BFM 1201 (Financial Analysis and Reporting)

Objectives:

1. Define accounting.
2. To acquaint with the business’ use of financial statements for decision making purposes.
3. To introduce some technical terms in Accounting which will help them understand the language of business.

Accounting

- Accounting Standard Council (ASC) defined it as “it is service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities, that is intended to be useful in making
economic decisions.”
- American Institute of Certified Public Accountants (AICPA) defined it as “an art of recording, classifying,
summarizing in a significant manner and in terms of money, transactions and events which are, in part at
least of a financial character and interpreting the results thereof.”

Accounting considered as the “Language of Business”

As mentioned earlier, the business and the owner are being separated and the financial statements
become the “bridge of communication” between them.

Five Financial Statements

1. Statement of Financial Position or Balance Sheet

- shows the financial position of an enterprise as of a particular or specific date.
- this measures and evaluates in terms of the enterprise’s liquidity, solvency, financial structure and
capacity for adaptation.
2. Statement of Comprehensive Income or Income Statement
- shows the performance of the enterprise for a given period of time
- performance of the enterprise is primarily measured in the level of income earned and by the
enterprise through effective and efficient utilization of its resources.
3. Statement of Changes in Equity
- summarized the changes in equity for a given period.
4. Statement of Cash Flows
- provides information about the details of changes in cash position of the business during a given
period.
5. Accounting Policies and Notes to Financial Statements
- represents significance accounting policies that affected the financial statements and other disclosure
necessary to make the financial statements more useful.

Five Elements of Financial Statements

1. Assets – resources controlled by the enterprises as a result of past transactions and events and from which
future economic benefits are expected to flow the enterprise.
 - things that are owned and used by the enterprise in its operations.
2. Liabilities – present obligation of an enterprise arising from past transactions or events, the settlement
which is expected to result in an outflow from the enterprise of resources embodying economic
benefits.
- financial obligations of the business to the creditors.
3. Owner’s Equity or Capital – the residual interest in the assets of the enterprise after deducting all its
liabilities.
- it is increased when there is profit or additional contributions and decreased when there is loss or
withdrawals by the owner.
4. Revenues – the gross inflow of economic benefits during the period arising in the course of ordinary
activities of an enterprise when those inflows result in increase in equity, other than those relating
to contributions from owners.
5. Expenses – the gross outflow of economic benefits during the period arising in the course of ordinary
activities of an enterprise when those outflow result in decrease in equity, other than those relating
to distribution to owners.

Bookkeeping – is the process of recording “systematically’ the business transaction in a “chronological manner”.

 systematic – it follows procedures and principles

 chronological – recorded in order of the date of occurrence

Accounting Cycle

- refers to the various steps of the accounting process which are composed of the following steps:

1. Journalizing 6. Financial Statements

2. Posting 7. Closing Entries
3. Trial Balance 8. Post Closing Trial Balance
4. Adjusting Entries 9. Reversing Entries
5. Worksheet

Business Transactions

- series of activities commonly called “business operations”

- in every transaction there is a Value Received, we call a debit and Value Parted, we call a credit. This is the
“give and take” process of accounting.

How business Transactions Analyzed?

- business transactions are analyzed from the view point of business. It the transaction is “ Purchased” or
“Bought”, it is the business that is buying.

Illustration
 “Bought a car for a cash, P 650,000.”

1. Who bought the car? The business

2. What is the value received? Car
3. What is the value parted with? Cash
4. What is the peso equivalent of these exchange? P650,000

We then say,
Car 650,000
Cash 650,000

Extended Illustrations on Transaction Analysis

1. Sold an old typewriter for cash, P 20,000.

Cash 20,000
Office Equipment 20,000

2. Bought laundry supplies on credit from Gaisano Fiesta Mall, P30,000.

Laundry Supplies 30, 000
Accounts Payable 30, 000

Account Titles

- are identifications or brief descriptions of item that fall to same kind, class or nature. In recording business
transactions, the elements of financial statements which are better known as “accounting elements” or
“accounting values” are to be assigned with their individual names called “account titles”.

Chart of Accounts

- list of account titles

Accounting Equation

Assets = Liabilities + Owner’s Equity

Normal Balance of Accounts

Assets – Debit Income/Revenues – Credit

Liabilities – Credit Expenses – Debit
Owner’s Equity – Credit

Rules of Debit and Credit

 a. Asset accounts normally have debit balances. An increase in asset is recorded as debit while a decrease in an
asset is recorded as credit.
b. Liability accounts normally have credit balances. An increase in liability is recorded as credit while a decrease
in an asset is recorded as debit.
c. The owner’s equity accounts normally have credit balances. This increase on the credit and a decrease on
the debit.
d. Income/revenue accounts normally have credit balances. These accounts increase on the credit and
decrease on the debit.
e. Expense accounts normally have debit balances. These accounts increase on the debit and decrease on the
credit.

JOURNALIZING

Book of Accounts – records that are used and kept by the business in storing all of the accounting data

f. Journal – book of original entry

g. Ledger – book of final entry

Columnar Headings of a General Journal

DATE – shows the dated when the transactions took place

PARTICULAR – shows the item or the accounts debited and credited as a result of a transaction analysis
as well as brief or concise explanation of what the transaction is about

FOLIO – shows the number of an account in a ledger page or page of a ledger to which it was
transferred. Folio is a Latin word for “page”.

DEBIT COLUMN – this is a money column showing the peso amount of the value received in a
transaction

CREDIT COLUMN – this is a money column showing the peso amount of the value parted in a
transaction

Recording is the first phase of Accounting. This involves the writing down of business transaction in a systematic
manner and in order of occurrence in the book of original entry.

Procedures in Filling-up a Journal

1. The Date Column is divided into sub-columns. Enter in the first sub-column the month and the year. The year
is written above the month in the same space of the first line.
2. The Particular Colum – After analyzing a transaction and have ably determined the value received and the
value parted with. Enter the debit item first in the same line with the transaction date and the corresponding
peso amount in the debit money column. The credit item is indented with a reasonable distance from the
column of the debit item. The amount of the debit must be equal with the amount of the credit
A complete journal entry should have an explanation.
3. Leave a vacant space before recording the next transaction. Write only the date in the second sub-column of
the date column and the same procedure is follows.