Fundamentals of accounting

LESSON 1
Statement of Financial Position - this statement
informs the users of the financial condition of
the business at a given date, usually at the end
of an accounting period.

Two Forms of Statement Financial Position:

Account Form - In the account form of

Statement of Financial Position, the assets are
listed on the left side of the report and the
liabilities and proprietorship on the right side.

Report Form - A Statement of Financial Position Statement Heading - This includes the name of
prepared in report form shows the assets on the the business. It tells what kind of statement it is,
top section of the statement and the liabilities and gives the date for which the report is
and owner’s equity on the bottom section. prepared.

Charlotte’s Designer and Tailoring Shop Assets, Liabilities, Proprietorship - Items are
Statement of Financial Position grouped and each group of items is identified by
special captions.

Captions - Classifications of each group of items

appear against the left margin of the statement

Account Titles - Individual account titles in each

classification are indented.

Current Assets - The individual current assets

are usually listed in order of their liquidity, with
the most liquid asset, cash appearing first.
Plant, Property, Equipment - The plant assets
are often listed in order of their expected useful
life. Land, having the longest expected useful
life, appears first.
Note (#) - The separate computational schedule
attached to the report explaining in detail the
aggregated amount presented on the face of the
financial statement.
Current Liabilities - The current liabilities are in
theory listed in order of due date, with the
earliest due date appearing first.
Captions Indicating Totals - Each group of items
(i.e, total current assets, total plant, property
and equipment, total current liabilities, etc) is
indented further.
Single Rule Line - The last figure in each group of
items is underlined.
Final Tools - The two final tools (i.e. , total assets
and total liabilities and owner’s equity) appear
as the last line in their respective sections and
are underlined twice (double ruled) to indicate a
final total.
Peso Sign - Peso signs are used (a) to the left of
the first amount of a group of amounts being
combined and (b) to the left of each final total.
Peso Amount - The peso amount for the
detailed items is shown in one column; the total
of each classification is extended into the last
column on the right-hand side of the statement.
Accounting Equation - This relationship exists
regardless of the size of the enterprise or the
variety of its assets, liabilities, and ownership
interest. This identity is called the basic
accounting equation.
Often it is stated as:
Assets = Liabilities + Owner’s Equity
This equation connotes that the total resources
(assets) equals to the total amount owed
(liabilities) plus proprietorship (owner’s equity).
Other times the equation appears as:
Assets – Liabilities = Owner’s Equity
or
Assets – Owner’s Equity = Liabilities
Assets - This includes anything owned or
possessed by the business which is capable of
being expressed in terms of money or
possessing monetary values, and which,
consequently, is available for the payment of the
debt of the business.
Liabilities - These are economic obligations(i.e.
debts) payable to an individual or an
organization outside the business.
Owner’s Equity - This represents the claim of an
owner of a business over the assets of the
business after the claims of the creditors have
been satisfied.
LESSON 2
The SCI is a Statement that reports the results of
operations of the business for one accounting
period. The SCI is describe as a “for the period”
report.
Financial statements - is a set of interconnected
reports.
Income - refers to a transaction that increases
assets and /or decreases liabilities leading to
increase in equity resulting from the operations
of the business and not from the owner’s
contribution.
Expenses - are transactions that decrease assets
and/or increase liabilities leading to decrease in
equity resulting from the operations of the
business and not because of distributions to
owners.
Two Kinds of Income:
Revenues - are income generated from the
primary operations of the business.
Gains - on the other hands are income derived
from other activities of the business.
Two Kinds of Expenses:
Expenses - are related to the primary operations
of the business.
Losses - are from other activities of the business.
Elements of the Statement of Comprehensive
Income:
REVENUE
Service Income - The Service Income account is
generally used to describe revenue derived from
rendering of services.
Sales - The Sales Revenue account is generally
used to describe revenue derived from selling of
goods.
Accounts Payable - we mentioned that suppliers
give discounts to their customers to encourage
early payments. We delivered the goods to the
buyer and appropriately recorded Sales
Revenue based on full selling price.
We use another Contra-Sales account called
Sales Discount.
Net Sales - refer to Gross Sales less Sales Return
and Allowances and Sales Discount.
(Net Sales = Gross Sales – Sales Return – Sales
Discount)
EXPENSES
Cost of Goods Sold (Cost of Sales)
This is an account used by companies that sells
goods instead of services. For trading
operations, Cost of Sales collects the cost of the
merchandise sold. This includes the purchase
price of inventory, brokerage and shipment cost
to bring the goods the premises of the company.
This shipment cost is called Freight-in.
Cost of sales - is part of inventory accounting.
Accountants have two ways of keeping records
of inventory – perpetual and periodic inventory
system.
Perpetual - means that the Inventory and Cost
of Goods Sold accounts are “perpetually”
updated.
The other method is called periodic inventory
system. The Inventory account is only
“periodically” updated. “Periodically” means
that the inventory account is updated only at
end of the year or end of the month.
Cost of merchandise acquired is collected using
the Purchases account. We also introduce two
contra- Purchase accounts: Purchase Returns
and Allowances and Purchase Discount.
Returns of defective goods are reported under
Purchase Returns and Allowances.
Discounts taken are reported under Purchase
Discount.
Net purchases is equivalent to Purchases plus
Freight-In less Purchase Returns and Purchase
Discount (Net Purchases = Purchases + Freight-
In – Purchase Returns – Purchase Discount).
Beginning and ending inventory are determined
based on the physical count of the merchandise
owned by the company. The ending inventory of
the prior-period is also the beginning inventory
of the current period. The “periodic” adjustment
updates the inventory account to bring it to the
balance based on year-end physical count.
Operating Expenses - It refers to all other
expenses related to the operation of the
business, other than cost of sales. These include
salaries of employees, supplies, utilities
(electricity, telephone and water bills), gasoline
expense, representation, bad debts expense,
depreciation and amortization.
Bad debt expense - is an operating expense
related to accounts receivable. It is an estimated
expense.
Presentation of Statement of Comprehensive
Income:
There are two formats for the SCI,
Single-step - is closely related to the nature of
expense format.
Multi-step - approach is also associated with the
function of expense.