Financial accounting and reporting

APDS; BSA

MODULE 1: UNDERSTANDING THE ELEMENTS OF FINANCIAL STATEMENTS AND THE RECORDING PROCESS
Lipa can use the rented space for the period
The Double Entry System and stipulated in the lease contract. SM owns the space
but Executive Optical has the right to use the space
Accounting Equation based on their contract or agreement.
(ii) Rights to use intellectual property. Example, the
inventors of covid vaccine can control the
production, distribution and sale of the said vaccine.
The DOUBLE-ENTRY SYSTEM OF ACCOUNTING or
c. rights established by contract or legislation such as owning a debt
bookkeeping means that for every business instrument or an equity instrument or owning a registered patent.
transaction, amounts must be recorded in a
minimum of two accounts. The double-entry LIABILITIES
system also requires that for all transactions, the A present obligation of the entity to transfer an
amounts entered as debits must be equal to the economic resource as a result of past events.
amounts entered as credits. Hence to be a liability, there is the PAST,
PRESENT, FUTURE ...
Example of a Double-Entry System
To illustrate double entry, let's assume that a company • PAST- an event happened in the past and the
borrows P500,000 from its bank. The company's Cash entity obtained benefits from the transaction.
account must be increased by P500,000 and a liability Example you have purchased a brand-new car
account must be increased by P500,000. To increase last month (on account and not on cash)
an asset, a debit entry is required. To increase a • PRESENT-the past event resulted to a present
liability, a credit entry is required. Hence, the account obligation. An obligation is a duty or responsibility
Cash will be debited for P500,000 and the liability that an entity has no practical ability to avoid. It is
Loans Payable will be credited for P500,000. something owed to another party.
• FUTURE- To extinguish the obligation, the entity
Double Entry Keeps the Accounting Equation in Balance
is to transfer the economic resource at a future
Double entry also means that the accounting equation
date. An obligation to transfer economic resource
(Assets = Liabilities + Owner's Equity) will always be in
include for example:
balance. In our example, the accounting equation o obligations to pay cash.
remained in balance because both assets and liabilities o obligations to deliver goods or noncash resources.
were each increased by P500,000. o obligations to exchange economic services with another
party on unfavorable terms. Such obligations include, for
example, a forward contract to sell an economic resource
Elements of Financial Statements on terms that are currently unfavorable or an option that
entitles another party to buy an economic resource from
the entity.
o obligation to provide services at some future time.
ELEMENTS OF FINANCIAL POSITION o obligation to transfer an economic resource if specified
uncertain future event occurs.

ASSETS
Economic resource is a right that has the EQUITY
potential to produce economic benefits. There It is the net assets of the business. One may
are three aspects to these definitions: "right"; " arrive at the equity by subtracting the total
potential to produce economic benefits"; and " liabilities from the total assets.
Control." • Sole Proprietorship - only one owner's equity
account
Rights that have the potential to produce economic benefits take many • Partnership - several owner's equity account,
forms, including: one for each partner
a. rights that correspond to an obligation of another party, for
example: • Corporation - shareholder's equity which
i. Rights to receive cash. consists of the share capital, retained earnings
ii. Rights to receive goods or services. and reserves.
iii. Rights to exchange economic resources with another party
on favorable terms. Example a forward contract to buy corn
at a fixed price of P 10.00 per kilo even if the price of corn
may fluctuate in the future.
ELEMENTS OF FINANCIAL PERFORMANCE
iv. Rights to benefit from an obligation of another party to INCOME
transfer an economic resource if a specified uncertain
future event occurs. Example the company ensures its
warehouse and all its inventory for P 10M had it be burned INCOME
by fire.
b. Rights that do not correspond to an obligation of another party for Increases in assets or decreases in liabilities,
example: that result in increases in equity, other than
(i) Rights over physical objects, such as property, plant
and equipment or inventories. Example, the those relating to contributions from holders of
business owner of Executive Optical located at SM equity claims.

Life is like accounting. Everything must be balanced.

 Financial accounting and reporting
APDS; BSA
EXPENSES or supply of goods or services, or for rental to
others, or for administrative purposes and which
Expenses are decreases in assets or decreases in
are expected to be used during more than one
liabilities, that result in decreases in equity, other period. These includes land, building, machinery
than those relating to distributions to equity and equipment, furniture and fixtures, motor
holders. vehicles and equipment.
8. ACCUMULATED DEPRECIATION - it is a contra
Account Titles Commonly Used in asset account that totals the depreciation
charges of the property, plant, and equipment.
Businesses 9. INTANGIBLE ASSETS - as per PAS 38, intangible
assets are identifiable, nonmonetary assets
ASSETS without physical substance that are held for use
in the production or supply of goods or services,
Philippine Accounting Standards (PAS) 1 states that for rental to others, or for administrative
Assets should be classified as either Current Assets or purposes.
Non-Current Assets.
LIABILITIES
OPERATING CYCLE is the period when the entity
acquires assets, process it, sells it and realize or CURRENT LIABILITIES
converts back to cash or cash equivalents. When the
operating cycle of an entity is not clearly identifiable, 1. ACCOUNTS PAYABLE - This account represents
it is assumed to be twelve months. the reverse relationship of the accounts
receivable. By accepting the goods or services,
CURRENT ASSET the buyer agrees to pay for them soon.
o it expects to realize the asset, or intends to sell or 2. NOTES PAYABLE - The business entity is the
consume it, in its normal operating cycle. maker of the note; that is the business entity is the
o it holds the asset primarily for the purpose of trading. party who promises to pay the other party a
o it expects to realize the asset within twelve months after specified amount of money on a specified due
the reporting period; or
date.
o the asset is cash or cash equivalent unless the asset is
3. ACCRUED LIABILITIES - Amounts owed to others
being restricted from being exchanged or used to settle
a liability for at least twelve months after the balance for unpaid expenses. This account includes
sheet date. salaries payable, utilities payable, interest
payable and taxes payable.
1. CASH - Is any medium of exchange that a bank 4. UNEARNED REVENUES - When the business
will accept for deposit at face value. entity receives payment before providing its
2. CASH EQUIVALENTS - PAS 7 defines cash customers with goods or services, the amounts
equivalents as highly liquid investments that are received are recorded in the unearned revenue
readily convertible to cash. account (liability method). When the goods or
3. NOTES RECEIVABLE - It is a written pledge that services are provided to the customer, the
the customer will pay the business a fixed amount unearned revenue account is reduced, and
of money on a certain date. income is recognized.
4. ACCOUNTS RECEIVABLE - These are claims 5. CURRENT PORTION OF LONG-TERM DEBT -
against customers arising from the sale of These are portions of mortgage notes, bonds and
services or goods on credit. This has less security other long-term indebtedness which are to be
as compared to promissory notes. paid within one year from the statement of
5. INVENTORIES - These are assets which are (a) held financial position.
for sale in the ordinary course of business, (b) in
the process of production for such sale, (c) in the NON-CURRENT LIABILITIES
form of materials or supplies to be consumed in
the production process or in the rendering of 6. MORTGAGE PAYABLE -This account records
services. long-term debt of the business entity for which
6. PREPAID EXPENSES- These are expenses paid the business entity has pledged certain assets as
by the business in advance. security to the creditor. (Has Collateral)
7. BONDS PAYABLE - Business organizations often
NON-CURRENT ASSETS obtain substantial sums of money from lenders to
finance the acquisition of equipment and other
7. PROPERTY, PLANT AND EQUIPMENT (PPE) - needed assets. They obtain these funds by issuing
PAS16 defines this asset as tangible assets that bonds. The bond is a contract between the issuer
are held by an enterprise for use in the production and the lender specifying the terms of repayment
and the interest to be charged.

Life is like accounting. Everything must be balanced.

 Financial accounting and reporting
APDS; BSA

ACCOUNTING EVENT
OWNER'S EQUITY • Is an economic transaction that increases or
1. CAPITAL - from the Latin word capitalis meaning decreases an entity's assets, liabilities, and
property, this account is used to record the owner's equity.
investment of the owner. • A recordable event is that which is measurable in
2. WITHDRAWALS - It is a temporary account that money.
is used to record the withdrawal of the business • A fortuitous event that cause damage to
owner of cash or other asset from the business. properties and that the amount of damage can be
3. INCOME SUMMARY- It is a temporary account known should be recorded in the books of the
that is used to close the income and expenses of entity.
the business at the end of the accounting period.
Two types of an accounting event
INCOME ▪ EXTERNAL EVENT - is one in which the company
transactions with an outside party and that its
1. SERVICE INCOME REVENUES - earned when finances will change due to the said event.
performing services to a client. ▪ INTERNAL EVENT - if it affects the entity such as
2. SALES REVENUES - earned because of sale of use of machineries and equipment to produce
merchandise. goods and services or the use of the product of
Department A by Department B.
EXPENSES
1. COST OF SALES - the cost incurred to purchase TYPES and EFFECTS of TRANSACTIONS
or produce the products being sold. 1. SOURCE OF ASSETS (SA) - This means that the entity
2. SALARIES OR WAGES EXPENSE - Includes all acquires the asset by either having liabilities or
payments because of the employer-employee that which is provided by the owner.
relationship. ▪ Increase in Assets = Increase in Liabilities
3. TELECOMMUNICATIONS, ELECTRICITY, FUEL ▪ Increase in Assets = Increase in Owner's
AND WATER EXPENSES - Expenses related to Equity
the use of telecommunication facilities, and
consumption of electricity, fuel, and water. 2. EXCHANGE OF ASSETS (EA) - Here the company use
4. RENT EXPENSE - Expenses for the use of space, the assets to have another asset.
equipment, or other assets for rentals. ▪ Increase in One Asset = Decrease in another
5. SUPPLIES EXPENSE - Expense of using supplies Asset
while doing business.
6. INSURANCE EXPENSE - Portion of premiums 3. USE OF ASSETS (UA) - Here an asset account
paid on insurance coverage. decreases and a liability or equity account
7. DEPRECIATION EXPENSE - The portion of the decreases.
cost of assets with physical substance charged to ▪ Decrease in Assets= Decrease in Liabilities
expenses during the period. ▪ Decrease in Assets = Decrease in Owner's
8. UNCOLLECTIBLE ACCOUNTS EXPENSE OR Equity
BAD DEBTS EXPENSE - The number of
receivables that are estimated to be doubtful of 4. EXCHANGE OF CLAIMS (EC) - One claims (liabilities
collection and charged to expense during an or owner's equity) account increases and another
accounting period. claims (liabilities or owner's equity) account
9. INTEREST EXPENSE - Expense related to decreases.
borrowed funds. This is the cost of the funds ▪ Increase in Liabilities = Decrease in Owner’s
borrowed which shall be paid in addition to the Equity
principal amount owed. ▪ Increase in Owner's Equity = Decrease in
Liabilities
The Account and The Accounting Equation
▪ Increase in one Liability = Decrease in
another Liability
▪ Increase in one Owner's Equity=Decrease in
ACCOUNT another Owner's Equity
The basic summary device of accounting.
T ACCOUNTS
ACCOUNTING EQUATION
DEBIT (DR) comes from Latin “debere” and
merely means “left,” or the “left-hand” side
ASSETS = LIABILITIES + OWNER’S of an account.
EQUITY

Life is like accounting. Everything must be balanced.

 Financial accounting and reporting
APDS; BSA
CREDIT (CR) comes from the Latin
“credere”, and means “right,” or the “right-
hand” side of an account.

ACCOUNTS TITLE

DEBIT CREDIT

ACCOUNT DEBIT CREDIT

ASSETS + -
LIABILITIES - +
O-EQUITY - +
DRAWINGS + -
REVENUE - +
EXPENSES + -

ACCOUNTS INCREASING IN DEBIT:

• ASSETS
• DRAWINGS
• EXPENSES

ACCOUNTS INCREASING IN CREDIT:

• LIABILITIES
• O-EQUITY
• REVENUE

Life is like accounting. Everything must be balanced.