Definition of Accounting
> Accounting is a 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.
> Accounting is the process of identifying, measuring, and
communicating economic information to permit informed
judgments and decisions by users of the information.
> Accounting is the art of recording, classifying, and
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.
1. IDENTIFICATION
- select economic events (transactions)
2. RECORDING
- Record, classify, and summarize
3. COMMUNICATION
- Prepare accounting reports
- Analyze and interpret for users
Branches of Accounting
The work that accountants undertake ranges far beyond that
simply of summarizing information in order to calculate how
much profit a business has made, how much it owes, and
how much is owed to it. Although this work is still very
important, accountants are involved in different kind of work.
The branches of accounting and their brief descriptions are
discussed as follows:
1. Auditing is the accountancy profession’s most significant
service to public. An external audit is the independent
examination that ensures the fairness and reliability of the
reports that management submits to users outside the
business entity.
2. Bookkeeping is a mechanical task involving collection of
basic financial data. The data are first entered in the
accounting records or the books of accounts, and then
extracted, classified, and summarized in the form of income
statement, balance sheet, and cash flows statement.
3. Cost bookkeeping is the process that involves the
recording cost of data in books of accounts. It is, therefore
similar to bookkeeping except that data are recorded in very
much greater detail.
Cost accounting makes use of those data once they have
been extracted from the cost books in providing information
for managerial planning and control.
4. Financial accounting is focused on the recording business
transactions and the periodic preparation of reports on
financial position and results of operations. Financial
accounting is the more specific term applied to the
preparation and subsequent publication of highly
summarized financial information.
Financial Management
Financial management is a relatively new branch of
accounting that has grown rapidly over the last 30 years.
Financial managers are responsible for setting financial
objectives, making plans based on those objectives, obtaining
the finance needed to achieve the plans, and generally
safeguarding all the financial resources of the entity.
Examples: Financial Objectives
 Grow eamings per share 15% annually
 Boost annual retum on investment (or EVA) from 15% to
20%
 Increase annual dividends per share to stockholders by
5% each year
 Strive for stock price appreciation equal to or above the
S&P 500 average
 Maintain a positive cash flow
 Achieve and maintain a AA bond rating
Management accounting incorporates cost accounting data
and adapts them for specific decisions which management
may be called upon to make a decision. A management
accounting system incorporates all types of financial and
non-financial information from a wide range of resources.
Government Accounting (Branches of Accounting)
It is concerned with the identification of the sources and uses
of resources consistent with the provisions of city, municipal,
provincial or national laws. The government collects and
spends huge amount of public funds annually so it is
necessary that there is proper custody and disposition of
these funds.
Taxation (Branch of accounting)
Tax accounting includes the preparation of tax returns and
the consideration of the tax consequences of proposed
business transactions or alternative courses of action.
Accountants with this specialization aim to comply with
existing tax laws but are also in constant legal search for ways
to minimize tax payments.
Forms of Business Organizations
Any of the above types of activities may be performed by a
business organization be it a sole proprietorship, a
partnership, or a corporation. A business generally assumes
one of the three forms of organization. The accounting
procedures depend on which form the organization takes.
Sole Proprietorship. This business has a single owner called
the proprietor who generally is also manager. Sole
proprietorships tend to be small service-type (e.g. physicians,
lawyers, and accountants) businesses and retail
establishments. The owner receives all profits, absorbs all
losses, and is solely responsible for all debts of the business.
From the accounting viewpoint, the sole proprietorship is
distinct from its proprietor. Thus, the accounting records of
sole proprietorship do not include the proprietor’s financial
records.
A Partnership is a business owned and operated by two or
more persons who bind themselves to contribute money,
property, or industry to a common fund, with the intention of
dividing the profits among themselves. Each partner is
personally liable for any debt incurred by the partnership.
Accounting considers the partnership as a separate
organization, distinct from the personal affairs of each
partner.
A Corporation is a business owned by its stockholders. It is an
artificial being created by operation law, having the rights of
succession and the powers, attributes, and properties
expressly authorized by law or incident to its existence. The
stockholders are not personally liable for the corporation’s
debts. The corporation is a separate legal entity.
A Cooperatives is a business owned by member-owners.
 FUNDAMENTALS OF ACCOUNTING 1
Accounting is a 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, and in making reasoned choices among
alternative courses of action. - Accounting Standards Council
Accounting is a service activity.
> The function of accounting is to provide quantitative
information, primarily financial in nature.
> About economic entities.
Types of Business According to Activities > Intend to be useful in making economic decision.
Although the fundamental business model does not vary, > Making reasoned choices among alternative courses of
there are infinite ways of applying it to provide range of action.
products and services that make up the business world. Nature of Accounting
However, the range of products and services can be  Art
summarized in seven broad categories, such as follows:  Financial
Type Activity Structure Examples  Process
Services Selling people’s time Hiring skilled staff Software  Information System
and selling their development
time Accounting Functions of Accounting
Legal  Maintenance of systematic records
Trader Buying and selling Buying a range of Wholesaler
 Financial results of an entity can be communicated
products raw materials and Retailer
manufactures  Meeting legal requirements
goods and  Protecting assets of a business
consolidating
them, making  Assistance to management
them available for History of Accounting
sales in locations
near to their
> Accounting can be traced to ancient civilizations.
customers or > Accounting records dating back more than 7,000 years have
online for delivery
been found in Mesopotamia.
Manufacture Designing products, Taking raw Vehicle Assembly
aggregating materials and Construction > Other early accounting records were also found in the ruins
components and using equipment Engineering of ancient Babylon, Assyria and Sumeria.
assembling finished and staff to Electricity Food and
products convert them into drink > The Roman Empire had access to detailed financial
finished goods Chemicals information as seen in "The Deeds of the Divine Augustus"
Media
Pharmaceuticals
> Records of cash, commodities, and transactions were kept
Water by military personnel of the Roman army.
Raw Materials Growing or Buying blocks of Farming Mining Oil > The merchants during the Goryeo Dynasty of Korea kept
extracting raw land and using
materials them to provide track of their businesses and trades through
raw materials record-keeping methodologies.
Infrastructure Selling the utilization Buying and Transport (airport
of infrastructure operating assets operator, airlines.
Luca Bartolomeo de Pacioli - FATHER OF ACCOUNTING
(typically large trains, ferries buses) - an Italian mathematician and Franciscan friar
assets) selling Hotels Summa de arithmetica, geometria, proportioni et
occupancy often in Telecoms
combination with Sports facilities proportionalita
services Property Summary of arithmetic, geometry, proportions and
management
Financial Receiving deposits, Accepting cash Bank proportionality
lending and investing from depositors Investment house > Published in 1494
money and paying them
interest; using the
Details of calculation and recording - describes the
money to provide accounting methods then in use among northern-Italian
loans to merchants, including double- entry bookkeeping, trial
borrowers.
charging them balances, balance sheets and various other tools still
fees and a higher employed by professional accountants.
rate of interest
than the
depositors receive BRANCHES OF ACCOUNTING
Insurance Pooling premiums of Collecting cash Insurance
many to meet claims from many
Financial accounting pertains to the preparation and
of a few customers: interpretation of financial statements that is intended for
investing the external users such as investors, lenders, suppliers,
money to pay the
losses customers, government.
Management accounting pertains to the preparation of
experienced by a
few customers. By
internal information both financial and non-financial in
understanding the nature that is useful for the decision making of internal users
risk accepted and
the likelihood of a
such as the management.
claim, more Government accounting pertains to the administration and
premium income use of public funds to bring service to the public.
can be earned
than claims paid Auditing - It is often noted that auditing starts when
accounting ends. This is because auditing involves the
verification, examination and evaluation of information to
enhance its credibility.
Tax accounting primarily focuses on the analysis of various
tax rules and regulations and involves the computation on
and preparation of tax-related documents and transactions
of individuals and entities.
Cost accounting is known to be partially involved with
financial accounting and managerial accounting at the same
time as it is both useful for internal and external purposes.
Accounting Education and Research is a branch of
accounting where the accountant becomes an accounting
teacher, reviewer or researcher. It involves teaching and
research in accounting, auditing, management advisory
services, accounting aspects of finance, business law,
taxation and other technically related subjects.
Users of Accounting Information - Users of financial
information or stakeholders are people or entities that may
have an interest in the business. These users may be
classified as external or internal users. External users pertain
to investors, lenders, suppliers, employees, customers and
the government. Internal users, on the other hand, are
composed of the management of the business entity.
Management is interested in financial information that will
help them come up with decisions needed for the effective
and efficient operations of the entity. The information
provided by accounting may assist them in planning,
organizing, controlling and directing the company.
Investors are interested in the financial reporting that will
provide them insights about the investment that they make
in the entity. It will help them decide whether he should
invest in business, withdraw or retain his investment in a
company.
Lenders are interested in financial information that will
provide them assurance that the amount that they lend will
be paid on time. Their concerns for payments are not limited
to the principal amount alone but of the interest that goes
along with it as well.
Suppliers are concerned on whether the goods and services
that they sell will be paid on time. If the company is a
significant customer of the supplier, it is also important for
the supplier to determine the stability of the company as a
regular client.
Employees are concerned with financial information that will
provide employees insights on the ability of the company to
provide their salaries and benefits.
Customers are concerned with the capacity of the company
to supply continuously the goods and services that they
demand. They are also concerned with the cost and pricing of
the products and services that they pay.
Government is concerned with financial information that
pertains to tax payments and compliance with government
rules and regulations.
FUNCTIONS OF ACCOUNTING IN BUSINESS
Accounting is a language of business and is primarily used to
document business transactions. With many stakeholders in
a business entity, accounting serves as the main source of
financial information useful in making economic decisions.
The summary of financial transactions is contained in the
financial statements. Financial statements are important to
both internal and external users.
TYPES OF FINANCIAL STATEMENT
Statement of Financial Position - This type of financial
statement is also called the balance sheet. This presents the
entity’s assets, liabilities, and capital at a given point in time.
The data in this statement provide information about the
entity’s financial condition or position.
Statement of Comprehensive Income - This financial
statement is also known as the profit and loss statement. It
shows the results of the company’s performance as a result
of operations at a particular period of time. Also called
income statement, this type of financial statement indicates
whether the entity has gained or lost from the operations by
detailing its income and expenses.
Statement of Changes in Equity - Throughout the
organization’s existence, its capital changes as it
receives investments or as it experiences withdrawal of
investments, generates income, or incurs losses. These
activities are all recorded in the statement of changes in
equity.
Statement of Cash Flows - The statement of cash flows
provides information about the entity’s cash
inflows and outflows resulting from its operating, investing,
and financing activities. Thus, it shows the balance of cash
flow from the beginning until the end of a given period.
Each of these types of financial statements may or may not
have related notes. The Notes to Financial Statement, which
are found at the end of the financial statement, provide
information about the business entity (who they are and
what they do), the method of accounting of the company,
and other information that helps explain specific items in the
financial statement.
ACCOUNTING CONCEPTS and PRINCIPLES
Generally Accepted Accounting Principles (GAAP)
> Accounting practices follow certain guidelines, stands for
generally accepted accounting principles, encompass the
conventions (agreement), rules, and procedures necessary to
define accepted accounting practice at a particular time.
> This usually depends on how well it meets this three criteria:
relevance, objectivity (fairness) and feasibility (possibility)
Three Criteria of GAAP
RELEVANCE
> it results in information that is meaningful and useful to
those who need to know something about a certain
organization.
OBJECTIVITY
> the resulting information is not influenced by the personal
bias or judgement of those who furnish it.
> Connotes reliability and trustworthiness. It also connotes
verifiability, which means that there is some way of finding
out whether the information is correct.
FEASIBILITY
> it can be implemented without undue difficulty or cost.
These criteria often conflict with the one another. In some
cases, the most relevant solution may be the least objective
and the least feasible.
OBJECTIVITY Principle
Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as
useful as possible.
Reliable data are verifiable when they can be confirmed by
independent observers. Ideally, accounting records are based
on information that flows from activities documented by
objective evidence. Without this, accounting records would
be based on whims (notions or fancies) and opinions and is
therefore subject to disputes (arguments)
OBJECTIVITY Principle (continuation)
Historical Cost - States that acquired assets should be
recorded at their actual cost and not at what management
thinks they are worth as at reporting date.
Revenue Recognition Principle - Revenue is to be recognized
in the accounting period when goods are delivered or
services are rendered or performed.
Expense Recognition Principle - Expenses should be
recognized in the accounting period in which goods and
services are used up to produce revenue and not when the
entity pays for those goods and services.
Adequate Disclosure - Requires that all relevant information
that would affect the user’s understanding and assessment of
the accounting entity be disclosed or revealed in the financial
statements.
Materiality
> Financial reporting is only concerned with information that
is significant enough to affect evaluation and decisions.
> Depends on the size and nature of the item judged in the
particular circumstances of its omission.
> In deciding whether an item or an aggregate of items is
material, the nature and size of the item are evaluated
together.
> Depending on the circumstances, either the nature or the
size of the item could be the determining factor.
Consistency Principle - The firms should use the same
accounting method from period to period to achieve
compatibility over time within a single enterprise. However,
changes are permitted if justifiable and disclosed in the
financial statements
ACCOUNTING CONCEPTS
Accounting concept refers to the basic assumptions and rules
and principles which work as the basis of recording of
business transactions and preparing accounts.
For example, when the owner invests money in the business,
it is recorded as liability of the business to the owner.
Business Entity / Entity Concepts
> The business and its owner(s) are two separate existence
entity.
> Any private and personal incomes and expenses of the
owner(s) should not be treated as the incomes and expenses
of the business.
> The affairs of the business are distinct from the personal
affairs of its owner. The business is an independent ENTITY.
Examples :
- Insurance premiums for the owner’s house should be
excluded from the experience of the business.
- The owner’s property should not be included in the
premises account of the business.
- Any payments for the owner’s personal expenses by the
business will be, treated as drawings and reduced the
owner’s capital contribution in the business
Money Measurement / Stable Monetary Unit Concept
All transactions of the business are recorded in terms of
money. The Philippine peso is a reasonable unit of measure
and that its purchasing power is relatively stable.
It provides a common unit of measurement records are kept
in monetary terms, and only matters capable of being
expressed in monetary terms are reflected in the books.
Examples :
- Market condition, technological changes and the efficiency
of management would not be disclosed in the accounts.
Going Concern
> The business will continue in operational existence for the
foreseeable future.
> Financial statements should be prepared on a going
concern basis unless management either intends to liquidate
the enterprise or to ease trading, or has no realistic
alternative but to do so.
> The business is assumed to have a continuing and indefinite
life. The business is not on the verge of extinction.
Examples :
- Possible losses from the enclosure of business will not be
anticipated in the accounts.
- Prepayments, depreciation provision may be carried
forward in the expectation of proper matching against the
revenues of future periods.
- Fixed assets are recorded at historical cost.
Historical Cost
> Assets should be on the balance sheet at the cost of
purchase instead of current value.
> Accountants compute the value of an asset by reference to
its expected future benefits.
Examples :
The cost of fixed assets is recorded at the date of acquisition
cost. The acquisition cost includes all expenditure made to
prepare the asset for its intended use. It included the invoice
price of the assets, freight charges, insurance or installation
costs.
Prudence / Conservatism
> Revenues and profits are not anticipated. Only realized
profits with reasonable certainty are recognized in the profit
and loss account.
> However, provision is made for all known expenses and
losses whether the amount is known for certain or just an
estimation.
> This treatment minimizes the reported profits and the
valuation of assets
(1) The accountant should not anticipate profit, and should
provide all possible losses;
(2) Faced with several methods of valuing an asset, the
accountant should choose that which leads to the lesser
value.
Example :
> Stock valuation sticks to rule of the lower of cost and net
realizable value
> The provision for doubtful debts should be made
> Fixed assets must be depreciated over their useful
economic lives.
Materiality
> Immaterial amounts may be aggregated with the amounts
of a similar nature or function and need not be presented
separately.
> This depends on the size and nature of the item judged in
the particular circumstances.
Examples :
- Small payments such as postage, stationary and cleaning
expenses should not be disclosed separately. They should be
grouped together as sundry expenses
- The cost of small-valued assets such as pencil sharpeners
and paper clips should be written off to the profit and loss
account as revenue expenditures, although they can last for
more than one accounting period.
Consistency
> Companies should choose the most suitable accounting
methods and treatments, and consistently apply them in
every period.
> Changes are permitted only when the new method is
considered better and can reflect the true and fair view of
the financial position of the company.
> The change and its effect on profits should be disclosed in
the financial statements.
Examples :
- If a company adopts straights line method and should not
be changed to adopt reducing balance method in other
period.
- If a company adopts weight-average method as stock
valuation and should not be changed to other method e.g.
first-in-first-out method.
Accruals / Matching
> Revenues are recognized when they are earned, but not
when cash is received.
> Expenses are recognized as they are incurred, but not when
cash is paid
> The net income for the period is determined by subtracting
expenses incurred from revenues earned.
Examples :
- Expenses incurred but not yet paid in current period should
be treated as accrual/ accrued expenses under current
liabilities.
- Expenses incurred in the following period but paid for in
advance should be treated as prepayment expenses under
current asset.
- Depreciation should be charged as part of the cost of a fixed
asset consumed during the period of use.
Problems in the recognition of expenses
Normally, expenses represents resources consumed during
the current period. Some costs may benefit several
accounting periods, for example, development expenditures,
depreciation on fixed assets.
Recognition criteria for expenses
Association between cause and effect.
> Expenses are recognized on the basis of a direct association
between the expenses incurred on the basis of a direct
association between the expenses incurred and revenues
earned.
> For example, the sales commissions should be accounted
for in the period when the products are sold, not when they
are paid.
Realization
> Revenues should be recognized when the major economic
activities have been completed.
> Sales are recognized when the goods are sold and delivered
to customers or services are rendered.
> Any change in the value of an asset may only be recognized
at the moment the firm REALIZES it, or disposes of that asset
Recognition of Revenue
> The realization concept develops rules for the recognition
of revenue
> The concept provides that revenues are recognized when it
is earned, and not when money is received
> A receipt in advance for the supply of goods should be
treated as prepaid income under current liabilities.
> Since revenue is a principal component in the
measurement of profit, the timing of its recognition has a
direct effect on the profit.
Recognition criteria for revenues
> The uncertain profits should not be estimated, whereas
reported profits must be verifiable
> Revenue is recognized when
1. The major earning process has substantially been
completed
2. Further cost for the completion of the earning process are
very slight or can be accurately ascertained, and
3. The buyer has admitted his liability to pay for the goods or
services provided and the ultimate collection is relatively
certain.
Examples
- Goods sent to our customers on sale or return basis.
- This means the customer do not pay for the goods until they
confirm to buy. If they do not buy, those goods will return to
us.
- Goods on the sale or return basis will not be treated as
normal sales and should be included in the closing stock
unless the sales have been confirmed by customers.
Problems in the recognition of revenue
> Normally, revenue is recognized when there is a sale
> The point of sales in the earning process is selected as the
most appropriated time to record revenues.
> However, if revenue is earned in a long and continuous
process, it is difficult to determine the portion of revenue
which is earned at each stage
> Therefore, revenue is permitted to be recorded other than
at the point of sales
Exceptions to rule of sales recognition
1. Long-term contracts
- owning to the long duration of long-term contract, part of
the total profit estimated to have been arisen from the
accounting period should be included in the profit and loss
account.
2. Hire Purchase Sale
- Hire purchase sales have long collection period. Revenue
should be recognized when cash received rather than when
the sale (transfer of ownership) is made
- The interest charged on a hire purchase sale constitutes the
profit of transaction
3. Receipts from subscriptions
- A publisher receives subscriptions before it sends
newspapers or magazines to its customers
- It is proper to defer revenue recognition until the service is
rendered.
- However, part of subscription income can be recognized as
it is received in order to match against the advertising
expenses incurred
Disclosure
> Financial statements should be prepared to reflect a true
and fair view of the financial position and performance of the
enterprise
> All material and relevant information must be disclosed in
the financial statements
Uniformity
> Different companies within the same industry should adopt
the same accounting methods and treatments for like
transactions
> The practice enables inter-company comparisons of their
financial positions
ACCOUNTING EQUATION
The Accounting Equation
> Financial statements tell us how a business is performing.
They are the final products of the accounting process. But
how do we arrive at the items and amounts that make up the
financial statements? The most basic tool of accounting is
the accounting equation.
>This equation presents the resources controlled by the
enterprise , the present obligations of the enterprise, and the
residual interest in the assets. It states that assets must
always equal liabilities and owner's equity. The basic
accounting model is:
Assets = Liabilities + Owner’s Equity
Example: 850,000 = 350,000 + 500,000
- Note that the assets are on the left side of the equation
opposite the liabilities and owner's equity. This explains why
increases and decreases in assets are recorded in the
opposite manner as liabilities and owner's equity are
recorded. The equation also explains why liabilities and
owner's equity follow the same rules of debit and credit.
> The logic of debiting and crediting is related to the
accounting equation. Transactions may require additions to
both sides (left and right sides), subtractions from both sides
(left and right sides), or an addition and subtraction on the
same side (left or right side), but in all cases the equality
must be maintained.
Debits (dr) record all of the money flowing into an account.
Credits (cr) record all of the money flowing out of an account.
TYPES OF MAJOR ACCOUNTING
Assets - A resource with economic value that an individual,
corporation, or country owns or controls with the
expectation that it will provide a future benefit. An asset can
be thought of as something that, in the future, can generate
cash flow, reduce expenses, or improve sales, regardless of
whether it's manufacturing equipment or a patent.
Assets are should be classified only into two:
current assets and non-current assets
Example of Assets
Individual (Personal Use) Organization (Business Use)
> Residential Flat > Factory Building
> Jewellery > Plant and Machineries
> Cars > Corporate Offfice
Current Assets - As per Philippine Accounting Standards (PAS)
No. 1, an 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 are;
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 - 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 customers
arising from sale of services or goods on credit. This type of
receivable offers less security than a promissory note.
Inventories - These are assets which are (a) 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 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 are;
All other assets should be classified as non-current assets.
When the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be twelve months.
Such non-current assets are:
Property, Plant and Equipment - 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. Included are such items as land,
building, machinery and equipment, furniture and fixtures,
motor vehicles and equipment.
Accumulated Depreciation - It is the total depreciation
amount for an asset that a company charge as expenses,
since time of purchase of asset or when it was available for
us.
Intangible Assets - 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. These include goodwill,
patents, copyrights, licenses, franchises, trademarks, brand
names, secret processes etc.
Example Computation;
Accumulated Depreciation
 CURRENT ASSETS NON-CURRENT ASSETS
Short Term Long Term
Likely to be converted into Not likely to be converted
cash within a year into a cash within a year
Cash in hand, Cash at Bank, Fixed Assets, Long term
Inventory, Trade receivables Investments, Good will,
and etc. Patent and etc.
Liabilities
> A liability is an obligation between one party and another
not yet completed or paid for.
Current Liabilities
An entity shall classify a liability as current when:
a. 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; or
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.
Example of accounts under current liabilities are:
Accounts Payable - This account represents the reverse
relationship of the accounts 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 for unpaid
expenses. This account includes salaries payable, utilities
payable, interest payable and taxes payable.
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 (liability method). When the goods or
services are provided to the customer, the unearned revenue
is reduced and income is recognized.
Current Portion of Long-Term Debt - These are portions of
mortgage notes, bonds, and other long-term indebtedness
which are to be paid within one year from the balance sheet
date.
Non-current Liabilities
> also known as long-term liabilities, are obligations listed on
the balance sheet not due for more than a year.
Such non-current liabilities are:
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 organizations often obtain
substantial sums of money from lenders to finance the
acquisition of equipment and other needed assets. They
obtain 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
> represents the owner's investment in the business minus
the owner's draws or withdrawals from the business plus the
net income (or minus the net loss) since the business began.
Capital - 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. Cash or other assets that the owner
may withdraw from the business ultimately reduce it. This
account title bears the name of the owner.
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 - is money (or some equivalent value) that an
individual or business receives, usually in exchange for
providing a good or service or through investing capital.
Service Income - Revenues earned by performing services for
a customer or client; for example, accounting services by a
CPA firm, laundry services by a laundry shop.
Sales - Revenues earned as a result of sale of merchandise;
for example, sale of building materials by a construction
supplies firm.
Expenses - An expense in accounting is the money spent, or
costs incurred, by a business in their effort to generate
revenues.
Cost of Sales - The cost incurred to purchase or to produce
the products sold to customers during the period; also called
cost of goods sold.
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 allowances 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 (e.g. office
supplies) in the conduct of daily business.
Insurance Expense - Portion of premiums paid on insurance
coverage (e.g. on motor vehicle, health, life, fire, typhoon or
flood) which has expired.
Depreciation Expense - The portion of the cost of a tangible
asset (e.g. buildings and equipment) 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.