A.

OBJECTIVES OF FINANCIAL STATEMENTS

General Purpose FS Specific-Purpose FS

external reports internal reports

are intended to meet the are prepared to meet the
diverse information needs of specific information needs of
the wide-range of data-users. certain decision-makers

Reporting Periods: Employees and Labor Unions – This group needs

to know how stable and profitable its employer is.
Calendar Year- 12-month Customers and Clients – The customers of the
reporting period that begins enterprise are interested to know whether their
on January 1 and ends on supplier is capable of continuously supplying their
needs for raw materials, spare parts, services, and
December 31. even technological information.
Fiscal Year - 12-month General Public – The other external data-users
need financial data related to the operations of a
reporting period that ends on
business for varied reasons.
a date other than December

31 C. COMPLETE SET OF FINANCIAL STATEMENTS

Natural Business Year- 12-
month period which ends in 1. Balance Sheet
2. Income Statement
the month business activities
3. Statement of Changes in the Owners’ Equity
are at their lowest 4. Statement of Cash Flows
5. Notes, comprising of the summary of significant
B. USERS OF THE FINANCIAL STATEMENTS accounting policies and other explanatory notes

Management- All these financial statements and

internal reports serve as management’s feedback
BALANCE SHEET (Statement of Financial Position)
tools, and at the same time aid the managers in - This shows the financial condition of a
making decisions as to what future actions to take.
business enterprise, which is assumed to be a
Investors – The financial information made available
to the investors could help them decide whether they
going concern, as of a particular date
should buy, hold or sell their investment in the

business enterprise. - This statement will show the assets,

Trade Creditors – A trade creditor wants to know liabilities, and owner’s equity of the business
whether his present or prospective customer is
as of a given date.
capable of settling his financial obligations within a
short period of time.

Banks and Other Lenders – A lender needs - All accounts appearing in this statement
information that will help in assessing the safety of are called real accounts in the sense that
his investment, or the risk involved in his lending
they are more or less permanent in nature
exposure.
Government and Its Agencies – The government
and their balances are carried forward from
wants to know how the business enterprise is period to period.
contributing to the needs of the community and to

the economy as a whole.

 2 MAJOR PARTS OF THE BALANCE SHEET

Heading Body

assets or economic resources

legal name of the enterprise owned by the reporting business
title of the financial statement, enterprise
which is the balance sheet liabilities or economic obligations of
particular date as of when the the enterprise to other entities
financial condition of the business equity of the owner or owners over
enterprise is being reported the assets of the business enterprise

A.1. Accounting Elements in the Balance Sheet

Accounts Receivable – claims from customers
Assets arising from sale of goods and services, on credit
basis, in the ordinary course of the business
They include those economic resources,
Notes Receivable – claims from customers arising
rights, and property – both tangible and from the sale of goods and services, on credit
intangible – that are owned and/or basis, or as a result of lending money, for which a
controlled by either a natural or legal entity. promissory note was received
Loans Receivable – claims from borrowers as a
Characteristics result of lending money.
An asset is acquired by the business Merchandise Inventory – goods and products that
enterprise as a result of a past activity or are acquired by a merchandising business for the
primary purpose of reselling them to customers at
event.
higher prices
An asset is recognized in the balance Prepaid Expenses – right to receive benefit from
sheet if, upon its acquisition, a reliable expenses already paid for but are expected to be
and objective monetary value can be consumed or used in the following periods
assigned to it. Accrued Revenue Receivable – right to collect
It is expected to generate, directly or income that is already earned but not yet
collected.
indirectly, net cash inflows.
Investments – placement of funds to generate
The owner or user of an asset has the income
legal capacity to restrict or prevent other Land
entities from having access to its Building
economic usefulness Office Equipment – mechanical equipment such
Examples
as computers, printers, adding machines used in
Cash – money and other medium of exchange the office.
available for general disbursements Office Furniture and Fixtures – tables, chairs,
Investment in stock – ownership of shares of a shelves, filing cabinets, etc. used in the office
corporation Store Equipment – mechanical equipment such as
Investment in bonds – ownership of financial computers, printers, point-of-sale machines used
instruments evidencing an obligation of in the store.
another entity Store Furniture and Fixtures – tables, chairs,

shelves, filing cabinets, etc. used in the store.
Liabilities Equity
They represent the present economic It represents the residual claim of
obligations of an entity that would the owner over the enterprise’s
require some form of future assets
settlement.
Characteristics Characteristics
A specific financial activity or event that Original investment of the owner(s)
obligates the business enterprise has + Additional investments
occurred. + profit or (loss) during the reporting
A liability is recognized if a reliable and period
objective monetary value can be - personal withdrawals or profit
assigned to it at the time it is incurred. distributions
A liability requires a settlement = equity of the owner(s) as of the end
sometime in the future – either on an
of the reporting period
agreed date, on demand, or when a
specified event occurs. Examples

The obligation to settle cannot be Emilio Andre, Capital – account title used to
avoided. show the original and additional investments
of the owner of the business enterprise
Examples Emilio Andre, Drawing – account title used to
Accounts Payable – obligations of the
show the total withdrawals of Emilio Andre, the
business enterprise to the suppliers as a
proprietor, whether in the form of cash or non-
result of buying goods and services, on
cash assets, for personal or family use.
credit basis, in the ordinary course of

business A.2 EXAMPLE

Notes Payable – obligations as a result of
buying goods and/or services, on credit
basis, or as a result of borrowing money,
for which a promissory note is given by the
business
Advances from Customers – obligations
by a seller to deliver goods or render
services to the customers who paid in
advance
Loans Payable – obligations of the
business enterprise to lenders as a result
of borrowing money.
Unearned Revenues – obligations for
revenues that are collected in the current CLASSIFICATIONS OF ASSETS
reporting period but are expected to be 1. Current Assets – cash and other assets that are expected to be
converted to cash or consumed within one year from the
earned in the following periods accounting period or the normal operating cycle of the business
Accrued Expenses Payable – obligations whichever is longer
2. Noncurrent Assets – other assets of the business that are not
for expenses that are already incurred but classifiable as current such as fixed assets.
not yet paid CLASSIFICATIONS OF LIABILITIES
Mortgage Payable – obligation of the 1. Current Liabilities – financial obligations of the business which
are payable within one year from the end of accounting period.
business for long-term borrowing wherein 2. Noncurrent Liabilities - financial obligations of the business
a land or building is used as collateral which are payable for more than one year from the end of
accounting period.

 A. INCOME STATEMENT Accrual Basis

Under the accrual basis accounting,
- This shows the results of the operations of a revenues are reported in the income
business enterprise for a certain period of statement of the period when they are
time or reporting period earned.
- This statement summarizes the different Revenue is considered earned in the period
revenues and expenses of the business to when the delivery of goods is made to the
arrive at the net income. customer, or in the period when the service is
- All accounts appearing in this statement rendered to the client, in the ordinary course
are called nominal accounts in the sense that of operations.
they are merely temporary accounts and are
Examples
not carried forward from period to period.
Sales Income, Sales Revenues, or Sales –

2 MAJOR PARTS OF THE INCOME STATEMENT used to record the gross selling price of the
goods and products sold
Heading
Service Fees/Service Income – generic
legal name of the enterprise
term used to encompass all income earned
title of the financial statement, which is
for services rendered to the customers
the income statement
Professional Fees /Professional Income –
the particular reporting period covered used to record the gross billings of a doctor,
by the income statement accountant, lawyer, architect, artist,
Body engineer or other professionals, for services
reports a detailed and systematic listing, rendered
together with their cumulative balances, Commission Revenues/Commission
of the operating and non-operating Income – consideration received by an
income and expense elements of the agent or broker for performing a task on
business behalf of the principal
B.1 Accounting Elements of Income Statement Rent Revenues/Rent Income –
consideration received by the owner of a
Income property for allowing another entity to use
usually used in connection with activities his tangible property, such as land,
that result to the inflow of assets and/or building, machinery, or equipment
outflow of liabilities Interest Revenues/Interest Income –
consideration received by the lender for
Characteristics
allowing a borrower to use his money
Revenues – arise from those ordinary
Royalty Revenues/Royalty Income –
activities that are directly related to the consideration received by the owner of a
normal operations of the business brand, patent, formula, secret, or any other
enterprise, such as the selling of goods exclusive right, for allowing another entity
and products or rendering of services to use his intangible asset
to customers Gain on sale of fixed assets & investments
Gains – include income from activities – If the selling price of a property is greater
or events that do not form part of the than the book value of the said property, a
ordinary operations of the business gain would result
Losses – represent decreases in assets Gain on sale of investments – If the selling
or increases in liabilities arising from price of the investment is greater than its
those activities or events that are carrying amount, a gain would result.
outside the ordinary course of business
operations
Expenses Royalty Expense – consideration paid by a
franchisee for being allowed to use a brand,
usually used in connection with the
patent, formula, or any exclusive right that
outflow of assets or inflow of liabilities
belongs to another entity called the franchisor.
that are directly or indirectly related to
Depreciation – Building/Machinery and
the normal activities of the business
Equipment/Furniture and Fixtures/Delivery
enterprise
Equipment – portion of the cost of fixed assets
Accrual Basis that is considered as an expense of the current
reporting period
Expenses and losses are recognized in the
Bad Debts/Doubtful Accounts – portion of the
period when they are incurred.
accounts and notes receivable that is
An expense that has direct relationship
considered as a loss because it may not be
with an income is reported in the same collected any more
period when the income is recognized. Taxes and licenses – taxes paid to local and
Expenses that have an indirect national government.
relationship with the income are Income Tax Expense – share of the
systematically allocated over the period government in the profit that the business
or periods benefited by the expenses. enterprise earned during the year
Examples
Loss on sale of fixed asset
Cost of Sales/Cost of Goods Sold – book Loss on sale of investment
value of the goods and products sold to the

customers in the ordinary course of B.2 EXAMPLE

business
Freight In – cost of transporting the
purchased goods to the business site
Salaries and Wages
Permits and licenses – amount paid to the
government for allowing the business
enterprise to operate
Expired Insurance / Insurance expense
Advertisement and Promotions
Audit and Legal Fees Expense
Supplies Used / Supplies expense
Communication Expenses – cost of
sending e-mail, telegrams, letters, and
other forms of communication
Utility Expenses – cost of electricity, water,
telephone, and other utility services
received
Representation and entertainment
Membership and subscription Expenses
Bonus and Allowances
Transportation and Travel
Bank Charges
Commission Expense – consideration paid
by a principal for the performance of tasks
assigned to an agent
Rent Expense – consideration paid by a
lessee for using a property that belongs to
another entity called the lessor or landlord
Interest Expense – consideration paid by a
borrower for using the money of a lender

 A. FUNDAMENTAL ACCOUNTING EQUATION

BALANCE SHEET ELEMENTS:

Assets – represent those economic resources and/or controlled by the enterprise, and
which are expected to have future usefulness to the business.
Liabilities – include those economic obligations of the enterprise, and which require future
settlements that are expected to result in outflows of economic resources.
Equity – the residual interest of the owner or owners over the assets of the enterprise, after
deducting its total liabilities.
B. RESULTS OF OPERATIONS

INCOME STATEMENT ELEMENTS:

Income – used in connection with the inflow of assets and/or outflow of liabilities that is
related to the activities of the business.
Expenses – used in connection with the outflow of assets and/or inflow of liabilities that is
directly or indirectly related to the activities of the business enterprise.

C. ENDING BALANCE OF THE PROPRIETOR’S EQUITY

The equity of the proprietor may be computed independently from the asset and liability
elements, if information about profit and withdrawals for personal use is available.
 4. Lesson 2: The Accounting Cycle

Lesson 3: Classification of Business Transactions

Business Transactions – activities or events

that occur during a period of time, if they
affect the business’ financial condition and
are capable of being assigned monetary
values.
Internal business transactions – activities
or events that occurred within the business
enterprise with no separate entity involved.
External business transactions –
exchanges of economic consideration with
Phase 1: Recording and Classifying another separate entity, whether a natural
or an artificial entity.
Step 1- Compile and arrange the source Reciprocal transactions – every business
documents that support the business transaction has two-fold effects. There is
transactions. reciprocity of value received and value
Step 2- Analyze the business transactions parted with in every business transaction.
and determine their two-fold effects on the Non-reciprocal transactions – value is
accounting elements. received yet no value is parted with.
Step 3- Journalize the business transactions Monetary Transaction – it is assumed that
in the books of original entry called journals. objective and reliable monetary values can
Step 4- Post the journal entries to the books of be assigned to the business transactions.
final entry called ledgers. Non-monetary transactions – are assigned
Step 5- Prepare the unadjusted trial balance. equal-to-cash peso values or fair market
peso values that are agreed upon between
Phase 2: Summarizing and Reporting parties involved.
Source Documents – It is necessary that
Step 6- gather the data needed to adjust the the reported information can be easily
accounts. traced back to the supporting evidences.
Step 7- Prepare the worksheet.

Step 8- Journalize and post the adjusting

entries.
Step 9- Prepare the financial statements and
supplementary schedules.

Phase 3: Closing Process

Step 10- Journalize and post the journal

entries.
Step 11- Rule and balance the ledger
accounts.
Step 12- Prepare the post-closing trial
balance.
Step 13- Journalize and post the reversing
entries.