ACCOUNTING ELEMENTS

FINANCIAL POSITION

 Assets – present economic resource (4M’s) controlled by the entity as a

result of past transaction. An economic resource is a right that has the
potential to produce economic benefits.
 Liabilities – present obligation of an entity to transfer an economic
resource as a result of past events. An obligation is a duty or responsibility
that the entity has no practical ability to avoid.
 Equity – “residual interest” in the assets of the entity after deducting all of
its liabilities.

FINANCIAL PERFORMANCE

 Income
– increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity
claims.
Ex: sales on account & sales for cash > increase in asset as well as increase
in income.
unearned revenue/income > decrease in liabilities but increase in income.
- collected in advance but not yet earned.
Ex: the seller is engaged in a renting business: rent income – “unearned
revenue” whereas, the buyer renting the place: rent expense – “prepaid
rent”. Once, the revenue is earned there would be a decrease in liabilities:
unearned revenue and increase in income.
 Expenses
– decreases in assets, or increases in liabilities that result in decreases in
equity, other than those relating to distributions to holder of equity claims.
Ex: the buyer has prepaid expense – paid in advance but not yet incurred
(increase asset: rent, decrease asset: cash) but the time that the prepaid
expense is incurred there would be decrease in liabilities: prepaid expense,
increase in expense.
accruals – already incurred but not yet paid.
- already recognized in the expense.
o Increase in income = increase in equity – directly related
o Increase in expense = decrease in equity – indirectly related
 Expenses – must be recognized when incurred not or regardless when
paid.
 Income – must be recognized/recorded when earned or the service is
already provided.
  Incurred – kung kailan talaga nagastos o nangyari ang expense. All
transactions must be recorded on the day occur not on the day of
payment.

ACCOUNT

- a basic summary device

- it is where the detailed record of the increases and decreases and balance of
each element that appears in the financial statement.

- a separate account is maintained for each element that appears in the statement
of financial position and financial performance.

Account: (debit in left side) – value received

(credit in right side) – value parted with

NORMAL BALANCE SIDE

ACCOUNTING ELEMENTS DEBIT CREDIT

Assets +
Liabilities +
Owner’s Equity +

Income +
Expenses +

DOUBLE ENTRY SYSTEM

“dual effects of business transaction are recorded”

BUSINESS TRANSACTIONS

- economic activities of a business.

- an exchange of value between 2 parties (business and employee) expressed in

monetary terms (money).

CHARACTERISTICS:

 Exchange of value
 Between 2 parties
 In terms of money
ACCOUNT TYPE

- is determined how increases and decreases in the account is recorded.

 ACCOUNTING EQUATION

Assets = Liabilities + Equity

 EXPANDED ACCOUNTING EQUATION

Equity = (Capital – Withdrawal + Income – Expenses)

THE CHART OF ACCOUNTS

- listing of account titles that guides the bookkeeper in the recording of

transactions.

- account numbers and account codes.

 Asset – starts 1
 Liabilities – starts 2
 Equity – starts 3
 Income – starts 4
 Expenses – starts 5

NORMAL OPERATING CYCLE:

Service

renders service – collects – cash

Merchandising

cash – buy merchandise – sell – collects – cash

Manufacturing

cash – buy raw materials – convert to finished goods – sell – collects – cash

CLASSIFICATIONS:

ASSET

 Current Assets
– expected to be realized, sold, or consumed within the normal operating
cycle.
- held for the purpose of trading.
 - expected to be realized within twelve months after the reporting period.
- unrestricted from being exchange or used to settle a liability for at least
one year after the reporting period.
 Within – current
 Beyond – non-current
Cash – coins and currencies, checks, bank deposits.
o Cash on hand – cash items in the custody of the office-in-charge.
o Cash in bank – cash deposited in the bank under a current or
savings account.
Cash Equivalents – short-term highly liquid investments.
Accounts Receivable – claims against customers arising from sale of goods
and services. A collectible from customer.
Notes Receivable – written promise by a customer to pay at a fixed
amount on a certain date.
Inventories – assets held for sale in the ordinary course of business, in the
process of production, in the form of materials or supplies to be
consumed.
Prepaid Expenses – expenses paid in advance.

 Non-Current Assets
Property, Plant, and Equipment (PPE) – tangible assets held by the
enterprise for use in the production or supply of goods or services, for
rental to others, or for administrative purposes which are expected to be
used for a longer period of time.
o Land – lot or real estate owned and used by the business.
o Building – structure used to house the office, store or factory.
o Equipment – equipment such as typewriter, air conditioner,
calculator, computer, cars, etc.
o Furniture & Fixtures – tables, chairs, curtains, wall decorations,
etc.
o Leasehold or Lease Right – for a fee, the lessee is given the right to
use the property of the lessor over a long period of time.
Security Deposits – deposit being paid by lessee
2 PARTIES: lessee – who purchase the services
lessor – who gave services
Ex: lessee – nagrerenta
lessor - nagpaparenta
Now, lessee has to pay a security deposit to lessor, the least agreement is
3 years, need to pay 2 months advance and 1 month deposit. The security
deposit will be applied at the end of renting period.
 Accumulated Depreciation – sum of periodic depreciation charges;
deductible from PPE. A “contra asset account”.
Ex: buys a 100,000 worth laptop (expected useful life is 5 years).
100,000/5 years = 20,000 (annual depreciation)

DEPRECIATION 2022 2023 2024 20252 2026

Depreciation 20,000 20,000 20,000 20,000 20,000
Expense
Accumulated 20,000 40,000 60,000 80,000 100,000
Depreciation

Intangible Assets – an asset without physical substance held by the

enterprise for use in the production or supply of goods or services, for
rental to others, or for administrative purposes.
Ex: copyright, trademark, brand names > intellectual properties.

LIABILITIES

 Current Liabilities
- expected to be settled within the normal operating cycle.
- for the purpose of trading.
- expected to be settled within one year.
- no unconditional right to defer settlement for at least 12 months after
the reporting period – if you are the debtor, you have no right to
defer/extend the settlement or term.
Accounts Payable – reverse relationship of the account receivable. If it is
due to be settled either within or beyond 1 year, still current assets.
o Loan Payable – liability to pay the bank or financing instituton for
the amount borrowed by the business.
o Interest Payable – additional charge or obligation to pay for
interest-bearing promissory note.
Short-term Notes Payable - amounts owed to others for unpaid expenses.
Accrued Liabilities – expenses are incurred but not yet paid.
Unearned Revenues – advances received from customers before providing
goods or services.
Taxes Payable

The account receivable of seller is the accounts payable of buyer.

 Non-Current Liabilities
Mortgage Payable – long-term debt for which the entity has pledge certain
assets as security to the creditor. It has a collateral.
 Ex: loan in bank and the collateral would be the properties
Long-term Notes Payable – has a promissory note.

EQUITY

ACTIVITY OWNER’S PARTNERS’ SHAREHOLDERS’

EQUITY EQUITY EQUITY
Investment Owner’s Capital Partner’s Capital Share
Account Account Capital/Share
Premium
Withdrawal Owner’s Loan/Return of Generally not
Withdrawal Investment allowed
Account
Income and Owner’s Capital Partner’s Capital Retained earnings
Losses
Distribution of Owner’s Partner’s Capital Retained earnings
Income Withdrawal Account
Account

INCOME

Service Income – revenues earned by performing services for a customer

or clients.
Sales – revenue earned as a result of sale of merchandise.
Gains – income earned other than the ordinary course or business.
Ex: old equipment sold is called gains, when a something was depreciated
then was able to sell is part of gains.

EXPENSES

Cost of Salaries
Salaries Expense
Utilities
Rent Expense
Insurance
Depreciation
Uncollectible Accounts Expense – “bad debts expense”
Interest Expense