LESSON 4

DEFINITION OF TERMS

OBJECTIVES:

1. To define the different terminologies in accounting

2. To give importance about the given terminologies in accounting.

LEARNING CONTENT:

TYPICAL ACCOUNT TITLES USED

Statement of Financial Position

Assets

Assets are should be classified only into two: current assets and non-current assets. Per revised
Philippine Accounting Standards (PAS) no. 1, entity shall classify assets as current when:
a. It expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle;
b. It holds the asset primarily for the purpose of trading;
c. It expects to realize the asset within twelve months after the reporting period or;
d. The asset is cash or a cash equivalent (as defined in PAS No. 7) unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve months after
the reporting period.

Current Assets

Cash. Cash is any medium of exchange that a bank will accept for deposit at face value. It
includes coins, currency, checks, money orders, bank deposits and drafts.

Cash Equivalents. Per PAS No. 7, these are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of changes in
value.

Notes Receivable. A note receivable is a written pledge that the customer will pay the business a
fixed amount of money on a certain date.

Accounts Receivable. These are claims against customer arising from sale of services or goods
on credit. This type of receivable offers less security than a promissory note.

Inventories. Per PA No. 2, theses are assets which are (a) held for sale in the ordinary course of
business; (b) in the process of production for such sale; (c) in the form of materials or supplies to
be consumed in the production process or in the rendering of services.
Prepaid Expenses. These are expenses paid by the business in advance. It is an asset because the
business avoids having to pay cash in the future for a specific expense. These include insurance
and rent. These prepaid items represent future economic benefits – assets – until the time these
start to contribute to the earning process; these, then, become expenses.

Non-current Assets

Property, Plant and Equipment. Per PAS No. 16, these are tangible assets that are held by an
enterprise for use in the production or supply of goods or services, or for rental to others, or for
administrative purposes and which are expected to be used during more than one period

Accumulated Depreciation. It is a contra account that contains the sum of the periodic
depreciation charges. The balance in this account is deducted from the cost of the related-
equipment of building – to obtain book value.

Intangible Assets. Per PAS No. 38. These are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.

Liabilities

Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify a liability as
current when:
a. It expects to settle the liability in its normal operating cycle
b. It holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the reporting period; or
d. The entity does not have an unconditional right to defer settlement of the liability for
atleast twelve months after the reporting period.

Current liabilities

Accounts Payable. This account represents the reverse relationship of the account receivable. By
accepting the goods or services, the buyer agrees to pay for them in the near future.

Notes Payable. a note payable is like a note receivable but in a reverse sense. In the case of a note
payable, the business entity is the maker of the note; that is; the business entity is the party who
promises to pay the other party a specified amount of money on a specified future date

Accrued Liabilities. Amounts owed to others to others for unpaid expenses.

Unearned Revenues. When the business entity receives payment before providing its customers
with goods or services, the amounts received are recorded in the unearned revenue account.

Current Portion of Long-Term Debt. These are portions of mortgage note, bond and other long
term indebtedness which are to be paid within one year from the balance sheet date.

Non current Liabilities

Mortgage Payable. This account records long term debt of the business entity for which the
business entity has pledged certain assets as security to the creditor. In the event that the debt
payments are not made, the creditor can foreclose or cause the mortgaged asset to be sold to
enable the entity to settle the claim.

Bonds Payable. Business organization often obtain substantial sums of money from the lenders
to finance the acquisition of the equipment and other needed assets. They obtain these funds by
issuing bonds. The bond is a contract between the issuer and the lender specifying the terms of
repayment and the interest to be charged.

Owner’s Equity

Capital(from the Latin capitalis, meaning “property”). This account is used to record the original
and additional investments of the owner of the business entity. It is increased by the amount of
profit earned during the year or is decreased by a loss.

Withdrawals. When the owner of a business entity withdraws cash or other assets, such are
recorded in the drawing or withdrawal account rather than directly reducing the owner’s equity
account.

INCOME STATEMENT
Income

Service Income. Revenues earned by performing services for a customer or client

Sales. Revenues earned as a result of sale of merchandise\

Expenses

Cost of sales. The cost incurred to purchase or to produce the products sold to customers during
the period

Salaries or Wages Expense. Includes all payments as a result of an employer-employee

relationship such as salaries or wages, 13th month pay, cost of living allowance and other related
benefits.

Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of

telecommunications facilities, consumption of electricity fuel and water.

Rent Expense. Expense for space, equipment or other asset rentals.

Supplies Expense. Expense of using supplies in the conduct of daily business.

Insurance Expense. Portion of premiums paid on insurance coverage.

Depreciation Expense. The portion of the cost of a tangible asset allocated or charged as
expense during an accounting period.
Uncollectible Accounts Expense. The amount of receivables estimated to be doubtful of
collection and charged as expense during an accounting period.

Interest Expense. An expense related to use of borrowed funds.

REFERENCE: BASIC ACCOUNTING MADE EASY BY WIN BALLADA, CPA,CBE,MBA