Transaction No.2.
When the entity renders services on credit, it creates an entity’s normal operating cycle is not clearly identifiable, it is assumed to be
account receivable which is an asset account and a revenue account which
increases owner’s equity.
Transaction No. 3. When an electric bill is received, an expense account
is created, but it was not paid, therefore, the incurrence of an expense
decreases the owner’s equity account and increases the liability account due
to non – payment.
Transaction No. 4. Borrowings increase the asset account Cash and the
Notes Payable due to issuance of promissory note which is a liability
account.
Transaction No.5. The owner withdraws cash for personal use, therefore
asset cash decreases and a withdrawal account is created which is a contra-
equity account. Owner’s equity account has a normal balance of “credit”,
the withdrawal account is a contra account and has a normal balance of
“debit”.
TYPICAL ACCOUNT TITLES USED
Statement of Financial Position (briefly discuss)
Assets. As per revised Philippine Accounting Standards (PAS) No. 1,
assets should be classified only in two (2): Current and Non-Current Assets.
Assets are considered current when:
a. it expects to realize, consumes or intends to sell it within the normal
operating cycle of the business
b. it holds the asset primarily for the purpose of trading
c. it expects to realize the asset within twelve (12) months after the
reporting period
d. the asset is cash or 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.
Operating Cycle is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the
twelve (12) months. The entity uses an accounting period that covers certain
accounting functions which can be either a calendar or fiscal year.
Calendar year means the accounting operations of the business covers
one year from January and ends in December.
Fiscal year or period means any 12-month period covering the
accounting operations of the business.
Example: May 2019 to May 2020 is one fiscal period.
Current Assets
Cash. It refers to any medium of exchange that a bank will accept for
deposit at face value including 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 amount of cash and which
are subject to insignificant risk of changes in value
Notes Receivable. 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 customers arising from
sale of services or goods on credit. This type of receivable offers less
security than a promissory note.
Allowance for Uncollectible accounts /Bad debts. A contra-asst
account which provides for possible losses from uncollected accounts
receivable. The amount provided for this is only an estimate.
Inventories. Per PAS No. 2, these are assets (a) which are held for sale in
the ordinary course of business; (b) in the process of production for such
sale; or (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 for by the business in
advance. It is classified as an asset because the business avoids having to
pay cash in the future for a specific expense.
Noncurrent Assets
Property, Plant & 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.
Examples: Land, Machinery, Equipment, furniture and fixtures.
Accumulated Depreciation. It is a contra-account that contains the sum
of the periodic depreciation charges. The balance from this account is
deducted from the cost of the related asset – equipment or building – to
obtain book value.
Intangible Assets: Per PAS No. 38, these are identifiable non-monetary
assets without physical substance held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes.
Examples: Goodwill, patents, copyrights, licenses, franchises,
trademarks, brand names, secret processes, subscription lists and on-
competitive agreements.
Liabilities
Current Liabilities. As per revised PAS No 1, an entity shall classify
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 (12) months after the
reporting period.
d. the entity does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting period.
Accounts Payable. It denotes obligations or debts of the business arising
from services received, merchandise, supplies or property, plant and
equipment acquired on account. It is an “open account” obligation because it
is not supported by a promissory note.
Notes Payable. The treatment is similar to accounts payable however, this
account is supported with a promissory note executed by the debtor in favor
of the creditor.
Accrued liabilities. Amounts owed to others for unpaid expenses. This
account includes salaries payable, utilities payable, interest payable and
taxes payable.
Unearned Revenues. The business entity receives payment before
providing the customers with goods or services, the amount received is
reorder to unearned revenue account. When the goods or services are
provided to the customer, the unearned revenue account is reduced and
income is recognized.
Current Portion of Long-term Debt. These are portion of mortgage
notes, bonds and other long-term indebtedness which are to be paid within
one year from the balance sheet date.
Noncurrent liabilities
Mortgage Payable. This account is used to record long-term debt that is
supported or backed up by a collateral or has pledged certain assets as
security to the creditor.
Bonds Payable. Is a contract between the issuer and the lender specifying
the terms and conditions of repayment and the amount of interest to be
charged. It is a long-term obligation evidenced by certificate of
indebtedness. Business obtain funds to finance acquisition of equipment and
other needed assets by issuing bonds.
Equity. The equity represents what is left to the business after the liabilities are fully
paid.
Capital. This account is used to record the original and additional investments of the
owner of the business. It is increased by the amount of profit earned during the year or
decreased by a loss or by cash or other assets that the owner may withdraw from the
business. This account bears the name of the owner.
Example: if the owner of the business is Mr. Landicho, therefore, the capital account
of the business will be Landicho, Capital.
Withdrawals. When the owner of a business entity withdraws cash or other assets for
personal use, such is recorded in the withdrawal account rather than directly reducing the
owner’s equity account.
Income Summary. Is a temporary account used at the end of accounting period to close
income and expenses.This account shows the profit or loss for the period before closing to
the capital account.

Statement of Comprehensive Income

Income. Increases in economic benefits during the accounting period in the form of
inflows and enhancement of assets. The definition of income encompasses both revenue
and gains. Though these terms are almost similar, however, there is a distinct technical
difference between them.
Service Income. Revenues earned by performing services for a customer or client.
Example: accounting services by a CPA, laundry services by a laundry shop.
Sales. Revenues earned as a result of sale of merchandise.
Example: sale of hardware materials by a hardware company sale of medicines by a
pharmaceutical company
Expenses. A decrease in economic benefits during the accounting period as a result of
outflows or depletion of assets.
 Cost of Sales. The cost incurred to purchase or produce the products sold to the
customers during the period. It is also known as the cost of goods sold.
Salaries and Wages Expense. All payments that arise from services from workers/
employees in an employee-employer relationship. It includes salaries and wages, 13th
month pay, cost of living allowances and other related benefits.
Rent Expense. Expense