cost of Goods Sold
500
Return of merchandise from customer.
Accounts Payable
201
25 Cash
101
Payment of accounts payable to supplier.
Shayne, Drawing
Cash 302
30
Withdrawal of cash from the business for her 101
personal use.
Salaries Expense
505
31 Cash
101
Paid salaries to employees for the month.
 
With the forgoing illustration, we can see the significance of the journal in the
accounting process. First, it shows a chronological record of the company’s
transactions. Through the journal, companies can easily detect if there are missing or
unrecorded transactions. Like a person’s diary, the journal narrates the different
business dealings of the company by date of occurrence. Next, it discloses the full effect
of each of the transactions per entry. Like in the first journal entry of the given
illustration, we can easily identify the transaction has an effect on the company’s assets
(cash) and equity (Shayne, Capital). Lastly, the journal serves as a check-and-balance
tool of the company. It provides the transaction’s corresponding debits and credits. We
know from the preceding chapters that the debits should always equal the credits of
each entry. As such, each entry in the journal helps prevent and locate errors as the
debits and credits can be easily compared.
 
Other illustration:
 
In the year 2021, the following transactions were made in the first quarter.
February 14    Acquired vehicle for ₱950,000.
March 1           Purchased office equipment for ₱150,000; paying ₱80,000 in cash and
the balance next month.
  
Date Account Titles and Explanation P.R. Debit

2021

Service Vehicle
Cash
February 14 ₱950
To record the acquisition of service
vehicle.
Office Equipment
Cash
March 1 Accounts Payable ₱150
The purchase of office equipment on
cash and on account.
 
What are the essential parts of a general journal?
 
The standard contents of the general journal are as follows:
 
1. Date
 Shows the date of the occurrence of the transaction. The year and the month are not
rewritten for every entry unless the year and month have changed, or a new page is
needed.
2. Account Titles and Explanation
 Shows the account debited and credited as well as a brief explanation of the
transaction. The account to be debited is entered at the extreme left of the first line
while the account to be credited is entered slightly indented on the next line. A brief
description of the transaction is usually made on the line below the credit.
3. Posting Reference (P.R.)
 This will be used when the entries are posted, that is, until the amounts are transferred
to the related ledger accounts. The posting process will be described later.
4. Debit
 Corresponding amount of the account debited is entered in this column.
5. Credit
 Corresponding amount of the account credited is entered in this column.
 
THE SPECIAL JOURNALS
 Large companies often engage in hundreds of transactions each day. In order to
expedite the journalizing process, a company usually utilizes special journals in addition
to the general journal. Special journals are used to record typical and similar types of
transactions. The number of special journals managed by a company is dependent on
the types of transactions that occur frequently.
What are the examples of special journals?
Some of the most common special journals and respective formats used by
companies are shown below.
1. Sales Journal – Used in journalizing all sales of merchandise on account.

SALES JOURNAL
Dr.
Date Account Debited Invoice Number Reference

 
2. Purchases Journal – Used to record purchases of inventory made on account.
 
PURCHASES JOURNAL
Account Dr.
Date Terms Reference
Credited
 
3. Cash Receipts Journal – Used to record all cash that had been received.
 
CASH RECEIPTS JOURNAL
Account
Date Reference Dr. Cash Cr. Accounts Receivable Cr. Sales
Credited
 
4. Cash Payments Journal – Used to record transactions involving cash payments. It is
also known as cash disbursement journal.
 
CASH PAYMENTS JOURNAL
Check Account
Date Reference Dr. Accounts Payable Dr. Other Accounts
Number Debited
 
 In cases where a company has other recurring transactions not mentioned in the
foregoing, the company may opt to add further special journals. Consequently, the
company records the rest of the transactions that cannot be entered in the special
journals on the general journal. In addition, correcting, adjusting, and closing entries are
recorded in the general journal.
After journalizing the business transactions in the general journal and special
journals, the company will now proceed to the process of posting. Posting involves the
process of transferring of the same information found in the journal to the ledger
accounts to bring together the effect of the transactions to the individual accounts of the
company.
The journal does not reflect information like outstanding balance of the account
or the total balance of an account. It is, rather, a chronological listing of transactions,
where the value received and value parted with are given importance.
Posting, basically, is a sorting process. It groups similar transactions according to
their nature and type. Another distinct difference between journalizing and posting is
that journalizing is undertaken daily; while posting is usually done at the end of the
month.
The grouping of the transactions follows the accounting elements – assets,
liabilities, equity, income, and expenses. The grouping of transactions is done in the
ledger. Hence, information found in the general journal are transferred to the ledger.
In the process of transferring the information from the journal to the ledger, the
following guidelines may be observed:

1. No alterations should be made.

2. Debit entries in the journal shall be transferred to the debit side of the ledger.
3. Credit entries in the journal shall be transferred to the credit side of the ledger.
The terms “debit entries” and “credit entries” include the date, debit or credit
account, and debit or credit amount.
In this chapter, we are going to focus and discuss on the second major books of
accounts – the ledger.
 
What is the purpose of ledger in accounting?
 
THE LEDGER
Ledger is a grouping of the entity’s accounts showing its respective outstanding
balances. It is also called the book of final entry of accounting transactions. It presents
the changes in specific account balances. All account balances presented in the
financial reports of the company are derived from the ledger. The two kinds of ledgers
are the general ledger and the subsidiary ledgers.
 GENERAL LEDGER
 A general ledger is the reference book of the accounting system and is used to
classify and summarize transactions, and to prepare data for basic financial statements.
It contains all the asset, liability, and owner’s equity accounts of the company. The
ledgers are usually grouped according to their chart of accounts and arranged
according to the order on how they appear on the financial statements. Each account is
numbered based on the chart of accounts for easier and faster reference. The general
ledger shows the amount outstanding on each of the company’s accounts as of a
certain date.
The accounts in the general ledger are classified into two general groups:

1. Balance Sheet or Permanent Accounts (assets, liabilities, and owner’s equity).

2. Income Statement or Temporary Accounts (income expenses). Temporary or nominal
accounts are used to gather information for a particular accounting period. At the end of
the period, the balances of these accounts are transferred to a permanent owner’s
equity account.
What are the essential parts of a general ledger?

1. Account Title – The general ledger contains all of the company’s accounts and its
balances.
2. Ledger Account Reference Number – With the reference to the company’s chart of
accounts, each of the account titles corresponds to a reference number.
3. Date – The date of the transaction is also entered in reference to the journal.
4. Explanation – A brief description of the business transaction is defined. This is
sometimes omitted since the entries on the journal already provide an explanation of the
transaction.
5. Journal Reference (J.R.) – This column displays the journal page number from which
the transaction was posted.
6. Debit – Amounts debited to the account are inputted.
7. Credit – Amounts credited to the account are entered.
8. Balance – What distinguished a ledger from the journal is the running outstanding
balances provided by the ledger. After every transaction, the balances of each of the
accounts are known. On year-end, these balances will be the basis of the amounts
presented in the financial statements of the company.
 
To further understand ledger and to picture what it looks like, using the
information from the sample general journal of Shayne, a sample format of a general
ledger is illustrated as follows.
 With the illustration, it will be easier for the company to determine the balances of
each of its accounts. These are as follows:
 Assets
 Cash ₱246,500
 Accounts Receivable      21,000
 Inventory      29,000
 Property, Plant and Equipment      50,000
Liabilities
 Accounts Payable ₱  30,000
Equity
 Shayne, Capital ₱250,000
 Shayne, Drawing        2,000
 Sales   110,000
 Sales Return       5,000
 Cost of Goods Sold     31,500
 Salaries Expense       5,000
The general ledger aids in knowing the balances of each of the accounts at any
given time. Unlike the journal, the general ledger classifies the transactions into
accounts and provides the outstanding balances of each. Additionally, the general
ledger, together with the subsidiary ledgers, serves as a control account to check for
errors and misstatements in posting. At month-end or year-end, the company reconciles
the balances of its general ledger and subsidiary ledgers.
 
What are the advantages of using subsidiary ledgers?
 SUBSIDIARY LEDGERS
Large companies have thousands of transactions from their hundreds of
customers who buy goods and merchandise on credit. If the company only utilizes a
general ledger, imagine the time it will take to determine the outstanding balances of
each of its individual customers. The same is also true when it comes to the company’s
individual creditors.
To ease their burden, large companies use subsidiary ledgers. A subsidiary
ledger is a group of accounts with a similar characteristic. It is an additional record to
the general ledger utilized by the company to track the per-individual accounts of the
company’s customers, creditors, and the like.
The two most common types of subsidiary ledgers are the accounts receivable
ledger and the accounts payable ledger.
a. Accounts Receivable Ledger – It is used in tracking individual accounts receivable
balances of company’s customers.
Illustrations:
The format of an accounts receivable subsidiary ledger is the same as that of the
general ledger. The only difference is that the accounts receivable subsidiary ledger
provides a running balance of each of the company’s customer on credit. In the
illustrations, it is recognized without effort that the balances of Ianbabes & Co., Jowsie &
Co., and Ryanbear & Co. as of March 31 are ₱80,000, ₱19,000, and ₱0 respectively.
b. Accounts Payable Ledger – It is used in tracking individual accounts payable
balances of company’s creditors.
Illustrations:
Like the accounts receivable subsidiary ledger, the format of an accounts payable
subsidiary ledger is the same as that of the general ledger. The accounts payable
subsidiary ledger provides a running balance of each of the company’s suppliers or
creditors. From the foregoing illustrations, the balances of TedSchmosby Inc.,
Scherbatsky Ltd., and Barney WaitForlt Stinson & Co. are determined easily – ₱25,000,
₱115,000, and ₱20,000 respectively.
Subsidiary ledgers are valuable especially in large companies with thousands of
transactions from numerous customers and creditors. This provides an up-to-date
information on the different individual account balances. In addition, the subsidiary
ledgers help in detecting errors and misstatements in posting of entries in the ledger. At
year-end or month-end, the company can easily reconcile the balance of the general
ledger account to the total of the individual subsidiary ledgers to determine whether
there are transactions not posted. Finally, like the special journal, the subsidiary ledger
allows greater division of labor for the company. As the two kinds of ledgers are being
utilized, different employees can post in the general ledger and in the subsidiary ledgers
simultaneously.
 
What is the T-Account in accounting?
The T-Account is the alternative way of preparing a general ledger. This is used
in times when an accountant needs to know the ending balance or transaction of a
single account. This is also used to post journal entries (normally not too many) in a
particular period to arrive at a trial balance.
The T-Account is termed as the simplest form of an account because you can
summarize transactions through this without using the general ledger book and one can
already prepare a trial balance. At the top of the T-account is where you write the
account name or title, on the left side of the T-account is where you write or post the
debit transactions, and on the right side of the T-account is where you write or post the
credit transactions. Then pencil footing is applied at the bottom of the T-account to
determine the balances.
Pencil footing is a method used in accounting to add together all the figures on
the debit and credit columns then write the results in small pencil figures at the bottom
of the columns. The pencil footing is then used to carry over the figures to another page.
 The T-account is literally a broad and very wide letter “T” with the debit on the left
side and the credit on the right side and account name at the center on top of the letter
“T”.
Let’s take a few examples of transactions and post these to the T-account.
Illustration:
July 1               Mr. Cruz invested to his business for ₱225,000 in cash.
July 5               The owner purchased supplies for ₱5,000 in cash.
July 10             The owner purchased furniture on account for ₱23,000.
July 15             Paid rent for the month, ₱5,000.
 
Now, let us first journalize the transactions.
 
Date Account Titles and Explanation P.R. Debit
Cash
July 1 Cruz, Capital ₱225,000
To record owner’s investment.

Supplies
July 5 Cash ₱5,000
To record purchase of supplies.

Furniture
Accounts Payable
July 10 ₱23,000
To record purchase of furniture on
account.
Rent Expense
July 15 Cash ₱5,000
To record rental for the month
This means that the outstanding balances of the following accounts, using the t-
account, as of July 15 are as follows:
 
Debit Credit
Cash ₱215,000
Supplies 5,000
 Furniture 23,000
Accounts
₱23,000
Payable
Cruz, Capital 225,000
Rent Expense 5,000
₱248,000 ₱248,000
 
The result of t-account is the same as the ledger, which leads us to the amounts to be
used in the unadjusted trial balance.
 
Take note:
When using the ledger and the t-account, the result of their outstanding balances must be equal ac
accountants up to the present to counter check the validity of the ledger or to determine the outstandin

Week3

Mr. Andie Lim started Lim Industrial Spray Service on December 1, 2020. The following
transactions occurred during the month of December:

Dec.     1         Invested cash in the business, P115,000.

 2         Bought a service vehicle from Chua Motors for P120,000, paying P30,000 in
cash, with the remainder due in sixty days.
 5         Purchased spray equipment on account from Ong Company, P20,000.
 7         Paid cash for insurance on service vehicle for the year, P10,000.
10        Paid rent for the month, P5,000.
13        Received cash for spray services done on a building, P25,000.
15        Bought supplies for cash, P6,000.
20        Billed customers on account for services performed, P5,000.
25        Paid cash for utilities, P1,200.
26        Received bill for gasoline used by the service vehicle during the month,
P3,450.
28        Received cash from customers, P17,000.
29        Lim withdrew cash for personal use, P8,000.
 31        Paid salaries to employees, P16,500.

Additional information:

        Consider that there were no adjustments made during the period.

GUIDELINES
Prepare the Statement of Financial Position of Lim Industrial Spray Service using the report
format. Use the provided answer sheet.

Scoring rules:

2 points:          Title and Heading

2 points:          Captions
2 points:          Margin and Currency Sign
16 points:        Arrangement of accounts with correct corresponding amounts.
6 points:          Total current assets, noncurrent assets and current liabilities.
2 points:          Correct balance satisfying the equation A = L + OE.

THE STATEMENT OF FINANCIAL POSITION

 
What is a Statement of Financial Position (SFP)?
The Statement of Financial Position is a report based on the accounting equation: Assets =
Liabilities + Owner’s Equity. Most students endearingly refer to the accounting equation as
ALOE. It is also called as balance sheet because the sum of the assets should be balanced to
the sum of the liabilities and equity. The SFP is balanced as a consequence of double-entry
accounting.
Basically, SFP is a snapshot of the financial position of the company that reports the
resources available for the company to use, obligations that the company is required to settle,
and the equity that belongs to the owners of the company.
 
Which method of presenting SFP should be used by a business entity?
The balance sheet can be presented in either the report format or the account format.
The report format simply lists the assets, followed by the liabilities then by the owner’s equity in
 vertical sequence. The account format lists the assets on the left and the liabilities and owner’s
equity on the right. Either balance sheet format is acceptable.
 
CLASSIFICATION
The revised IAS No. 1 does not prescribe the order or format in which an entity represents
items in the statement of financial position; what is required is the current and noncurrent
distinction for assets and liabilities. Assets can be presented current then noncurrent. Liabilities
and equity can be presented current liabilities then noncurrent liabilities then equity.
It is proper to present a classified balance sheet; that is, the assets and liabilities are
separated into various categories. Assets are sub-classified as current assets and non-current
assets; while liabilities as current liabilities and non-current liabilities. At this point, it is advisable
to review the definitions of the foregoing. Classifying a balance sheet aids in the analysis of
financial statement data.
To make accounting information useful to decision-makers, the items in the balance sheet
may be grouped and arranged in accordance with the following guidelines:
 Assets are classified and presented in decreasing order of liquidity. Cash is the most liquid.
Assets that are least likely to be converted to cash are listed last.
 Liabilities are generally classified and presented based on time of maturity such that obligations
which are currently due are listed first.
As you already learned, the total assets in the balance sheet does not tally with the total
debits in the balance sheet columns of the worksheet. Likewise, the total liabilities and owner’s
equity do not equal the total credits in the balance sheet columns of the worksheet. The reason
for these differences is the accumulated depreciation and withdrawals are subtracted from their
related accounts in the balance sheet but added in their respective columns in the worksheet.
 
How should we prepare a Statement of Financial Position?
1. Title and Heading
a. Legal name of the company. This is presented in the first line of the heading.
b. The name of the report. It is presented in the second line of the heading. Indicate if it is the
statement of financial position.
c. Reporting date. For SFP, start with the phrase “as of the month/year ended” followed by the
date presented as month, date, and year. 
Example:
Green Pasteur
Statement of Financial Position
As of the Year Ended December 31, 2021
2. Captions. These are headings within your statement. It designates major elements with details
below them for the total and subtotaled. For statement of financial position, it has three primary
elements: Assets, Liabilities and Equity.
 
3. Margin. The extreme margin on the left is used for describing the major classifications of
accounts under the major elements. Followed by an indention for describing the accounts.
Example:

ASSETS

Current Assets
Cash
Accounts Receivables
Prepaid Supplies

4. Money Columns. The money columns are on the right side of the account. The total for the
major classification of accounts are placed on the extreme right while the details are on the
inner money column for the amounts for each account described.
Example:

ASSETS

Current Assets
Cash ₱250,000
Accounts Receivables 175,000
Prepaid Supplies 25,000 ₱450,000

5. Currency Sign. The peso sign (₱) is placed on top of each money column. A peso sign is
also placed at the final amount. (See example in number 6)
 
6. A single line or rule is drawn under the last amount to be added or subtracted and a double
line or rule is drawn under the final amount.
Example:

ASSETS

Current Assets

Cash ₱250,000

Accounts
175,000
Receivables

Prepaid Supplies 25,000 ₱450,000

 Noncurrent Assets

Land 1,000,000

Furniture and
225,000
Fixture

Equipment 2,125,000

Building 5,000,000 8,350,000

Total Assets ₱8,800,000

 
7. Arrangement of Accounts. The accounts are arranged according to liquidity. Thus, current
assets are arranged based on their convertibility to cash while noncurrent assets are arranged
from the lowest amount to the highest amount except for the land that is generally listed first. On
the other hand, the liabilities are arranged based on time of maturity where the currently due are
listed first.
 
For better understanding, the illustration below was extracted from the previous lesson for
you to be able to connect the lesson and to gain a clearer understanding on the two formats of
presenting the statement of financial position. Thus, let us again use the data from the Del
Mundo Landscape Specialist.
 The classified balance sheet of Del Mundo Landscape Specialist in report format is:
Del Mundo Landscape Specialist
Statement of Financial Position
As of the Month Ended November 30, 2020

Assets

Current Assets

Cash ₱182,250

Accounts Receivable 10,000

Supplies 500

Prepaid Rent 14,000

 Prepaid Insurance 22,000 ₱228,750

Noncurrent Assets (Net)

Vehicles ₱300,000

Less: Accumulated Depreciation (4,500) ₱295,500

Equipment ₱54,000

Less: Accumulated Depreciation (1,000) 53,000 348,500

Total Assets ₱577,250

Liabilities

Current Liabilities

Accounts Payable ₱1,000

Notes Payable 100,000

Salaries Payable 1,600

Interest Payable 1,400

Unearned Revenues 11,250 ₱115,250

Owner’s Equity

Del Mundo, Capital, 11/30/2020 462,000

Total Liabilities and Owner’s Equity ₱577,250

 The classified balance sheet of Del Mundo Landscape Specialist in account format is:
 

Del Mundo Landscape Specialist

Statement of Financial Position

As of the Month Ended November 30, 2020

Assets Liabilities and Owner’s Equity

 Current Assets Current Liabilities

   Cash ₱182,250    Accounts Payable ₱1,000

   Accounts Receivable 10,000    Notes Payable 100,000

   Supplies 500    Salaries Payable 1,600

   Prepaid Rent 14,000    Interest Payable 1,400

   Prepaid Insurance 22,000 ₱228,750    Unearned Revenues 11,250 ₱115,250

Noncurrent Assets
(Net)

Del Mundo, Capital,

   Vehicles ₱300,000 462,000
11/30/2020

   Less: Accumulated
(4,500) ₱295,500
   Depreciation

   Equipment ₱54,000

   Less: Accumulated
(1,000) 53,000 348,500
   Depreciation

Total Liabilities and

Total Assets ₱577,250 ₱577,250
Owner’s Equity

 
Remember that in presenting the statement of financial position, either way is acceptable.
Furthermore, whichever form of presentation, the total assets and the total liabilities and equity
of both formats should be the same or equal.