LIVING ANGELS CHRISTIAN ACADEMY

SY 2020-2021

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, and MANAGEMENT 1

Assets, Liabilities, Capital, Revenue, and Expenses of the Financial Statements

The Financial Statements

Types of Financial Statements

The key product or the end product of the accounting process is a set of documents called the
financial statements comprised of the following:

1. STATEMENT OF FINANCIAL POSITION or BALANCE SHEET – shows the financial

condition/position of a business as of a given period. It consists of the assets, liabilities,
and capital.
2. INCOME STATEMENT or STATEMENT OF COMPREHENSIVE INCOME or STATEMENT OF
FINANCIAL PERFORMANCE – It shows the result of operations for a given period. It
consists of the revenue, cost, and expenses.
The statement of comprehensive income consists of the revenue, cost and expenses and
also contains components of other comprehensive income (including reclassification
adjustments) as follows: changes in revaluation surplus, gains and losses on benefit plans,
gains and losses from investments in equity instruments, finance costs, share of
associates, and joint ventures under the equity method, tax expense, gain or loss from
discontinued operations, gain or loss on realization of assets from discontinued
operations, gain and loss from foreign operations, and all other operating and financial
events affecting the owner’s equity in the business. International Accounting Standards 1
defines Total Comprehensive Income as the “change in equity during a period resulting
from transactions and other events, other than those changes resulting from transactions
with owners in their capacity as owners.” For purposes of lessons in single proprietorship,
the activities will consist of the usual revenue, cost, expense, and transactions with
owners in their capacity as owners. Hence, the Income Statement will be used to show
the results of operations since there is no activity beyond regular profit and loss items.
3. STATEMENT OF CHANGES IN OWNER’S EQUITY or STATEMENT OF OWNER’S EQUITY –
shows the changes in the capital or owner’s equity as a result of additional investment or
withdrawals by the owner, plus minus the net income or net loss for the year.
4. STATEMENT OF CASH FLOWS – summarizes the cash receipts and cash disbursement for
the accounting period. It summarizes the cash activities of the business by classifying cash
inflows (receipts) and cash outflows (payments) into operating, investing, and financing
activities. It shows the net increase or decrease of a cash given period and the cash
balance at the end of the period. This allows management to assess the business’ ability
to generate cash and project future cash flows.

Typical Account Titles Used

Balance Sheet accounts, namely, assets, liabilities, and owner’s equity, are classified as real and
permanent accounts.

ASSETS – economic resources owned by the business expected for future gain. They are property
and rights of value owned by the business.
LIABILITIES – include debts, obligations to pay, and claims of the creditors on the assets of the
business.
OWNER’S EQUITY or CAPITAL – includes the interest of the owners on the business; claims of
the owners on the assets of the business; and the investment of the owner plus or minus the
results of operations. Owner’s Equity or capital comes from two main sources – investment of
owners and earnings of the business.

THE FUNDAMENTAL ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

Illustration

1. Given liabilities of Php 50,000 and the owner’s equity of Php 150,000, find the value of
assets.
Solution:
Assets = Liabilities + Owner’s Equity
= 50,000 + 150,000
= 200,000
2. Given assets of Php 180,000 and the owner’s equity of Php 110,000, find the liabilities.
Solution:
Liabilities = Assets – Owner’s Equity
= 180,000 – 110,000
= 70,000
3. Given assets of Php 250,000 and liabilities of Php 90,000, find the owner’s equity.
Solution:
Owner’s Equity = Assets – Liabilities
= 250,000 – 90,000
= 160,000

ASSETS

Classification of Current Assets

Improvements to International Accounting Standards 1 (December 2003) classify an asset

as current asset when it is:
1. Expected to be realized in, or is intended for sale or consumption in the entity’s
normal operating cycle;
2. Held primarily for the purpose of being traded;
3. Expected to be realized within twelve months of the balance sheet date; or
4. Cash or cash equivalent unless it is restricted from being exchanged or used to settle
a liability for at least twelve months after the balance sheet date.

Examples of current assets are as follows:

1. Cash includes coins, currencies, checks, bank deposits, and other cash items readily
available for use in the operations of the business.
2. Cash equivalents are short-term investments that are readily convertible to known
amounts of cash which are subject to an insignificant risk to changes in value (per SFAS
No. 22, revised 2000).
3. Marketable securities are stocks and bonds purchased by the enterprise and are to be
held for only a short span of time or duration. They are usually purchased when a business
has excess cash.
4. Trade and other receivables include the amounts collectible from any of the following
accounts:
 a. Accounts receivable – amount collectible from the customer to whom sales
have been made or services have been rendered on account or credit.
b. Notes receivable – promissory note issued by the client or the customer in
exchange for services or goods received as evidence of his/her obligation to
pay.
c. Interest receivable – amount of interest collectible on promissory notes
received from customers and clients.
d. Advances to employees – certain amount of money loaned to employees
payable in cash or through salary deductions.
e. Accrued income - income already earned but not yet received.
5. Inventories represent the unsold goods at the end of the accounting period. This is
applicable only to a merchandising business.
6. Prepaid Expenses include supplies bought for use in the business or services and benefits
to be received by the business in the future paid in advance.
7. Contra-Asset Accounts are accounts deducted from the related asset accounts.
a. Allowance for Bad Debts – losses due to uncollectible accounts. This is
deducted from the accounts receivable account get the net realizable value.
This is in line with the financial statements’ qualitative characteristic of
conservatism wherein no profits would be anticipated but all probable or
estimable losses should be provided.
b. Accumulated Depreciation – represents the expired cost of property, plant
and equipment as a result of usage and passage of time. This is deducted from
the cost of the related asset account to get the carrying value or book value of
the asset.

Classification of Non-Current Assets

1. Long-term Investments are assets held by an enterprise for the accretion of wealth
through capital distribution such as interests, royalties, dividends, and rentals, for capital
appreciation or for other benefits to the investing enterprise such as those obtained
through trading relationships. Investments are classified as long-term when they are
intended to be held for an extended period of time (IAS No. 25)
2. Property, Plant and Equipment are tangible assets that are held by an enterprise for use
in production or supply of goods or services, or for administrative purposes. These assets
are expected to be used for more than one period (IAS No. 16). Examples of property,
plant and equipment are the following:
a. Land – a piece of lot or real estate owned by the enterprise on which a building
can be constructed for business purposes.
b. Building – edifice or structure used to accommodate the office, store, or
factory of a business enterprise in the conduct of its operations.
c. Equipment – includes typewriter, air-conditioner, calculator, filing cabinet,
computer, electric fan, trucks, and cars used by the business in its office, store,
or factory. Specific account titles may be used such as office equipment, store
equipment, delivery equipment, transportation equipment, and machinery
equipment.
d. Furniture and Fixtures – includes tables, chairs, carpets, curtains, lamp and
lighting fixtures, and wall decors. Specific account titles may be used such as
office furniture and fixtures, and store furniture and fixtures.
e. Intangible Assets – identifiable, non-monetary assets without physical
substance held for use in the production or supply of goods and services, for
rental to others, or administrative purposes. These include goodwill, patents,
copyrights, licenses, franchises, trademarks, brand names, secret processes,
subscription lists, and non-competition agreements (IAS No. 38).
LIABILITIES

Classification of Current Liabilities

Improvements to International Accounting Standards 1 (December 2003) classify liability as a

current liability when:

1. It is expected to be settled in the entity’s normal operating cycle;

2. It is held primarily for the purpose of being traded;
3. It is due to be settled within twelve months after the balance sheet date; or
4. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the balance sheet date.

Trade and Other Payables – include payables from any of the following accounts:

1. Accounts Payable includes debts arising from the purchase of an asset or the
acquisition of services on account.
2. Notes Payable include debts arising from the purchase of an asset or the acquisition
of services on account evidenced by a promissory note.
3. Loan Payable is a liability to pay the bank or other financing institution arising from
funds borrowed by the business from these institutions payable within twelve months
or shorter. (Note: If the loan is payable beyond twelve months, then it is classified
under non-current liabilities.)
4. Utilities Payable is an obligation to pay utility companies for services received from
them. Examples of this are telephone services to PLDT, electricity to Meralco, and
water services to Maynilad.
5. Unearned Revenues represent obligations of the business arising from advance
payments received before goods or services are provided to the customer. This will
be settled when certain goods or services are delivered or rendered.
6. Accrued Liabilities include amounts owed to others for expenses already incurred but
are not yet paid. Examples of these are salaries payable, utilities payable, taxes
payable, and interest payable.

Classification of Non-Current Liabilities

Non-Current liabilities are long term liabilities or obligations which are payable for a period
longer than one year. Examples of non-current liabilities are as follows:

1. Mortgage Payable is a long-term debt of the business with security or collateral in the
form of real properties. In case the business fails to pay the obligation, the creditor can
foreclose or cause the mortgaged asset to be sold and use the proceeds of the sale to
settle the obligation.
2. Bonds Payable is a certificate of indebtedness under the seal of a corporation, specifying
the terms of repayment and the rate of interest to be charged.

OWNER’S EQUITY

Capital is an account bearing the name of the owner representing the original and additional
investment of the owner of the business increased by the amount of net income earned during
the year. It is decreased by the cash or other assets withdrawn by the owner as well as the net
loss incurred during the year.

Drawing represents the withdrawals made by the owner of the business in cash or other assets.
Income Summary is a temporary account used at the end of the accounting period to close
income and expense accounts. The balance of this account shows the net income or net loss for
the period before it is closed to the capital account.

INCOME AND EXPENSES

INCOME STATEMENT

Income statement accounts, namely revenue and expense, are classified as nominal or
temporary accounts.

a. Service Income includes revenues earned or generated by the business in performing

services for a customer or client. The following are different examples of income and
the accounting term used to describe the income:
 Laundry services by a laundry shop (Laundry Income)
 Medical services by a doctor (Medical Fees)
 Dental services by a dentist (Dental Fees)
 Legal services by a lawyer (Legal Fees)
 Advisory services by a consultant (Consultancy Fees)
 Accounting or auditing services by a certified public accountant (Audit
Fees)
b. Salaries and Wages include all payments made to employees or workers for rendering
services to the company. Examples are salaries and wages, 13th month pay, cost of
living allowances, and other related benefits given to the employees.
c. Utilities Expense is an expense related to the use of electricity, fuel, water, and
telecommunication facilities.
d. Supplies Expense covers office supplies used by a business in the conduct of its daily
operations.
e. Insurance Expense is the expired portion of premiums paid on insurance coverage
such as premiums paid for health or life insurance, motor vehicles, or other
properties.
f. Depreciation Expense is the annual portion of the cost of tangible assets such as
buildings, machineries, and equipment charged as expense for the year.
g. Uncollectible Accounts Expense/Doubtful Accounts Expense/ Bad Debts Expense
means the amount of receivables charged as expense for the period because they are
estimated to be doubtful of collection.
h. Interest Expense is the amount of money charged to the borrower for the use of
borrowed funds.

THE SINGLE-STEP INCOME STATEMENT

Presented below is the format of the income statement of a service business. Expenses are simply
deducted from the total revenue to arrive at the net income.

Name of the Company

Income Statement
For Period Ended xxx

Service Revenue Php xxx

Other Income xxx
Total Income Php xxx
Expenses
Salaries Php xxx
Depreciation xxx
 Supplies xxx
Rent xxx
Insurance xxx
Other Expenses xxx
Finance Cost xxx xxx
Net Income Php xxx

Illustration

Below are accounts taken from the books of Luffy’s Ship Repair Services for the month of August.
Prepare an income statement from the given data.

Repairs Revenue Php 200,000

Rent Income 10,000
Salaries and Wages 35,000
Utilities Expense 14,000
Supplies Expense 11,000
Depreciation Expense 2,000
Miscellaneous Expense 3,000

Luffy’s Ship Repair Services

Income Statement
For the Month Ended August 31, 2016

Repairs Revenue Php 200,000

Other Income 10,000
Total Income Php 210,000
Expenses
Salaries and Wages Php 35,000
Utilities Expense 14,000
Supplies Expense 11,000
Depreciation Expense 2,000
Miscellaneous Expense 3,000 Php 65,000
Net Income Php 145,000

Ong, Flocer Lao (2016). Fundamentals of Accountancy, Business, and Management. Quezon City: C&E Publishing, Inc.