Big Picture A

Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

a. Define business and accounting and analyze its relationships.

b. Analyze the concepts of financial statements and the accounting
equation.
c. Prepare Journal Entries.

Big Picture A in Focus: ULOa. Define business and accounting

and analyze its relationships.

Metalanguage
For you to demonstrate ULOa, you will need operational understanding of the terms
enumerated below.

Accounting is the bridge of communication between business and its owners.

Business is the activity of making one's living or making money by producing or buying
and selling products (such as goods and services).

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge laid down in the succeeding pages. Please
note that you are not limited to exclusively refer to these resources. Thus, you are
expected to utilize other books, research articles and other resources that are available
in the university’s library e.g. ebrary, search.proquest.com etc., and even online tutorial
websites.

1. CONCEPT OF BUSINESS AND ACCOUNTING

WHAT IS THE KNOWLEDGE WE NEED TO STUDY ACCOUNTING?

First, we need analytical ability this is most knowledge you need to study accounting.
Your ability to analyze transactions and situational problems. For the beginners, this is
the most difficult part is to know the correct account titles to be used and what are the
credited or debited accounts.

Second, we also need the stocked knowledge in arithmetic and not mathematics, you
need only the basics on processing how to add, subtract, divide and multiply.
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Third, we need to have a positive, or this is the psychological factor, as many student
will always say that accounting is difficult, this is the impression for the subject. But when
you think you can do, then you say “yes, I can”. So try and try!!

WHY DO WE STUDY ACCOUNTING?

Accountability in all walks of life is the reason why we do accounting whether you are
professional or non-professional. As we need this whether we like it or not, we have to
cope-up with budgets, pay our bills and anything that we do in life that are accountable.
Moreover businesses also need to account all the transactions of the business.

Business is any activity that of making money by producing products, selling it to ultimate
customers, buying and selling of product and providing services to customers for a fee.

Accounting a system that measures business activities, processes that information into
reports & communicates the results to decision-makers. This is needed by businesses
as the owners and management of the business needs to know about the business
earnings and spending thus, accounting will provide this to them. This is considered as
the language of business. It is given emphasis and definition by various organizations in
the past and today. Here are some of the definition given.

Flour expenses P100(Debit)

Cash …………….P100 (Credit)

Cash
1/1 P200 1/5 P100 flour
1/7 100 equipment

1/7 Baking Equipment (Assets) --- P500

Cash………………………………P100
Accounts payable………………. 400

Accounts Payable
P400

Baking Equipment
P500

Accounting Standards Council (1983) define that 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.

Moreover, American Accounting Association (1966) defines that accounting is a process

of identifying, measuring and communicating economic information to permit informed
judgments and decisions by the users of the information.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Furthermore, Financial Accounting Standards Board (1978) defines that accounting is

an information system that measures, processes and communicates financial
information about an economic entity.

Finally, American Institute of Certified Public Accountants (1953) defines that accounting
is an 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.

IMPORTANCE OF ACCOUNTING TO BUSINESS

Accounting is considered as the “diary” of the business, as in diary we will record

everything what happened that day also in accounting we need this, and that is the
purpose of accounting to business to record every transactions from day-to-day. Thus,
we need to keep track and keep records of our business in the “books of accounts”. This
book provide the data that are financial in character which are processed and
transformed into reports called “financial statements” knows as the end product of
accounting.

Government also need accounting data for them to compute what are the amount due
to the Bureau of Internal Revenue as your taxes that provides funds to the government
as this is the lifeblood of the government also accounting reports are needed in
compliance for municipal or city ordinance for the local business taxation.

Business is operated for a motive to earn profit and to create employment and to provide
taxes to government but creation of employment is possible only for big company as
most of the sole proprietorship business the owner is the manager of its own business
so no or little contribution only as to employment creation in this situation.

Accounting helps the owners/managers to know how profitable is the company and how
much profit they earn in the business. If the manager/owner had little knowledge in
accounting then they need to hire a professional accountant to record and facilitate the
preparation of the reports called the financial statements.

Professional accountant is a person who earn a baccalaureate degree in Bachelor of

Science in Accountancy and had taken and passed the difficult and competitive
Licensure Examination for Certified Public Accountants. And now you are to carry with
you the Title C.P.A., who is under the supervision of the PRC(Professional Regulation
Commission) in the practice of the profession. However, you are not a passer of this
examination then you cannot practice in public accounting. All CPAs are member of
PICPA or the Philippine Institute of Certified Public Accountants

The business and owners are separate from each other, thus owners will only be aware
of what are the happenings of the business by the reports of the accounting that they
can rely for decision making. The reports that accounting produces is the “Financial
Statements” that will serve as the bridge of communication between the owner and the
business. Thus, Accounting becomes the “Language of Business”.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

FORMS OF BUSINESS ORGANIZATION

There are Four (4) forms of business organizations:

Sole Proprietorship a business owned by a single person.

Partnerships is a business owned and operated by two or more person who binds
themselves to contribute money, property or industry to a common fun, with the intention
of dividing the profits among themselves.

Corporations are business owned by its stockholders. It is an artificial being created by

the operation of law, having the right of successions and the powers, attributes and
properties expressly authorized by law or incident to its existence. The management of
the business is given to the Board of Directors. The business is registered by the
Securities and Exchange Commission (SEC).

Cooperatives is an autonomous association of persons united voluntarily to meet their

common economic, social, and cultural needs and aspirations through a jointly-owned
enterprise. This type of business must registered to the CDA (Cooperative Development
Authority).

MICRO, SMALL AND MEDIUM ENTERPRISES

The Republic Act No. 9501 on May 23, 2008 was signed into law by President Gloria
Macapagal-Arroyo. The law address problems facing MSMEs, particularly the lack of
capital and access to credit. Under this law, banks and lending institutions are now
required to allocate 10% of their total loan portfolio to MSMEs, broken down as follows:
8% for micro and small businesses and 2% to medium enterprises. Amending the old law
from 8% to 10%.

The law also give the small business corporation, the government financial institution
created to assist MSMEs more financial muscle by increasing its authorized capital stock
to P 10.00 billion.

The law updated the definition of the MSMES by increasing the net asset threshold.
The micro enterprises are those company with assets before financing of 3 million or
less and employ not more than 9 workers.

The small enterprises are those companies with assets before financing of 3 million to
15 million and employ 10 to 99 employees.

The medium enterprises are those companies having an assets before financing of
above 15 million to 100 million and employ 100 to 199 workers

NATURE OF BUSINESS

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Service Concern are companies that engage in providing services to the client for a
source of income.

Merchandising Concern are companies that engage in buying and selling of goods or
products and sell it directly to the customers at a profit. It might be retailer or wholesaler.

Manufacturing Concern are business that engage in processing raw materials to

finished products and sell it for a profit.

Agri- Business are companies that involved in planting crops and selling its products
either raw or finished form at a profit.

Hybrid Companies are companies that involves in more than 1 types of activity

ACTIVITIES IN BUSINESS ORGANIZATION

Accounting provides important information for the business organization to make different
types of decisions and there are three (3) types of business organizational activities
namely: Financing, Investing and Operating.

Financing activities are activities that the business will obtain financial resources from the
financial markets and how they manage and use it to produce goods and services.

Investing activities is the transformation of the resources obtained from one form to a
different form that are more valuable to meet the needs of the people. It is also having
the right mix of resources for effective and efficient operations. This also involve selection
and management of long-lived assets or long-term resources that are used to develop,
produce and sell goods and services

Operating activities are those activities that involves the use of resources to design,
produce, distribute and market goods and services ( Selling & administrative Expenses)

PURPOSE AND PHASES OF ACCOUNTING

The Accounting Function

This is a part of a broader business system that handles the financial operations of the
business but also provides information and advice to other departments.

It processes the business transactions that are economic activities of the business.
Recording it is a significant function of accounting and produce report that are aid of the
management in planning, controlling and decision making to comply with the regulations
of the statutory bodies.

The Phases of Accounting

Measuring is the assignment of peso amounts or values to the transactions to be

recorded. The accountant must decide when the transaction occurred (recognition issue),

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

what is the value of the place on the transaction (valuation issue), and how the component
of the transactions should be classified (classification issue).

Water Bill expenses (OA) --- P100

Accounts Payable P100 .. P100

Shares stock (Marketable securities)… P100

Classifying is the process of reducing the numerous transactions into useful groups or
categories.
Water Bill expenses (OA) --- P100 (Expenses) – Income Statement
Accounts Payable (FA) ….. P100 (Liabilities) - Balance Sheet /Equity section
Marketable Securities ( IA) …P100 ( Asset) - Balance Sheet

Summarizing is the process of preparation of financial statements and summarized the

effects of the transactions occurred in the period.

Interpreting is the process of analyzing the results of the operations to evaluate the
liquidity, profitability and solvency of the business organization.

Liquidity = Current Assets (CA) = 200,000 = 2:1 Liquidity Ratio (Std)

Current Liabilities (CL) 100,000
= P200,000 -100,000= P100,000 left)
Profitability Ratio = income/sales = P100,000 = .50 0r 50% or P1.00 x 50% =P0.50 x 50% =. 25
200,000

THE CAREER OPPORTUNITY OF A PROFESSIONAL ACCOUNTANT

PUBLIC ACCOUNTING. A CPA that are employed or partner or owner of an accounting

firm that offers accounting, management services and auditing to clients

GOVERNMENT ACCOUNTING. A CPA that are employed in the government such as

Commission on Audit, Bureau of Internal Revenue and other agency or company of the
government that needs accountants.

PRIVATE ACCOUNTING OR COMMERCE AND INDUSTRY. A CPA that are employed

in the company as controller, internal auditor, and other position that is hold by a CPA.

ACADEME OR ACCOUNTING EDUCATION. A CPA that are teaching accounting in

schools, colleges, and universities such Dean in Accountancy, Program Head in
Accounting Education or even a Faculty member of the Accounting department.

The career opportunities are presented in the law that govern the accountancy
profession in the Philippines and that is the R. A. 9298 or otherwise known as “The
Philippine Accountancy Act of 2004”

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

TYPES OF ACCOUNTING REPORTS

Auditing is concerned with the attestation and examination procedure of a CPA that
ensure the credibility, reliability and fairness of the reports that the management submits
to the users outside the business entity. This examination will include the testing of
the accuracy of records, select testing techniques and samples to ensure the
honesty and consistency of the records from the source documents to the financial
reports. The result is the independent auditor’s report. ( GAAP & Audit Standard)

Bookkeeping is concerned with the mechanical tasks of accounting which is to collect

all the basic financial data.

Cost Bookkeeping, Costing and Cost Accounting is concerned with the preparation
or recording and accumulating costs data and information for the management to decide
about the cost control and pricing control and management of the company in producing
the products and services.

Financial Accounting is concerned with the preparation of reports (Financial

Statement- Income Statement/ Balance sheet & Cash Flow Statement) that will help
the existing and potential creditors, lenders and investors of the company for them to
create economic decisions based on the information provided by this branch of
accounting. ( Financing/ Investing/Operating Activities)

Financial Management is concern with providing information to financial managers to

set financial objectives, making plans on those objectives, obtaining finances needed to
achieve the plans and generally safeguarding all the financial resources of the entity.

Management Accounting is concerned with providing necessary accurate, correct, and

relevant information to the management necessary for planning, controlling and
evaluating the company’s operation. ( interpretation of the financial statement )

Taxation is concerned with the preparation of tax returns and the consideration of the tax
consequences of proposed business transactions or the alternative courses of action.

Government Accounting is concern with the identification of the sources and uses of
the government funds that are consistent with the provision of the city, municipal,
provincial and national laws. This is for proper custody and disposition of these funds.

GAAP (GENERALLY ACCEPTED ACCOUNTING PRINCIPLES)

These are the conventions, rules and procedures necessary to define the accepted
accounting practice at a particular time. This must be followed in preparing financial
reports. The acceptance of this principle is depends on the criteria that must be meet.
3/28/2022 end for 4;30-5;30

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

BASIC PRINCIPLES

In order to furnish a more useful information to the users of the financial statements,
accountants should rely on this principles.

Objectivity Principle. Accounting records should be based on information that flows to

the entity from activities documented by objective evidence. The data presented in the
financial statements can be confirmed by independent observers. Thus, accounting
records should not be based on whims and opinion and therefore subject to disputes.

Historical Cost Principle. This principle states that the newly acquired assets should be
recorded at their actual cost and not at what management thinks they are worth as at
reporting date.
Acquisition :

1/20/2022- Machine P20,000

Cash P20,000

Revenue Recognition Principle. Recognizes revenue (Sales) at the period the products
delivered and services are rendered or performed.

3/30 /22 - Cash P10,000

Sales …… P10,000

3/30/22 Accounts Receivable … P5,000

Sales …………………………..P5,000

Expense Recognition Principle. The expenses are recognized at the period it is used
to produce the product or services

3/30/222- Rent Expense …. P3,000

cash …………..P3,000

Adequate Disclosures. The presentation and preparation of financial statement requires

that all relevant information that would affect the user’s understanding and assessment
of the accounting entity must be disclose properly in the face of the financial reports.
FS: I/S ( Revenue & Expenses , other income) B/S (A,L,Cor Equity) CF ( Cash inflow
–cash outflow)

Materiality. This is concern with the significance of the information that must be
presented in the financial report that are enough to evaluate and craft decisions. It
depends the nature and size of the items to be judged in a particular circumstance of its
omission.

Consistency Principle. The principle that states that the company should report same
transaction with the same method of recording or recognition. This is for the information
to have comparability over time. Changes are permitted if justifiable and disclosed in the
financial statements.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Matching Principle. A concept that no expenses can be recognize if the revenue/income

is also not recognized and vice versa.
Revenue xxx
Less: Expenses xxx
Profit xxx
====

FUNDAMENTAL CONCEPTS

Several fundamental concepts underlie in the accounting process and the accountants
should consider the following:

Entity Concept is the most basic concept that an accounting entity should be separate
from its owners and they should be considered as separate economic entity

Periodicity Concept is the concept that the life of the business is subdivided into a
meaningful equal time periods for reporting purposes. This concept allows the users to
obtain timely information to serve as the basis on making economic decisions about the
future activities of the entity.

3/30/22 Cash P100,000 (As of a given date)

3/31/22 Machine P50,000 (as of a given date) - P50,000 cash

Stable Monetary Unit Concept is considering that Philippine peso is the stable or
reasonable unit of measure and its purchasing power is relatively stable. It allows applying
simple arithmetic in computations.

Going Concern is the concept that in the preparation of the financial statements, it is
assume that the entity will continue its operation for a foreseeable future time.

BRIEF HISTORY OF ACCOUNTING

Accounting History
This is important to accounting pedagogy, policy and practice and works on the effect of
the evolution to the environment. The learnings of this will make us understand better the
past, the present and the possible future of accounting. It is the study of how accounting
thoughts, practices and institutions evolves to respond the changes in the environment
and societal needs.

The Primitive Accounting

The origin of keeping accounts is evidenced by clay tokens, cones, disks, spheres and
pellets in 8500 B.C. in Mesopotamia(Iraq). Bullae is the tokens used to deliver products,

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

this are clay balls that are broken on delivery and this are called as the first known bill of
lading.

Wet clay tablets replaces the bullae as this is the origin of record keeping using the art of
writing. These are also used by Babylonia(3,600 B.C.) in recording payments of wages
to keep track of the costs of labor and materials in building structures (e.g. Great Pyramids
of Egypt)

Scribe on a small mound of clay is used by Babylonia(2286-2242 B.C.) where the

signatures of the parties affixed in the mound of clay and allow them to dry. It contains
the record about the agreed-price of the transaction, this is a sealed memorandum given
by the seller to the buyer as required by the law based on the Code of Hammurabi, before
the transaction become enforceable.

These evidenced that accounting is one of the humanities oldest skills. The tablets are
used in collections of writing about how many bushels of grain in the warehouse and who
brought them and how much taken to the king as his share. Thus, tax collecting activity
is linked to accounting in ancient times.

Middle Ages
Arabic numerals are used that allow columns of numbers to be added and subtracted in
the trade of Near East to Northern Italy. The use of credit was prevalent and a semblance
of an international banking system was also functioning. These happen during 11th to 13th
centuries.

The use of knotted cords of different length and colors that are called quipu in keeping
accounting records in Inca Empire and west coast of South America in 11th to 14th
centuries.

In 13th to 15th centuries, the developments of more formal account-keeping methods are
discovered and attributed to the merchants and bankers of Florence, Venice and Genoa.

Double-entry bookkeeping is a result of continued efforts to meet the need of trade that
changing over times. It was a decisive event in European economic history.

Fra. Luca Pacioli

A Franciscan friar and a calebrated mathematician, is generally associated with the
introduction of double-entry bookkeeping. He published a book in 1494 titled “Summa de
Arithmetica, Geometria, Proportioni et Proportionalita” or “Everything about Arithmetic,
Geometry, Proportions and Proportionality”, which includes “Details of Calculations and
Recordings” or “Particularis de Computis et Scripturis”. The book describes the double-
entry bookkeeping. The treatise reflected the practices of Venice at the time that became
the Method of Venice or Italian method. Therefore, he describe what were prevalent
accounting practices of the day.

He did not claim in developing the art of bookkeeping. He has regarded as the father of
double-entry accounting. He stated the purpose or bookkeeping was to give the trader
without delay information as to his assets and liabilities. He also advised the computation
of periodic profit and the closing of the books. He also said that it is always good to close

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

the books each year, especially if you are in a partnership with others as frequent
accounting makes long friendships.

Self-Help: You can also refer to the sources below to help you
further understand the lesson.

You can also refer to the sources below to help you further understand the
lesson:
Ballada, W. and Ballada, S. (2018). Basic finacial accounting and repoting (21st
ed.). Manila: DomDane Publishers.
Ballada, W .and Ballada, S. (2015). Basic accounting: made easy (2015 ed.).
Manila: DomDane Publishers.
Lopez, R. M. (2016). Basic accounting for non-accountants: simplified
approach.(2016 ed., Vol. 1). Ma-a, Davao City: MS Lopez Printing & Pub.

Note:

The content of this manual is based on the textbook for ACC 111 titled “Basic Financial
Accounting and Reporting” by Ballada, Win, CPA, CBE, MBA and Ballada, Susan, CPA.

Let’s Check!
I. Questions:
1. What is accounting?
________________________________________________________
________________________________________________________
________________________________________________________

2. What is GAAP?
________________________________________________________
________________________________________________________
________________________________________________________

3. What are the basic principles and explain each?

________________________________________________________
________________________________________________________
________________________________________________________

4. What are the basic principles in accounting?

________________________________________________________
________________________________________________________
________________________________________________________

5. What are the fundamental concepts in accounting?

________________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

________________________________________________________
________________________________________________________

6. What is/are the importance of accounting to business?

________________________________________________________
________________________________________________________
________________________________________________________

7. What are the activities and types of business organization?

________________________________________________________
________________________________________________________
________________________________________________________

8. What are the career opportunities of a professional accountant?

________________________________________________________
________________________________________________________
________________________________________________________

9. What are the branches of accounting?

________________________________________________________
________________________________________________________
________________________________________________________

Let’s Analyze!
Problem 1
The company is preparing financial statements and indicated that it is fairly represented
and in compliance with all standards and it follows the procedures, conventions and
practices. You, as the internal auditor of the company discover that there is material
misstatement in the preparation of financial statement. As a professional certified public
accountant, how does the Code of Ethics affect your decision?

Problem 2
Tisoy is a sole owner and manager of Upaw Gupit service. Tisoy purchased a car for
personal use. The amount that was paid to the car was recorded in the business. What
accounting assumption or principle does violated by Tisoy in recordin the personal
activities to the business? Why?

In the Nutshell!
Activity 1. Indeed, after the discussion and learning exercises provided it is time for us
to know the know the knowledge you get with that please feel free to write your arguments
or lessons learned below.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

I have indicated my arguments or lessons learned.

1. ________________________________________________________________
________________________________________________________________
__________________________________________________________

2. ________________________________________________________________
________________________________________________________________
__________________________________________________________

3. ________________________________________________________________
________________________________________________________________
__________________________________________________________

4. _______________________________________________________________
________________________________________________________________
__________________________________________________________

5. ________________________________________________________________
________________________________________________________________
__________________________________________________________

6. ________________________________________________________________
________________________________________________________________
__________________________________________________________

7. ________________________________________________________________
________________________________________________________________
__________________________________________________________

8. ________________________________________________________________
________________________________________________________________
__________________________________________________________

9. ________________________________________________________________
________________________________________________________________
__________________________________________________________

10. ________________________________________________________________
________________________________________________________________
__________________________________________________________

Q&A List
Do you have any question for clarification?
Questions/Issues Answers
1.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2.
3.
4.
5.

Keywords index
Accounting Business
GAAP Fundamental Concepts
Basic Principles

14
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOb. Analyze the concepts of

financial statements and the accounting equation.

Metalanguage

For you to demonstrate ULOd, you will need operational understanding of the terms
enumerated below.

Accounting Information System is a set of inter-related processes and procedures

that will process raw data to become information that are stored and disseminated to the
users.

Financial Statements are reports of the operation of the business that are provided by
the accountant to the user for decision making.

- Income Statement
- Balance Sheet
- Cash Flow Statement

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge laid down in the succeeding pages. Please
note that you are not limited to exclusively refer to these resources. Thus, you are
expected to utilize other books, research articles and other resources that are available
in the university’s library e.g. ebrary, search.proquest.com etc., and even online tutorial
websites.

1. ACCOUNTNG INFORMATION SYSTEM

Information System
This a collection of people, procedures, software, hardware and data that works
together to provide information essential in running an organization.

Accounting Information System

This system is needed to generate reliable financial information needed by the
decision make in a timely manner. A system that starts from the economic activities
that are inputted to the systems and transformed into a useful accounting information and
keep the information for future use. The financial information then be given to the decision
makers and then, go back to where the process starts. The information system will provide
reports called the “financial statements”

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. ELEMENTS OF FINANCIAL STATEMENTS

The financial statements are compose of Five (5) complete set.

2. Statement of Financial Position or Balance Sheet
3. Statement of Comprehensive Income or Income Statement
4. Statement of Cash Flows
5. Statement of Changes in Owner’s Equity (last part of Balance sheet)
6. Notes to Financial Statements ( adequate disclosures)

The financial statements are composed of five (5) elements namely:

Assets ( B/S)
Liabilities, (B/S)
Owner’s Equity (B/S)
Revenue (Sales) /Income ( I/S)
Expenses (I/S)

Three (3) of the elements will be presented in the Statement of Financial Position or
Balance Sheet namely: Assets, Liabilities and Owner’s Equity.

Two (2) of the elements will be presented in the Statement of Comprehensive Income or
Income Statement namely: Income and Expenses.

WHEN DO ACCOUNTANTS PREPARE THE FINANCIALTATEMENTS

The business has continuous life of existence. When it starts, it is assume that it will
continue to operate for an indefinite period of time and this is “going concern or continuity
assumption in accounting.

Considering the length of time involved in its operations, it is very impractical for the
owner to wait until the business stops to operate before he would be able to know the
results of operations and financial condition of the business. The life of the business is
then divided into equal periods wherein at the end of each period, financial statements
are prepared. These periods are being referred to as "Accounting Periods" or the
"time-period assumption" in accounting.

This explains why financial statements are prepared and communicated to the owner of
the business or various users/decision makers periodically.

Speaking of accounting periods, it can be a period of:

1 Month - where financial statements are prepared at the end of every month. We call
this on a "Monthly Basis”. This is the shortest accounting period.

3 Months - where financial statements are prepared at the end of every three months.
We call this "Quarterly Basis”.

6 Months- where financial statements are prepared at the end of every six months. We
call this "Semi Annual Basis”.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

12 Months - where financial statements are prepared at the end of every twelve
months. We call this "Yearly " or "Annual Basis”

The length of accounting period chosen depends on the need of the owner for financial
information about his business accounting period of one year. Most often, however, the
business adopts an accounting period of one year.

The owner or management has three (3) annual accounting periods to choose from
as far as periodic reporting of financial statements are concerned, these are

Calendar Year - the accounting period will begin on January 1 and will end on December
31 of the same year. This is the most common annual accounting period that the business
adopts because this is the nearest accounting period wherein business entities file their
Income Tax Returns. The business records are closed on December 31 and the deadline
for filing the said returns is April 15 of the next year.

Fiscal Year -the accounting period will begin on the first day of any month of the year
except January and will end on the last day of the twelfth month completing the one year
period. Example: June 1 end on May 31

Natural Business Year - is a twelve-month period that ends on any month when th-
business is at the lowest or experiencing slack season. Example, a fiscal year for the
hotel industry where the start is the point of slack in visitors and ends up at its peak
season.

An enterprise may adopt any of the aforementioned period. The basic consideration in
the choice of an accounting period is that the accounting period chosen must be reflective
of the "results of operations."

USERS OF FINANCIAL STATEMENTS

Financial accounting information is used by a variety of groups and diverse purposes.
The needs and expectations of users determine the type of information required. The
users of financial statements and their information needs follow:

Investors - They need information to help them determine whether they should buy,
hold or sell.

Stockholders are also interested in information which enable them to assess the ability
of the enterprise to pay dividends.

Employees - Employees are interested in information about the stability and profitability
of the enterprise. They are interested in information which enable them to assess the
ability of the enterprise to provide remuneration, retirement benefits and
employment opportunities.

Lenders - Lenders are interested in information which enable them to determine

whether their loans and interest thereon will be paid when due.

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Telefax: (084) 655-9591, Local 116

Suppliers and other trade creditors-These users are interested in information which
enable them to determine whether amounts owing to them will be paid on maturity.

Customers – These are users that have an interest in information about the continuance
of an enterprise enterprise especially when they have a long term involvement with
or are dependent on the enterprise.

Government and their agencies - These users require information to regulate the
activities of the enterprise, determine the taxation policies and as a basis for national
income and similar statistics.

Public - Enterprises affect members of the public in a variety of ways. For example,
enterprises make substantial contributions to the local economy in many ways including
the number of people they employ and their patronage of local suppliers. Financial
statements may assist the public by providing information about the trends and
recent developments in the prosperity of the enterprise and the range of its
activities. Actually, users of accounting information can be grouped into external and
internal users.

External users - these are persons who are not usually employees of the business but
have financial interest thereat. They are not involved in the daily operations of the
reporting entity, such as owner's, shareholder's, creditors suppliers, government
agencies, labor unions, customers, etc.

Internal users -these are who are actually involved in the daily operation of the business,
such as board of directors, chief financial manager and officers, plant managers
and supervisors who use financial information to help plan and control decisions.

In reality, however, financial statements are strictly held confidential among management,
investors and government agencies and seldom that the lenders and trade creditors are
being furnished with copies.

FINANCIAL POSITION ( Balance sheet ) financial condition of the business

ASSETS
This is a present economic resource (a right that has the potential to produce economic
benefits) controlled by the entity as a result of past transactions or events.
In the definition it states about the three (3) aspects
1. Rights can have potential economic benefits in a various ways
o Rights that correspond to an obligation of another party (e.g. rights to
receive cash, to receive goods and services, to exchange economic
resources with another party on a favorable terms and to benefit from an
obligation of another party to transfer an economic resources if a
specified uncertain future events occurs)

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Telefax: (084) 655-9591, Local 116

o Rights that do not corresponds to an obligation of another party (e.g.

rights over physical object and right to use intellectual property –
intangible asset/royalties).

2. Potential to produce economic benefits the entity is entitle to do one or more of

the following:
o Receive contractual cash flows or another economic resources;

Cost 100 Sold at P150 = P50

o Exchange economic resources with another party on a favorable terms;

Example :

Balance Sheet
Cash on hand P1,000,000 (asset) 4/1 ( Current Asset)
Then….

Car …… P1,000,000 ( Fixed asset)

cash …………..P1,000,000 ( given to Toyota Co.)

So….
Balance Sheet
Car P1,000,0000 (Asset) ( 4/2) (Fixed Asset or PPE)

o Produce cash inflows or avoiding cash ouflows;

4/1 Cash P10,000 (Current asset)

Sales P10,000 ( income account)

4/2 Rent Expense P5,000 (Expense Account)

Cash P5,000

o Receive cash or other economic resources by selling the economic resources;

and
Cash P10,000
Sales P10,000 ( income account)

o Extinguish ( eliminate or pay) liabilities by transferring the economic resources.

4/1 Cash P4,000
Account Payable … P4,000 ( Liability account / B/S)

#
4/2 Account Payable …. P4,000
Cash …………………………P4,000

Control that result to a present ability to direct the use of the economic
resources and obtain the economic benefits that may flow from the resources.

LIABILITY (obligation)

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Telefax: (084) 655-9591, Local 116

This is a present obligation of the entity to transfer economic resources as a

result of past transactions or events. The existence of liability must met all the criteria.

4/1 Cash P4,000

Account Payable … P4,000 ( Liability account / B/S)

#
4/2 Account Payable …. P4,000
Cash …………………………P4,000

a. The entity has an obligation;

b. The obligation is to transfer economic resources*; and
c. The obligation is a present obligation that exist as a result of past events.

The transfer of economic resources includes the following obligation:

a. To pay cash;
b. To deliver goods or provide services;
c. To exchange economic resources with another party on unfavorable terms.
d. To transfer economic resources if a specified uncertain future event occurs.
e. To issue a financial instrument if that financial instrument will oblige the entity to
transfer economic resources.

The present obligation exists as a result of past events only if:

a. The entity has already obtained economic benefits or taken an action; and
b. As a consequence, the company will or may have to transfer an economic
resource that it would not otherwise have had to transfer.

EQUITY it means the capital + net income (retained earning) = total equity
Basic Equation (A= L + E )

This is the residual interest after deducting all the liabilities from the total assets
this pertains to the following dependent on what type of business organization.
1. Sole Proprietorship = Owner’s Equity
2. Partnership = Partner’s Equity
3. Corporation = Stockholders’ Equity or Shareholders’ Equity (SHE)
4. Cooperatives = Member’s Equity

FINANCIAL PERFORMANCE Income Statement =shows the result of operation.

Because revenue (Sales) , expenses and income are presented

INCOME
This increases in assets, or decreases in liabilities that resulted to an increase in
equity other than those relating to contributions from the holders of equity claims.

4/1 Cash P10,000 (Current asset)

Sales P10,000 ( income account)

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

4/2 Account Payable …. P4,000 (original – credit account )

Cash …………………………P4,000 (Current Asset)

EXPENSES
This decreases in assets, or increases in liabilities that resulted to a decrease in
equity other than those relating to distributions to the holders of equity claims.

4/2 Rent Expense P5,000 (Expense Account)

Cash P5,000 (Current Asset )

4/2 Supplies …………… P4,000

Accounts payable ( Liability account - ) increase liability – credit
side

3. THE ACCOUNT, ACCOUNT TITLES AND THE ACCOUNTING EQUATION

The Account

This is the basic summary device in accounting. A separate account per elements that
appears to the financial statements. This is known as “T” accounts and this is the detailed
record of the increases, decreases and balance of each elements.

Account Title

Left side Right side

or Or
Debit (Dr) side Credit (Cr) side

The Accounting Equation

The financial statements will tell us how business is performing. The basic tool to
present the amounts in the statements is the use of accounting equation that states assets
is always equal to the total liabilities and equity this is known as “mirror image” and the
basic accounting model is

Assets = Liabilities + Owner’s Equity

or
A = L + OE

The Equation can be derived if:

- The Liability is unknown then the formula is, L = A – OE
- The Owner’s Equity is unknown then the formula is, OE = A – L

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 Department of Accounting Education
Mabini Street, Tagum City
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Telefax: (084) 655-9591, Local 116

- The assets are the left side and consider as the debit and the mirror image
which is the liabilities are the right side and consider as the credit. Therefore,
every business transaction requires a debit and credit sides.

The Expanded Accounting Equation

This presents the accounting equation with the effect of the income earned by the
company and the expenses incurred by the company.

Assets = Liabilities + Owner’s Equity + Revenues - Expenses

or
A = L + OE + R – E

Illustration:
If the company has total asset of P700,000 and the liability is P300,000. How much
is the Owner’s Equity?

Solution:
A = 700,000
L = 300,000
OE = ?
A L + OE
700,000 = 300,000 + OE ?
OE ? = A - L
OE = 700,000 - 300,000
OE = 400,000
Note: to make it more comprehensive just refer to the Basic Equation :

Assets = Liabilities + Owner’s Equity

P700,000 = P300,000 + __________? (Need to be balance)
Therefore: OE = P700,000 – 300,000
OE = 400,000

so to completely show the EQUATION:

Assets = Liabilities + Owner’s Equity

P700,000 = P300,000 + 400,000
P700,000 = P700,000

Another Example:
A company has total assets of 1,000,000 and the owner’s equity is 60% of the assets.
How much is the liability?

Solution:
A = 1,000,000
L =?
OE = (1,000,000*60%) = P600,000
A L + OE
1,000,000 = L + 600,000 ( 1,000,000 x 60%)

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 Department of Accounting Education
Mabini Street, Tagum City
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Telefax: (084) 655-9591, Local 116

L = A - OE
L = 1,000,000 – 600,000
L = 400,000

Note: to make it more comprehensive just refer to the Basic Equation :

Assets = Liabilities + Owner’s Equity

P1,000,000 = P400,000 + 600,0000 ( 60% of P1,000,000)
P1,000,000 = P1,000,000

Therefore : L = P1,000,000 – 600,000

= P400,000

Another Example
The company has total liability of 700,000 and the Owner’s equity is twice the
amount of the liability (so… P 700,000 x 2 = P1,400,000) . What is the total assets?

Solution:
A =?
L = 700,000
OE = (700,000*2) = 1,400,000

A = L + OE
A = 700,000 + 1,400,000 ( 700,000 x 2)
A = P 2,100,000

Therefore if we will apply the basic equation :

A = L + OE
P2,100 000 = P700,000 + P1,400,000
P2,100,000 = P2,100,000

Another Example:
The company has the following balances at the beginning of the year:
Assets of 2,500,000 and liabilities of 450,000.
During the year the assets decrease “ by “ 300,000 and the owner’s equity
increases “ to “ 1,200,000. What is the balance of the liability at the end of the year?

Solution:
Beginning: A = 2,500,000
L = 450,000
OE = 1,050,000
During the year:
Assets decreases by 300,000
Owner’s Equity increases to 1,200,000

A = L + OE

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Beg. 2,500,000 = 450,00 + 1,050,000

Changes during the year (300,000) = + 150,000(retained earnings
End. 2,200,000 = 1,000.000 + 1,200,000
2,200,000 = 2,200,000

L = A - OE
L = 2,200,000 – 1,200,000
L = 1,000,000 end 4/6/ 11-12 4/6 4:30 -5:30

Note: Notice that the “increase or decrease by” it would be added or deducted
accordingly. But if it is “increase or decrease to” then, it should be the ending balance of
the account. Furthermore, you can see that the 300,000 is considered as changes during
the year therefore, it is deducted as it is “decrease by”. The 1,200,000 is placed in the
end balance of the account of the OE as it is “increases to”.

NET INCOME COMPUTATION IS PRESENTED IN THE INCOME STATEMENT OR

THE STATEMENT OF FINANCIAL PERFORMANCE. Start 4/11/22

Another Illustration

A company earned a total revenue of 975,000 and the expenses incurred is 587,900.
What is the Net Income(NI)?

Net Income = Revenue – Expenses Note: Revenue (Sales or Service income)

NI = R - E
NI = 975,000 - 587,900
NI = P 387,100 result of operation of the business

4. THE DOUBLE ENTRY SYSTEM AND THE RULES OF DEBIT AND CREDIT

The Double-Entry System

This means that the business has dual effect to the account as it has effect on both
the debit side and credit side. The account debited are entered in the left side and the
account credited are entered in the right side.

The Normal Balances of an Account

The increase of an assets is recorded in the left side (Dr. side) and decrease in
recorded in the right side (Cr. side).

While, it is reversed for the liabilities and owner’s equity.

Sample Journal Entry ( Debit & Credit) :

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

BALANCES
Accounts Normal Increases Decreases
Assets ( Ex. Cash) Dr. Dr. Cr.

Contra Assets Cr. Cr. Dr.

Liabilities Cr. Cr. Dr.

Owner’s Equity Cr. Cr. Dr.

Owner’s Withdrawals Dr. Dr. Cr.

Income/Gain/Revenue Cr. Cr. Dr.

Expenses/Losses Dr. Dr. Cr.

ACCOUNTING EVENTS AND TRANSACTIONS

Accounting events are those economic occurrence that causes changes to the
elements of financial statements. Transactions are particular event that involving
transfer of something of value between two entities.

BALANACE SHEET OR STATEMENT OF FINANCIAL POSITION

The Account Titles
Assets are classified into two: current assets and non-current assets. Per revised PAS 1
(Philippine Accounting Standards No. 1). The entity shall classify assets as current when:
1. It is expected to realize the asset, or intends to sell or consume it, in its normal
operating cycle;( 12 months or one year)
2. It holds the assets for the purpose of trading; (inventories)

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

3. It expects to realize the assets within twelve months after the reporting period; or
4. The asset is a 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.

Those assets that are not classified as current shall be recognized as non-current assets.
Operating cycle is the time between the acquisitions of the assets for processing and their
realization in cash or cash equivalents. The entity’s normal operating cycle is
considered to be 12 months if not clearly identified.

Current Assets

Cash. This includes coins, currency, checks, money orders, bank deposits and drafts.
That are used as medium of exchange that a bank will accept for deposits at face value.
Cash Equivalents. An account used for short-term, highly, liquid investments that are
readily convertible to known amount of cash that are subject to an insignificant risks of
change in values. ( Marketable Securities-share of stocks/common stock)
Petty Cash Fund. Money set aside for petty or small amount of expenses.
Notes Receivables. The account used to account written pledged from customer that will
pay the business at a fixed amount of money at a certain date. (issuance of check)
Accounts Receivables. These are claims against customers arising from sale of service
or goods on credit.
Estimated Uncollectible Accounts (Allowance for Bad Debts) . A contra asset
account that is to account for the provision of possible losses from uncollected accounts.
This is presented as reduction to the accounts receivable accounts to get the net
realizable value of the accounts receivables.

Balance Sheet:
Accounts Receivable P2,000
Less: Estimated Uncollectible Accounts 500 P1,500

Advances to Employees. An account used to track the collectibles from employees for
allowing them to make cash advances that are deductible to the payroll or the salaries
and wages.
Inventories. These are assets that are held for sale in the ordinary course of business,
still in the process of production for such sale, or in the forms of materials or supplies to
be consumed in the production of goods or rendering service.
Merchandise Inventory, end. This refers to the inventory that are still unsold as
at the end of the period is determine by physical counting.
Supplies Inventory or Unused Supplies. Refers to the cost of supplies and
stationaries still unused as of the end of the period.

Prepaid Expenses. These are expenses paid for by the business in advance.

These accounts are arranged according to its liquidity (its readiness to be converted
into cash) in the balance sheet.

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

❖ Accrued income/Accrued Revenue is a current asset and would sit on the

balance sheet (the Statement of Financial Position) under trade receivables

Noncurrent Assets ( Fixed Assets)

Property, Plant and Equipment. The account use for tangible assets that are held by
an enterprise for use in supply or production of goods or services, for rental to others, or
for administrative purposes that are to be used for more than one (1) period.
Land - an account title for the site where the building used as office or store is
constructed.
Building - account title for a finished construction owned by the business where
operations and transactions took place.
Equipment includes calculators, typewriters, adding machines, computers, steel filing
cabinets and the like. If these are used in the office, the account title is Office Equipment
and if used in the store, Store Equipment. Trucks, jeeps, vans, automobiles and other
kinds of motor vehicles are used exclusively for delivering goods, the account title is
Delivery Equipment.

Accumulated Depreciation. A contra asset account used to accumulate all the

depreciation charges.

Balance Sheet:

Building P50,000
Less: Accumulated Depreciation 10,000 P40,000

Intangible Assets. An asset that has no physical substance, but identifiable and
nonmonetary assets held for use in the production or supply of goods and services, for
rental to others or for administrative purpose. Trademark, Copyrights.

Liabilities are classified into two: current liabilities and non-current liabilities. Per revised
PAS 1 (Philippine Accounting Standards No. 1). The entity shall classify liability as current
when:
1. It is expected to settle the liability in its normal operating cycle;
2. It holds the liability primarily for the purpose of trading;
3. It liability is due to be settled within twelve months after the reporting period; or
4. The entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.

Those liabilities that are not classified as current shall be recognized as non-current
liabilities.

Current Liabilities ( Credit side )

Accounts Payable. An account used for obligation that are lend by accepting goods
from suppliers and the company agrees to pay the amount in the future.

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

Notes Payable (Short-Term). An account of obligation that are used for amount lend
from the debtors in exchange of a promissory note that is payable within one year.

Accrued Liabilities. This account is used when there are unpaid expenses incurred by
the company. (Accrued expenses)

Unearned Income. This is the account used when payment is receiving before
providing services or before the products or goods are delivered.

Current Portion of Long-term Debt. This are portion of the mortgage notes, bonds and
other long-term obligations that are payable within 1 year after the reporting period or the
balance sheet date.

Example: For example, if a company owes a total of $100,000, and $20,000 of it is due and
must be paid off in the current year, it records $80,000 as long-term debt and $20,000 as CPLTD.

Non-current liabilities

Notes Payable (Long -Term). An account of obligation that are used for amount lend
from the debtors in exchange of a promissory note that is payable for more than 1 year.
( Check issuance )

Mortgage payables. This is to account a long-term debt of the entity that has pledged
certain assets as security to the creditor. If the loan is not paid the creditor will foreclose
the mortgage asset to be sold to enable the entity to settle the claim.

Owner’s Equity ( Capital)

Capital. From Latin word “Capitalis”, means “property”. This is the investment account
used to record original and additional investment of the owner of the business entity.
Increase by the amount of profit earned during the year and decrease with a loss.

Journal Entry
4/12 Machines & Equipment P100,000 ( Asset –debit)
Bebar, Capital P100,000 ( Credit Side – normal )
Invest M & E
#
4/12 Cash P 20,000 ( Asset –debit)
Bebar Capital P20,000 (credit side – normal)

Withdrawals. When the owner of a business entity withdraws cash or other assets rather
than directly reducing the owner’s equity account.

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

Bebar’s withdrawal …. P5,000

Cash ………………………….. P5,000

Income Summary. The temporary account (nominal account ) used to close the income
and expenses at the end of the accounting period. This accounts shows the profit if the
balance is credit but if the balance of this account is debit then it signifies loss.

INCOME STATEMENT OR STATEMENT OF FINANCIAL PERFROMANCE

Income ( Credit Account - credit side normal position )

Sales. This are revenues that are earned as a result of selling merchandise.

Sales Returns & Allowances ( to be deducted in the sales ) - this is a reduction from
sales account for goods that were sold but were returned by the buyer for bad order or
not conforming with the order. This is a reduction from sales account.

Sales Discounts ( to be deducted in the sales ) - refers to the discount given to the
buyers for early payment of merchandise sold on account or collection within the discount
terms. This is also a reduction from sales account.

Example: Credit term - 2/10, n/30

Service Income - In general, this is the account title used for all types of income derived
from rendering of services. Sometimes the account title used is Service Revenue. Other
specific income account titles used are:

Professional Income - the account title generally used by professionals for income
earned from the practice of their profession or may be specified as Accounting or
Auditing Fees Income for Accountants, Legal Fees Income for Lawyers, Dental Fees
Income for Dentists, Medical Fees Income for Doctors, etc.

Rental Income - for income earned on buildings, space or other properties owned
and rented out by the business as the main line of its activity.

Interest Income - for income received by the business arising from an amount of
money borrowed by a customer and usually covered by a promissory note. This is
typical in lending institutions.

Miscellaneous Income - for income earned by the business which is not the
main line of its activity and could not be clearly classified.

COST AND EXPENSES

Cost
Cost of Sales. The cost of the sold goods and products as incurred from the purchase
or produce of product during the period. Also known Cost of Goods Sold.

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 Department of Accounting Education
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Example:
How to compute the Cost of Sales

Beginning Inventory (ending in Dec 31, 2021) Jan 1,2022 P 2,000

Purchases……………………………………………. P5,000
Add: Freight In ………………………………………. 400
Total Purchases ………………………………………. P 5,400
Less : Purchase Return & allowances ………… P300
Purchase Discount (10%) ………………………... 500 800 4,600 ( Net purchases)
Total Goods Available for Sale (TGAS) P6,600
Less: Merchandise ending Inventory (Dec, 31, 2022) ……………… 1,000
Cost of Sales or Cost of Goods Sold P5,600
======

Freight In - refers to transportation cost incurred in buying goods. Under periodic system,
this is not an expense on the part of the business buyer but "cost" which is an adjunct
account to purchases while under perpetual inventory system, it is treated as
merchandise inventory.

Purchases - the account title for "merchandise" purchased under the periodic Inventory
system. Under perpetual inventory system, the account title is "merchandise inventory".

Purchase Returns & Allowances - under periodic inventory system, this refers to the
cost of merchandise that were purchased but later returned to the suppliers for bad
order or does not conform with the specifications. This is a reduction from purchases
account, under perpetual inventory system it is a reduction to merchandise inventory
account.

Purchase Discounts - refers to discount availed for early payment of merchandise

under Periodic Inventory System. This is also a reduction from purchased purchases
account. Under perpetual inventory system, it is also a reduction from merchandise
inventory account.

Merchandise Inventory, beginning - the merchandise inventory at the beginning of the

period which is usually dated Jan. 1 is an asset but will turn into "cost" when such period
ended.

Expenses refer to decreases in economic benefits during the accounting period in the
form of outflows or depletion of assets or incurrence of liabilities that result in decrease in
equity, other than those relating to distribution to equity participants. Losses represent
other items that meet the definition of expense and may, or may not, arise in the cause
of the ordinary activities of an enterprise. Losses represent decreases in economic
benefits and as Such are no different in nature from other expenses. Hence, they are not
regarded as constituting a separate element.

Salaries and Wages. The payments to the labor force as a result of employee-employer
relationship

Utilities Expense. Expenses related to the use of telecommunications facilities,

consumption of electricity, fuel and water.

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

Rent Expense. The amount of used supplies in the conduct of business operation.

Insurance Expense. The portion of premiums paid on insurance coverage that has
already expired.

Depreciation Expense. The portion of the costs of tangible assets allocated or charged
as expense during an accounting period.

1/1/2019 P100,000 Asset = P10,000 per year depreciation

10 years life ( useful life)

as of 1/1/2022 accumulated depreciation***(Contra asset Account)

3 years’ x P10,000 = P30,000

(1/1/2019- 12/31/2021) value P100,000 – P30,000*** = P70,000 (Net Value)

Uncollectible Accounts Expense (Bad debts) . An amount of receivables estimated to

be doubtful of collection and charge as an expense during an accounting period.

Interest Expense. An expense related to the use of borrowed funds.

Freight Out - refers to transportation expenses of merchandise sold.

Supplies Expense - this represents cost of supplies that were used and consumed that
bears specific titles as office supplies expense, store supplies expense, shop supplies
expense, etc.
Repairs and Maintenance - for expenses incurred in repairing or servicing the buildings,
machineries, vehicles, equipment, etc., which are owned by the business.

Uncollectible Accounts - for the anticipated loss that the business may incur arising
from uncollectible accounts. (Bad debts)

Depreciation Expense - for the portion of the cost of property and equipment or fixed
assets that has expired based on rational and systematic allocation procedure.

Taxes and Licenses - for the amount paid for business permits, licenses and other
government dues except the Income Tax paid which is not allowable by law as a
deduction.
Insurance Expense - account title for the expired portion of the insurance premium paid.
Miscellaneous Expense- any amount paid for not significant expense to warrant a
particular classification.

Self-Help: You can also refer to the sources below to help you
further understand the lesson.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

You can also refer to the sources below to help you further understand the
lesson:
Ballada, W. and Ballada, S. (2018). Basic finacial accounting and repoting (21st
ed.). Manila: DomDane Publishers.
Ballada, W .and Ballada, S. (2015). Basic accounting: made easy (2015 ed.).
Manila: DomDane Publishers.
Lopez, R. M. (2016). Basic accounting for non-accountants: simplified
approach.(2016 ed., Vol. 1). Ma-a, Davao City: MS Lopez Printing & Pub.

Note:

The content of this manual is based on the textbook for ACC 111 titled “Basic Financial
Accounting and Reporting” by Ballada, Win, CPA, CBE, MBA and Ballada, Susan, CPA

Let’s Check!
I. Questions:
1. What is accounting information system?
________________________________________________________
________________________________________________________
________________________________________________________

2. What is financial statements and what are the complete set?

________________________________________________________
________________________________________________________
________________________________________________________

3. What are the elements of financial statements?

________________________________________________________
________________________________________________________
________________________________________________________

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 Department of Accounting Education
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Telefax: (084) 655-9591, Local 116

In a Nutshell
Activity 1. Indeed, the double entry bookkeeping help us to analyze transactions. Based
from the discussion and the learning exercises that you have done, please feel free to
write your arguments or lessons learned below. I have indicated my arguments or lessons
learned.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Q&A List
Do you have any question for clarification?
Questions/Issues Answers
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Keywords index
Financial Statement Double Entry Bookkeeping
Assets Liabilities
Equity Normal Balances
Debit Credit

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