BOOKKEEPING 02

ACCOUNTING FOR

BUSINESS

Presented by:
MS. ALICIA G. BAÑAS
FINANCIAL STATEMENTS
Means by which financial accounting
information are communicated to internal
and external users.
Structured representations of management.
Portray the economic activities and the result
of economic activities undertaken by the
enterprise during a reporting period.

01
OBJECTIVES OF FINANCIAL
STATEMENTS
Provide information about the entity’s financial position, performance
and changes in financial position that is useful to a wide range of
users in making economic decisions.

Provide information on how well a management has been able to

make use of the resources of the enterprise during a particular
reporting period.

02
QUESTIONS THAT MAY BE SOUGHT
FROM FINANCIAL STATEMENTS
Does the entity have the ability to meet short-term obligations?
Is the entity profitable enough to provide a reasonable rate of return to
investors?
Does the entity have the ability to sustain its operations without risk of
being liquidated?
Is the entity complying with government rules and regulations?
Is the entity able to provide just remuneration to its employees?
Could the entity supply the needs of its customers?

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QUALITATIVE
CHARACTERISTICS
OF ACCOUNTING
INFORMATION
Understandability
Relevance
Reliability
Comparability

04
COMPONENTS
OF FINANCIAL
STATEMENTS
Statement of Financial Position
Statement of Comprehensive
Income
Statement of Cash Flows
Statement of Changes in Equity
Notes to Financial Statements

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BALANCE SHEET
Statement of Financial Position
Provides information on the financial position of
the entity as of a given reporting period.

INCOME STATEMENT
Statement of Comprehensive Income
Provides information on the performance of an
entity for a given reporting period. This statement
is an expanded form of the income statement, but
includes gains and losses taken to other
comprehensive income.
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STATEMENT OF
CASH FLOWS
Provides information about the historical
changes in cash and cash equivalents during
a reporting period.

STATEMENT OF
CHANGES IN EQUITY
Provides information on the activities that cause
changes in financial position and information on
performance that affect equity.
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NOTES TO FINANCIAL
STATEMENTS
Provides information on the accounting
policies adopted by the management,
schedules to support the balances
presented on the face of the financial
statements and other information that may
be relevant to the users but is not
appropriately presented on the face of the
financial statements.

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FINANCIAL STATEMENT
Responsibility for Preparation
and Presentation
Management, or where appropriate, those
charged with governance has the responsibility
for fair presentation and preparation of financial
statements in accordance with applicable
reporting framework (Philippine Financial
Reporting Standards).

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FINANCIAL
STATEMENT
Elements

01 Elements of Financial Position

Assets
Liabilities
Equity

02 Elements of Financial
Performance
Income
Expenses

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FINANCIAL
STATEMENT
General Purpose
These are intended to meet the diverse
needs of the wide range of data users.
These are sometimes referred to as
“external reports”.
These financial statements are not
prepared to meet the specific information
needs of the various decision-makers.

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FINANCIAL
STATEMENT
Special Purpose
These are not intended for general use
but are prepared to meet the specific
information needs of certain decision-
makers.
The most frequent user of these reports
is the management of the business
enterprise.
These are sometimes referred to as
“internal reports”.
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USERS OF
FINANCIAL
STATEMENTS
Management
Investors
Trade Creditors
Banks and Other Lenders
Government and its Agencies
Employees and Labor Unions
Customers and Clients
General Public
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FINANCIAL STATEMENTS
Underlying Assumptions
Accrual Basis
Under this basis, income is recognized when earned, not necessarily during the
period when cash is received; expenses are recognized when incurred, not
necessarily during the period cash is paid.

Going Concern Assumption

Under this basis, income is recognized when earned, not necessarily during the
period when cash is received; expenses are recognized when incurred, not
necessarily during the period cash is paid.

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STATEMENT OF
FINANCIAL POSITION
Conventionally called balance sheet
It presents the financial position of an
enterprise as of a given date.
It presents the three elements: assets,
liabilities and equity.
It is a formal presentation of the basic
accounting equation:

Assets = Liabilities + Equity

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MAJOR PARTS OF THE STATEMENT OF
FINANCIAL POSITION
Heading
1. Legal name of the business enterprise
2. The title of the financial statement,
that is “Statement of Financial
Position”
3. The particular date as of when the
financial position of the business
enterprise is being reported, which is
usually at the end of the month.
Body
1. The assets or economic resources
owned by the reporting business
enterprise.
2. The liabilities or economic
obligations of the enterprise to
other entities.
3. The equity of the owner or owners
over the assets of the enterprise.
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FUNDAMENTAL
ACCOUNTING
EQUATION

Assets = Liabilities + Equity

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ASSETS
Include those economic resources,
rights and property – both tangible
and intangible- that are owned
and/or controlled by either natural
or legal entity.
An item is considered as an asset if it
is expected to have future
usefulness to the entity, or if it has
the capacity to give entity certain
future economic benefits.

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EXAMPLES OF ASSET
ACCOUNT TITLES
Cash
coins, currencies and other similar
cash items that are readily available
for use in business operations.
Accounts receivable
amounts to be collected in the future
from clients or customers.
Loans receivable
claims from borrowers as a result of
lending money.
Merchandise Inventory
Goods and products that are acquired by
a merchandising business for the primary
purpose of reselling them to customers
at higher prices.
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EXAMPLES OF ASSET
ACCOUNT TITLES
Prepaid expenses
rights to receive benefit from expenses
already paid for but are expected to be
consumed to used in the following
period or periods.
Examples:
Unexpired insurance, Prepaid taxes,
Unused office supplies, Prepaid
advertising, Prepaid rent
Accrued revenue receivable
right to collect income that is but already
earned but not yet collected (e.g.
Accrued rent income).
Investment in stock
ownership of shares of a corporation.
Investment in bonds
ownership of financial instruments
evidencing obligations of another entity.
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EXAMPLES OF ASSET
ACCOUNT TITLES
Land
Building
Machinery and equipment
Furniture and Fixtures
Delivery Equipment
Intangible Assets (e.g. Franchise,
Copyright, Trademark, Patents)

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CURRENT ASSETS
Criteria

01 It is expected to be realized in, or it is intended for sale or

consumption in the entity’s normal operating cycle.

02 It is held primarily for the purpose of being traded.

03 It is expected to be realized within twelve months after

the reporting period.

04 It is cash or cash equivalent, unless it is restricted from being

exchanged or used to settle liability for at least twelve
months after the balance sheet date.
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NON-CURRENT ASSETS
Criteria

01 Non-current assets are for long-term use by the business and

are expected to help generate income.

02 Long-term investments such as such as bonds and shares,

fixed assets such as property, plant and equipment

03 Intangible assets such as copyrights and patents

04 Non-current assets are assets and property owned by a

business that are not easily converted to cash within a year.
They may also be called long-term assets.
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LIABILITIES
Represent the present economic
obligations of an entity that would
require some form of future
settlement.
They may arise as a result of buying
or acquiring goods or services on
credit term, borrowing money or the
occurrence of a business activity or
event that gives rise to a future
obligation.

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EXAMPLES OF LIABILITY
ACCOUNT TITLES
Accounts Payable
obligations of the business enterprise
to the suppliers as a result of buying
goods and services, on credit basis, in
the ordinary course of the business
operations.
Notes Payable
obligations as a result of buying goods
and/or services, on credit basis, or as a
result of borrowing money, for which a
promissory note is given by the business
to the supplier or lender.
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EXAMPLES OF LIABILITY
ACCOUNT TITLES
Advances from customers
obligations by a seller or contractor to
deliver goods or render services to the
customers who have paid in advance.
Loans payable
obligations of the business to lenders as
a result of borrowing money. Usually the
settlement of these requires payment of
interest.
Unearned Revenues
obligations for revenues that are
collected in the current reporting period
but are expected to be earned in the
following period or periods.
Examples: Unearned Rent Income or
Deferred Rent Revenue
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EXAMPLES OF LIABILITY
ACCOUNT TITLES
Accrued Expenses Payable
obligations for expenses that are
already incurred but not yet paid (e.g.
Accrued rent expense, Accrued taxes
or taxes payable)
Mortgage Payable
obligation of the business enterprise to a
lender, usually a bank for long-term
borrowing wherein land or building
owned by the business is used as a
collateral.
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CURRENT LIABILITIES
Criteria

01 It is expected to be settled in the entity’s normal

operating cycle.

02 It is held primarily for the purpose of being traded.

03 It is due to be settled within twelve months after the

reporting period.

04 The entity does not have an unconditional right to defer

settlement of the liability for at least twelve months after the
reporting period.
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EQUITY
It represents the residual claim or
owner or owners over the business
enterprise’s assets.
The owner’s equity is sometimes
called “capital” or simply “equity”.

Equity = Assets - Liabilities

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FORMS OF THE STATEMENT OF
FINANCIAL POSITION
Account Form
which looks like a big T-account, where
assets are listed on the left side of the
statement, while liabilities and equity
are listed on the right side.
Report Form
which is a continuous format of
presenting all the three elements.
Liabilities are presented immediately
after the total assets and equity
accounts are listed after the liabilities
section.
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BOOKKEEPING 02

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