1.What is the accounting equation?
c) it expects to realize the asset within
ASSET = LIABILITIES + OWNER’S EQUITY
2. What is the equation to compute for Net
Income/Net Loss?
REVENUE – EXPENSES = NET INCOME/NET LOSS
FIVE MAJOR ACCOUNTS
ASSETS
-resources controlled by the entity as a result of
past events and from which future economic
benefits are expected to flow to the entity.
LIABILITIES
-obligations of the company that needs to fulfill to
other companies.
OWNERS EQUITY
-are the owner’s claims in the business. It is the
residual interest in the assets of the enterprise
after deducting all its liabilities.
REVENUE
-The money received by individual or business,
usually in exchange for providing a goods and
services or through investing capital. It increases
owner’s equity.
EXPENSES
-It is the cost of operations that the company incurs
to generate revenue. As the popular saying “It cost
money to make money”.
CLASSIFICATION OF ASSETS
1. Current Assets - An entity shall classify an asset
as current when:
a) it expects to realize the asset, or intends
to sell or consume it, in the entity’s normal
operating cycle;
b) it holds the asset primarily for the
purpose of trading;
twelve months after the reporting date; or
d) the asset is cash or a cash equivalent,
unless it is restricted from being exchanged or used
to settle a liability for at least twelve months after
the reporting date.”
• Current assets are usually presented first on
company’s balance sheet and they are
arranged in their order of liquidity.
• Liquidity means the speed at which the
assets should be turning to cash; or the
assets nearness to cash.
Accounts under Current Asset
• Cash – is money on hand, or in banks, and
other items considered as medium of
exchange in business transactions.
• Accounts Receivable are oral promises to
entity to receive cash at a later date.
Usually arise from the normal course of
business such as selling of goods or
delivering services.
• Notes Receivable are amounts due from
clients supported by promissory notes.
• Inventories are assets held for resale.
• Supplies are items purchased by an
enterprise which are unused as of the
reporting date.
• Prepaid Expenses are expenses paid in
advance. They are assets at the time of
payment and become expenses through the
passage of time.
• Inventories are assets held for resale.
• Supplies are items purchased by an
enterprise which are unused as of the
reporting date.
• Prepaid Expenses are expenses paid in
advance. They are assets at the time of
payment and become expenses through the
passage of time.
• Accrued Income is revenue earned but not
yet collected.
• Short term investments are the
investments made by the company that are
intended to be sold immediately in less than
a year.
2. Non- Current Assets are assets that cannot be to the supplier or banks evidenced by a
easily and readily converted into cash and cash promissory note.
equivalents. Non-current assets are also termed
• Mortgage Payable – this represents the
fixed assets, long-term assets, or hard assets.
amount of money borrowed by the business
• Property, Plant and Equipment are long- from a bank or a lending institution which is
lived assets which have been acquired for secured by collateral.
use in operations. This are tangible assets,
EQUITY/ OWNER’S EQUITY
meaning they are physical in nature or can
be touched. (examples: Building, Table & This is the portion of the total assets that the
chairs, sofa, printers, laptop, filing cabinet, business owner fully owns. Equity also referred to
etc.) as Net worth.
• Long Term Investment - other investment • Capital - is the value of cash and other
made by the firm that will benefit company assets invested in the business by the
for several years. Example: Investment in owner of the business.
Equity Securities
• Drawing - is an account debited for assets
• Intangible assets – these are assets that are withdrawn by the owner for personal use
identifiable, non- monetary assets without from the business.
physical substance. Example: Trademark,
Goodwill, Patents, Copyright.
REVENUE/INCOME
CLASSIFICATION OF LIABILITIES
 increases economic benefits during
1. Current Liabilities - Liabilities that falls due
accounting period in the form of inflows of
within one year (12 months) after the reporting
cash or other assets or decreases of
date of Financial Statement. Examples: Accounts
liabilities that result in increase in equity.
Payable, Utilities Payable and Unearned Income.
 include revenue and gains.
• Accounts Payable are amounts due, or
payable to, suppliers for goods purchased • Service Revenue – this refers to the
on account or for services received on earnings made by any business that is into
account. rendering services. The term “revenue” is
used not “income” to distinguish that such
• Notes Payable are amounts due to third
an earning arises from the main line of
parties supported by promissory notes.
operations of the business.
• Accrued Expenses are expenses that are
• Interest Income - this represents interest
incurred but not yet paid (examples:
credited by the bank to the account of the
salaries payable, taxes payable)
business arising from bank deposits.
• Accrued Expenses are expenses that are
✓ Note: The term “income” was used since
incurred but not yet paid (examples:
earnings interest from bank deposits is not
salaries payable, taxes payable)
the main line operation of the business.
• Unearned Income is cash collected in
advance; the liability is the services to be • Sales – represents the earnings made by
any business that is from selling of goods or
performed or goods to be delivered in the
merchandise.
future.
• Professional Fees – this represents earnings
2. Non- Current Liabilities - Liabilities that do not
made by the professionals or experts from
fall due within one year-end date. Those accounts
rendering services to their clients. Like:
that is due after 12 months are considered as non-
Lawyer, Doctors, Teacher, Certified Public
current liabilities. Examples: Notes Payable, Loan
Accountants, etc.
payable, mortgage payable.
• Notes Payable – these represents the
amount of money borrowed by the business
EXPENSES 3. You are renting a space for your barbecue stand.
The rent is ₱5,000 per month.
Expenses are decreases in economic benefits
during accounting period in the form of outflows of Answer:
assets that result in decreases in equity.
Rent expense. At the end of the month, you will
• Utilities Expense – refers to a cost record ₱5,000 as rent expense and classified as
associated with the usage of electricity, account for Expense.
water, and communication for a particular
4. You sold barbecue worth ₱500.
accounting period.
Answer:
• Salaries Expense– refers to salaries incurred
associated with the services rendered by Sales. The worth ₱500 is recorded as Sales and
employees. classified as account for Income Statement.
• Taxes, duties & licenses– the cost incurred 5. You invested ₱ 1,500 to your barbecue business.
in registering the business to acquire the
Answer:
right to operate and to settle taxes. Ex.
Business Permit, BIR Capital. Your ₱1,500 investment is recorded in the
Owner’s capital and classify on the account
• Supplies Expense refers to office supplies
Owner’s Equity.
that was used during accounting period. Ex.
Bond Paper, Ballpen, Folder, etc..
• Depreciation Expense - represent the CHART OF ACCOUNTS
monetary value of an asset decreases over
• A chart of accounts is a listing of the
time due to use. Example building, vehicles
accounts used by companies in their
• Doubtful Accounts Expense – represents financial records.
the uncollectible amount in account
• The chart of accounts helps to identify
receivable.
where the money is coming from and where
**not all receivables can be collected, company’s/ it is going.
businesses set-up contra asset account called
• The chart of accounts is the foundation of
Allowance for doubtful Accounts or bad debts
the financial statements.
allowance that estimates how much of their current
receivables are uncollectible. **
1. A customer bought barbecue worth ₱500 from
your barbecue business. He told that he will be
paying it next week.
Answer:
Accounts receivable because the ₱500 is collectible
from the customer and recorded as account for
Assets.
2. Your electric bill for the month of January
amounted to ₱2,000. The bill is not yet paid.

Answer:
Utilities payable. The unpaid utility already used
but not yet paid and recorded as account for
Liability.