BASIC ACCOUNTING

PART II

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

Types of Financial Statements

1. Statement of Financial Position or Balance Sheet – shows financial

condition/position of a business as of a given period. It consists of the
assets, liabilities and capital.
2. Statement of Comprehensive Income or Income Statement – Shows the
result of operations for a given period. It consists of the revenue, cost and
expenses.
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 or minus the net
income or net loss for the year.
4. Statement of Cash Flow – Summarizes the cash receipts and disbursements
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 cash in a given period and the cash balance at the end of
the period.

BALANCE SHEET

- Permanent or Real Account

Assets – economic resources owned by the business expected for future gain.
They are property and rights of value owned by the business.

Current Assets – Expected to be realized within the normal operating cycle

 Cash
  Cash Equivalents
 Marketable Securities
 Trade and Other Receivables
o Accounts Receivables
o Notes Receivables
o Interest Receivables
o Advances to Employees
o Accrued income
 Inventories
 Prepaid Expenses
 Contra-Asset Accounts
o Allowance for Uncollectible Account
o Accumulated Depreciation

Non-Current Assets – any assets that did not fall under the classification of
current assets.

 Long-Term Investment
 Property Plant and Equipment
o Land
o Building
o Equipment
o Furniture and Fixtures
o Intangible Assets

Liabilities – include debts, obligations to pay, and claims of the creditors on the
assets of the business

Current Liabilities – expected to be settled in the entity’s normal operating cycle;

 Trade and other Payables

o Accounts Payable
 o Notes Payables
o Loans Payable
o Utilities Payable
o Unearned Revenue
o Accrued Liabilities
 Non-Current Liabilities – long-term liabilities or obligations which are
payable for a period longer than a year.
o Mortgage payable
o Bonds Payable

Equity – 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
result of operations. Comes from two main sources – investment of owners and
earnings of business.

 Capital
 Drawing
 Income Summary – temporary account used at the end of accounting
period to close income and expense accounts.

INCOME STATEMENT

Income Statement accounts – namely revenue and expenses, are classified as

nominal or temporary accounts.

Income – Increase in assets, or decreases in liabilities, that results in increases in

equity, or other than those relating to contributions from holders of equity claims.

 Service Income e.g.

o Laundry Income
o Medical Fees
o Dental Fees
o Legal Fees
 o Consulting Fees
o Audit Fees

Expenses – Decreases in assets, or increases in liabilities, that results in decreases

in equity, or other than those relating to distributions from holders of equity
claims.

 Salaries or Wages Expense

 Utilities Expense
 Supplies Expense
 Insurance Expense
 Depreciation Expense
 Uncollectible Accounts Expense
 Interest Expense

THE ACCOUNT

The basic summary device of accounting is the account. The simplest form
of account is the T Account.

Account Title

Left Side or Right Side or

Debit Side Credit Side

THE ACCOUNTING EQUATION

It states that assets must always equal to liabilities and owner’s equity.

ASSETS = LIABILITIES + OWNER’s EQUITY

 DEBITS AND CREDITS – THE DOUBLE-ENTRY SYSTEM

Accounting is based on a double entry system which means that the dual effects
of a business transaction is recorded. A debit side entry must have a
corresponding credit side entry. For every transaction, there must be one or more
accounts debited and one or more accounts credited. Each transaction affects
at least two accounts. The total debits for a transaction must always equal the
total credits.

NORMAL BALANCE OF AN ACCOUNT

Increases Normal Balance

Recorded by
Account Category Debit Credit Debit Credit
Assets / /
Liabilities / /
Owner’s Equity:
Owner’s Capital / /
Withdrawals / /
Income / /
Expenses / /

References
Ballada, W. (2018). Basic Financial Accounting and Reporting. Manila: DomDane
Publishers.

Ong, F. L. (2016). Fundamentals of Accounancy, Business and Management 1 for Senior

High School. Quezon City: C & E Publishing, Inc.