Fundamentals

of Accounting 1
MODULE 3

BASIC CONSIDERATION ON FINANCIAL STATEMENTS

Desired Learning Outcomes

• Understand and explain the
objective and qualitative
characteristics of financial
statements.
• Distinguish the elements of
financial statements, its
recognition and measurements.
• Learn and apply the principle of
Accounting Equation, the rule of
debits and credits.
• Understand Accounting events and
transactions, types and effects of
transactions

Instructor Leemon L. Araza 2015 Edition

FINANCIAL STATEMENTS
OBJECTIVES
Provide information about the financial position, performance and
changes in financial position of an entity that is useful to a wide range of
users in making economic decisions.
Financial statements prepared for this purpose:
 Meet the common needs of most users
 Also show the results of the stewardship* of management, or
accountability of management for the resources entrusted to it.

0
  Do not, however, provide all the information that users may need
to make decisions since they largely portray the financial effects
of past events and do not necessarily provide nonfinancial
information.

*e.g. in prev. times, it is the one employed by a large household or estate to

manage domestic concerns such as supervision of servants, collection of rents
and keeping of accounts.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

A. Fundamental qualitative characteristics

a. Relevance
b. Faithful Representation

B. Enhancing Qualitative characteristics

a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

RELEVANCE
Relevant financial information is capable of making a difference in the
decision made by users, influences the economic decisions of users by helping
them to evaluate, past, present, or future events or confirming, or
correcting, their past evaluations.

a. Predictive value. Financial information has predictive value if it can

be used as input to processes employed by users to predict future
outcomes. For e.g. information about financial position and past
performance is frequently used in predicting wages payments, and the
ability of the entity to meet maturing obligations.

b. Confirmatory value (or feedback). Financial information has confirmatory

value if it provides feedback about (confirms or changes) previous
evaluation. Information with feedback value enables users to confirm or
correct expectations.

FAITHFUL REPRESENTATION
To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it
purports to represent.

a. Completeness. A complete depiction includes all information necessary

for a user to understand the event or information being presented,
including all necessary descriptions and explanations.

1
 b. Neutrality. A neutral presentation is one without bias.

c. Freedom from error. Means there are no errors or omissions in the

description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors in the
process.

ENHANCING QUALITATIVE CHARACTERISTICS

a. Comparability. It enables the users to identify and understand

similarities in, and differences among, items. Consistency, although
related to comparability, is not the same.
“Comparability is the goal; consistency helps to achieve that goal.”

b. Verifiability. Means that different knowledgeable and independent

observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.

c. Timeliness. Means having information available to decision-makers in

time to be capable of influencing their decisions.
d. Understandability. Means classifying, characterizing, and presenting
information clearly and concisely.

THE ELEMENTS OF FINANCIAL STATEMENTS

The financial statements portray the financial effects of transactions and

other events by grouping them into broad classes according to their economic
characteristics. These termed the elements of financial statements. Elements
directly related to measurement of financial position are:
Elements directly related to measurement of financial position are:
 Assets
 Liabilities
 Equity
Elements directly related to measurement of performance are:
 Income
 Expense

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or income statement an item
that meets the definition of an element and satisfies the criteria for recognition . An item that
meets the definition of an element should be recognized if:
 It is probable that any future economic benefit associated with the item
will flow to or from the enterprise; and

2
  The item has a cost or value that can be measured with reliability.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements of
financial statements are to be recognized and carried in the balance sheet and income
statement. This involves the selection of a particular basis of measurement. A
number of these are used to different degrees and in varying combinations in
financial statements. They include the following:

HISTORICAL COST. Assets are recorded at the amount of cash or cash

equivalents paid or the fair value of the consideration given to acquire them
at the time their acquisition.

CURRENT COST. Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was acquired
currently.

“Liabilities are carried at the discounted amount of cash and cash equivalents
that would be required to settle the obligation currently.”
RELIAZABLE (SETTLEMENT) VALUE

Reliazable value. Assets are carried at the amount of cash or cash

equivalents that could currently be obtained by selling an asset in an
orderly disposal.

Settlement value. Liabilities are carried at the undiscounted amounts of

cash or cash equivalents expected to be paid to satisfy the liabilities
in the normal course of business.

Present Value. Assets/liabilities are carried at present discounted value of

the future net cash inflows/outflows that the item is expected to
generate/settle in the normal course of business.

GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS

Philippine Accounting Standard 1 (PAS) gives us the following guidelines in

the presentation of financial statements.
(1) Each component of the financial statements shall be clearly
identified and the following information shall be emphasized for a
proper understanding of the information presented:
i. The name of the reporting entity;
ii. Whether the financial statements cover the individual
entity or a group of entities.
(2) The period covered by the financial statement shall be specified.

3
 Note: For Balance Sheet, use As of (date). For Income Statement,
Statement of Changes in Owner’s Equity and Statement of Cash flows, use
For the month/year ended (date).

FINANCIAL POSITION

The financial position of an enterprise is affected by the economic

resources it controls, its financial structure, it liquidity and solvency,
and its capacity to adapt to changes in the environment in which it operates.
This is primarily provided in the Statement of Financial Position or Balance
Sheet.
It answers the following questions:
 What assets does entity own?
 What does it owe?
 What are the residual equity interests in the entity’s net assets?

Other important information provided by the statement of financial position

is as follows:
 Financial structure – is the source of financing for the assets of
the enterprise. It indicates what amount of assets has been financed
by creditors, which is borrowed capital, and what amount of assets
has been financed by owners, which is invested capital.
Significance:
(1) Useful in predicting future borrowing needs and how
future profits and cash flows will be distributed
among those with an interest in the enterprise.
(2) Useful in predicting how successful the enterprise is
likely to be raising further finance.
 Liquidity – refers to the availability of cash in the near future
after taking account of financial commitments over this period.
Significance:
(1) Useful in predicting the ability of the enterprise to
meet its short-term financial commitments as they
fall due.

 Solvency – refers to the availability of cash over the longer term to

meet financial commitments as they fall due. Significance:
(1) Useful in predicting the ability of the enterprise to
meet its long-term financial commitments as they fall
due.

 Capacity for adaption – the ability of the enterprise to use its

available cash for unexpected requirements and investment
opportunities. This is also known as financial flexibility.
(1) Information about the economic resources controlled
by the enterprise and its capacity for adaptation is

4
 useful in predicting the ability of the enterprise to
generate cash and cash equivalents in the future.

COMPOSITION OF A STATEMENT IN FINANCIAL POSITION

Assets

These are resources controlled by the enterprise* as a result of past

events** and from which future economic benefits *** are expected to flow to the
enterprise.

For example, an asset may be:

• Used singly or in combination with other assets in the production
of goods or services to be sold by the enterprise;
• Exchanged for other assets;
• Used to settle a liability;
• Distributed to the owners of the enterprise.

Assets are should be classified only in two: current assets and

noncurrent assets. Operating Cycle is the time between the acquisition of
assets for processing and their realization in cash or cash equivalents. When
the entity’s normal operating cycle is not clearly identifiable, it is
assumed to be twelve months.
*Controlled by the enterprise – control is the ability to obtain the economic benefits
and to restrict the access of others (e.g. an entity being the sole user of its
plants and equipment or by selling idle assets)
**Past events – The event must be past before an asset can rise. (E.g. equipment will
only become an asset when there is the right to demand delivery or access to
the asset’s potential. Dependent on the terms of the contract, this may be on
acceptance of the order or on delivery.
***Future economic benefits – These are evidenced by the prospective receipt of
cash. This could be cash itself, an account receivable or any item which may be
sold. Although, for example, a factory may not be sold for it houses the
manufacturing facility for the goods. When these goods are sold, the economic
benefit resulting from the use of the factory is realized as cash.

Current Assets

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;

5
 d. The asset is cash or cash equivalent unless the asset is restricted
from being exchanged or used to settle a liability for at least
months after the reporting period.
1. Cash 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.
*Money orders is a document which can be bought as a way of sending money
through the post.

2. 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.
3. Accounts Receivable These are claims against customers arising from sale
of services or goods on credits. This type of receivable offers less
security than a promissory note.

4. 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.
5. Inventory or Merchandise Inventory these are assets which are (a) held
for sale by the company, (b) in the process of production for such sale,
(c) in the form of materials (raw materials) or supplies to be consumed
in the production.

6. Supplies this may be office supplies like bond papers, paper clips and
the like or can be also store supplies like boxes, bags, packaging tapes
and other related materials.
7. 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. This includes insurance and rent.

Non-current Assets

All other assets not classified or does not fall under the criteria of
current assets are called non-current assets.

1. Property, Plant and Equipment (PPE) these are tangible assets that are
held by an enterprise for use in the production or supply of goods or in
rendering services, or for rental to other, or for administrative
purposes and which are expected to be used during more than one period.
These are:
a. Land e. Delivery Equipment
b. Building f. Store Equipment
c. Office Equipment g. Service Vehicle
d. Furniture and Fixtures

2. Accumulated Depreciation applies to property, plant and equipment except

land as a contra account that contains the sum of periodic depreciation

6
 charges. The reflected amount is deducted from the cost of the related
asset to obtain book value.

To illustrate:
The Company has an office equipment worth P500,000 with a useful life of
10 years acquired last June 1, 2013.
Office Equipment P 500,000
Accumulated Depreciation – O/E (100,000)
Net book value P 400,000

Formula:
Annual Depreciation = Cost of the PPE – salvage value* (if any)
Life (n)

Accumulated Depreciation = Annual depreciation x age of the PPE

*Salvage value is the value of an asset if sold for scrap and also called as Residual or
scrap value.

To compute:
= 500,000 = 50,000 annual depreciation
10
= 50,000 x 2 years = 100,000 Accu. Dep.
(from june 1 2013 to june 1 2015)

3. Intangible
These are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or services,
for rentals to others or for administrative purposes. These are:
a. Goodwill e. Franchises
b. Patents f. Trademarks
c. Copyrights g. Brand names
d. Licenses

LIABILITIES

A present obligation of the enterprise arising from past events, the

settlement of which is expected to result in an outflow from the enterprise
of resources embodying can be measured benefits.

*Obligation – These maybe legal or not. A duty to do something or a debt.

* Transfer economic benefits - This could be a transfer of cash, or another
property, the provision of a service or the refraining from activities
which would otherwise be profitable.

7
The settlement of a present obligation involving outflow of resources may
take the form of:
a. Payment of cash
b. Transfer of other assets
c. Provision for services
d. Replacement of the present obligation with another obligation
e. Conversion of the obligation to equity

Current Liabilities

An entity shall classify a liability as current when:

a. It 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 period; 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.
1. Accounts payable This account represents the reverse relationship of the
accounts receivable. Due to suppliers of goods and other assets
purchased on credit.

2. Notes Payable A note payable is like a note receivable but in a reverse

sense. The business entity is the maker of the note; that is, the entity
is the party who promises to pay in a specified amount of money on
specified future date.
3. Accrued Liabilities Amounts owed to others for unpaid expenses. This
account includes:
a. Salaries payable c. Interest payable b. Utilities payable d.
Taxes payable

4. 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.

5. Current portion of Long-term debt These are portions of long-term

liabilities which are to be paid within one year from the balance sheet
date.

Non-current liabilities

All other liabilities not classified or does not fall under the criteria
of current liabilities are called non-current liabilities.

8
 1. Mortgage payable This account records long-term debt of the business
entity for which the entity has pledged certain assets as security to
the creditor.

2. Bonds payable is an obligation in connection with the bond, a contract

between the issuer and the lender specifying the terms of repayment and
the interest to be charged.

OWNER’S EQUITY

Equity is defined as the residual interest in the asset of an entity that

remains after deducting all its liabilities.
1. Capital this account is used to record original and additional
investment of the owner of the business entity. In partnership,
Partners’ Capital is use as its capital account while in corporation is
Shareholders’ Equity.

2. 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.
3. Income Summary It is a temporary account used at the end of the
accounting period to close the income and expenses. This account shows
the profit or loss for the period before closing to the capital account.

FINANCIAL PERFORMANCE reflected by accrual accounting*

Performance of an enterprise – comprise its revenue, expenses, net income or

loss for a period of time. It is the level of income earned by the enterprise
through efficient and effective use of its resources. Information about
performance is primarily provided in an Income Statement or Statement of
Financial Performance or Statement of Comprehensive Income or Statement of
Income and Expenses.

*Accrual Accounting recognizes transactions and other events of a reporting

entity in the periods in which those effects occur, even if the resulting
cash receipts and payments occur in a different period.

COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE

REVENUE OR INCOME

These are increases in economic benefits during the accounting period in

the form of inflows or enhancements of assets or decrease of liabilities from
delivery or production of goods, rendering of services, or other activities
that constitute the enterprise’s major operations.
1. Service Income Revenues earned by performing services for a customer or
client, for e.g. accounting services by a CPA firm, laundry services by
a laundry shop.

9
 2. Sales Revenues earned as a result of sale of merchandise; for e.g. sale
of merchandise by General Merchandise Store.

EXPENSES

These are decrease in economic benefits during the period in the form
of outflows or using up of assets or incurrence of liabilities that result in
decreases in equity, other than relating to distributions to equity
participants.
1. Cost of Sales The cost incurred to purchase or to produce the products
sold to customers during the period; also called as cost of goods sold.
2. Salaries and Wages Expense includes all payments as a result of an
employer-employee relationship such as salaries and wages, 13th month
pay, cost if living allowances, other related benefits.
3. Utilities Expense expenses related to use of telecommunications
facilities, consumptions of electricity, fuel and water.
4. Rent Expense expense for space, equipment or other asset rentals.
5. Supplies Expense expense of using supplies in the conduct of daily
business.

6. Insurance Expense portion of premiums paid on insurance coverage which

has expired.

7. Depreciation Expense portion of the cost of a tangible asset allocated

or charged as expense during an accounting period.
8. Uncollectible Accounts Expense the amount of receivables estimated to be
doubtful of collection and charged as expense during an accounting
period.

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

CHANGES IN FINANCIAL POSITION

It refers to the changes in the economic resources and obligation of an

enterprise. In constructing a statement of changes in Owner’s Equity, funds
can be defined in various ways, such as all financial revenues, working
capital, liquid assets or cash.

THE ACCOUNT

The basic summary device of accounting is the account. A separate

account is maintained for each element that appears in the balance sheet
(assets, liabilities, and equity) and in the income statement (income and
expense). Thus, an account may be defined as a detailed record of the
increases, decrease and balance of each element that appears in an entity’s
financial statements.

10
 The simplest form of the account is known as the “T” account because of its
similarity to the letter T. the account has three parts as shown on the next
page.

Account Title
Left side or Debit Right side or side
credit side

THE ACCOUNTING EQUATION and DEBITS AND CREDITS-THE DOUBLE ENTRY SYSTEM

Assets = Liabilities + Equity

Balance

The basic tool of accounting is the accounting equation. The left side
of the equation shows how much the business owns, and the right side of the
equation shows how much resources do the outside creditor and owner supplied
to the business.

The logic of debiting and crediting is related to the accounting

equation. Transactions may require addition to both sides (left or sides),
subtractions from both sides (left and right sides), or an addition and
subtraction on the same side (left or right sides). But in all cases the
equality must be maintained as shown above.

Accounting is based on a double-entry system which means that the dual

effects of business are recorded. A debit side entry must have a
corresponding credit side entry. For every transaction, there must be one or
more accounts debited and one or more accounts credited and must be equal
both sides. Each transaction affects at least two accounts.

The rules of debit and credit in accounts.

ACCOUNT DEBIT CREDIT

Assets + -
Liabilities - +
Capital or Equity - +

11
 Revenue or Income - +
Expenses + -
(+) increase; (-) decrease

ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an

enterprise’s assets, liabilities, and/or equity. A transaction is a
particular kind of event that involves the transfer of something of value
between two entities.

Accountants observe many events that they identify and measure in financial
terms. A business transaction is the occurrence of an event or a condition
that affects financial position and can be reliably recorded.

Financial transaction worksheet

Every financial transaction can be analyzed or expressed in terms of its

effects on the accounting equation. The financial transactions will be
analyzed by means of a financial transaction worksheet which is a form used
to analyze increases and decreases in the assets, liabilities or owner’s
equity of a business entity.

When a specific asset, liability or owner’s equity item is created by a

financial transaction, it is listed in the financial transaction worksheet
using the appropriate accounts.

12
 To illustrate:

Mr. Wagmalito Kayayan wants to open an accounting firm this year. The
following transactions are made during the month.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.

W. Kayayan Accounting Firm
Financial Transaction Worksheet
Month of May 2015

ASSET = LIABILITIES + OWNER’S EQUITY

May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

1 100,000 100,000

The financial transaction is analyzed as follows:

• An entity separate and distinct from Kayayan’s personal financial
affairs is created.
• An economic resource – cash of P 100,000 is invested in the business
entity. The source of this asset is the contribution made by the owner,
which represents owner’s equity. The owner’s equity account is W.
Kayayan, Capital.
• The dual nature of the transaction is that cash is invested and owner’s
equity created. The effects of this transaction on the accounting
equation are as follows: increase in asset – cash from zero to P
250,000 and increase in owner’s equity from zero to P 250,000.

May 3. Purchased office supplies worth P20,000 on account.

The effect of transaction is increase in asset and increase in liabilities. Take

note that the equality of the two sides of the equation is maintained.

13
 May 5. Purchased additional office supplies for cash, P10,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 100,000 0 20,000 0 20,000 0 + 100,000

5 10,000
90,000 0 30,000 0 = 20,000 0 + 100,000
120,000 = 120,000
(10,000)
Bal.

The effect of transaction is increase in asset and decrease in another asset

form of asset. After posting the transaction, total asset amounts to P120,000
and total liabilities and capital amount to P120,000.

May 6. Paid the accounts payable in full.

Transaction reduces both sides of the equation by P20,000 resulting to the

equality of the equation after posting.

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 100,000
8 50,000 50,000
Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
150,000 = 150,000

May 10. Rendered accounting services for cash, P25,000.

ASSET = LIABILITIES + OWNER’S EQUITY

14
 May 15 Rendered accounting services on account, P 30,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 95,000 0 30,000 50,000 50,000 0 + 125,000

15 30,000 30,000 Prof.fee
Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000
= 205,000 205,000

May 15 Paid Meralco bills, P 3,500.

ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000

15 (3,500) (3,500)Utility
Exp.
Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
201,500 = 201,500

May 15 Paid salaries for the period, P15,000.

ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500

15 (15,00) (15,000)Salaries
Exp.
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500

15
 May 20 Collected P10,000 from customer.
ASSET
May
Cash Accounts Office Office LIABILITIES + OWNER’S EQUITY
2015 = Accounts Notes + W. Kayayan
Receivable Supplies Equipment = Payable Payable Capital
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
20 10,000 (10,000)
Bal. = 136,500
86,500 20,000 30,000 50,000 50,000 0

186,500 =

May 22 A Short term loan from a local bank was granted in the amount of
P50,000, less P5,000 financing charges. Mr. W. Kayayan issued 1 year
promissory note.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500

22 45,000 50,000 (5,000)
= 50,000 +
231,500
Bal. 131,500 20,000 30,000 50,000
231,500

Interest Expense

16
 May 25 Paid telephone bill amounting to P 6,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital
Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
25 ( 6,000) (6,000) Comm.
Expense
Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
225,500 = 225,500

May 27 Mr. Kayayan withdrew P20,000 for personal use.

ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500

27 (20,000) (20,000)Kayayan,
Withdrawals
Bal. 105,500 20,000 30,000 50,000
205,500 = 50,000 50,000 + 105,500
= 205,500

May 30 At the end of the month, physical count of the office supplies revealed that
P 5,000 had been consumed.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500

30 ( 5,000) (5,000)Supplies
Expense
Bal. = 50,000 50,000 + 100,500
= 200,500
105,500 20,000 25,000 50,000
200,500

17
 Summary of W. Kayayan in tabular Form

W. Kayayan Accounting Firm

Financial Transaction Worksheet
Month of May 2015

ASSET = LIABILITIES + OWNER’S EQUITY

May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

1 100,000 100,000
3 20,000 20,000
5 (10,000) 10,000
6 (20,000) (20,000)
8 50,000 50,000
10 25,000 25,000 Prof.fee
15 30,000 30,000 Prof.fee
15 (3,500) (3,500)Utility
Exp.
15 (15,000) (15,000)Salaries
Exp.
20 10,000 (10,000)
22 45,000 50,000 (5,000) Interest
Expense
25 (6,000) (6,000) Comm.
Expense
27 (20,000) (20,000)Kayayan,
Withdrawals
30 (5,000) (5,000)Supplies
Bal.
= 105,500 20,000 25,000 50,000
200,500 = 50,000 50,000 + 100,500
200,500
USE OF T-ACCOUNTS

Analyzing and recording transactions using the accounting equation is

useful in conveying a basic understanding of how transactions affect the
business. However, it is not an efficient approach once the number of accounts
involved increases. Double-entry system provides a formal system of
classification and recording business transactions.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.

Cash W. Kayayan, Capital

18
 5/1 100,000 100,000 5/1

May 3. Purchased office supplies worth P20,000 on account.

Office Supplies Accounts Payable
5/3 20,000 20,000 5/3

May 5. Purchased additional office supplies for cash, P 10,000.

Office Supplies Cash
5/3 20,000 5/1 100,000 10,000 5/5
5/5 10,000

May 6. Paid the accounts payable in full, P20,000

Accounts Payable Cash
5/6 20,000 20,000 5/3 5/1 100,000 10,000 5/5
20,000 5/6

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.

Accounts Payable Office Equipment
5/6 20,000 20,000 5/3 5/8 50,000
50,000 5/8

May 10. Rendered accounting services for cash, P25,000.

Cash Professional Fees
5/6 20,000 20,000 5/3 25,000 5/10
5/10 25,000 50,000 5/8

May 15. Rendered accounting services on account, P30,000.

Accounts Receivable Professional Fees
5/15 30,000 25,000 5/10
May 15. Paid 30
Meralco bills,
,000 5/ 15 P3,500.
Cash Utilities Expense

5/6 20,000 20,000 5/3 5/15 3,500

5/10 25,000 50,000 5/8 3,500 5/15

May 15. Paid salary of office staffs,P15,000

Cash Salaries Expense
5/6 20,000 20,000 5/3 5/15 15,000
5/10 25,000 50,000 5/8 3,500 5/15

19
 15,000 5/15

May 20. Collected P 10,000 from customer.

Cash Accounts Receivable
5/6 20,000 20,000 5/3 5/15 30,000 10,000 5/20
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15 15,000
5/15

May 22. A short term loan from a local bank was granted in the amount of
P50,000, less P5,000 finance charges. W. Kayayan issued 1 year
promissory note.
Cash Notes Payable
5/6 20,000 20,000 5/3 50,000 5/22
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15

Interest Expense
5,000 5/22

May 25. Paid telephone bill amounting to P6,000.

Cash Telephone Expense
5/6 20,000 20,000 5/3 5/25 6,000
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15 6,000
5/25

May 27. W. Kayayan withdrew cash P20,000 for her personal use.
Cash W. Kayayan drawing
5/6 20,000 20,000 5/3 5/27 20,000
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15 6,000
5/25
20,000 5/27

May 30. At the end of the month, physical count of the office supplies revealed
that P5,000 had been consumed.
Office Supplies Supplies Expense
5/3 20,000 5,000 5/30 5/30 5,000

20
 5/5 10,000

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14 th Edition.
Manila: Domdane Publishers and Made Easy Books.
Ledesma, Ester L.(2014).Financial Accounting Theory Review Booklets. Manila: CRC-
Ace The Professional CPA Review School.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.

21
 ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MULTIPLE CHOICE

1. If a business is not being sold or closed, the amounts reported in the

accounts for assets used in the business operations are based on the cost
of assets. This practice is justified by
a. Accrual
b. Time period
c. Going concern
d. Accounting entity
2. It is the capacity of information to make a difference in decision by
helping users evaluate past, present and future events, or confirming, or
correcting their past evaluations.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
3. The attributes of relevance include all except
a. Neutrality
b. Materiality
c. Predictive value
d. Feedback value
4. It is the quality of information that assures readers that the information
is free from bias or error and faithfully represents what it purports to
show.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
5. The financial accounting information is directed toward the common needs of
users and is independent of presumptions about particular needs and desires
of specific.
a. Neutrality
b. Relevance
c. Completeness
d. Verifiability
6. It is the result of the standard of adequate disclosure
a. Completeness
b. Neutrality

22
 c. Faithful Representation
d. Substance over form
7. The financial information must be comprehensible or intelligible if it is
to be useful.
a. Comparability
b. Understandability
c. Relevance
d. Reliability
8. It is the ability to bring together for the purpose of noting similarities
and dissimilarities
a. Relevance
b. Reliability
c. Comparability
d. Understandability
9. Financial reporting is concerned only with information that is significant
enough to affect evaluation or decision.
a. Materiality
b. Timeliness
c. Comparability
d. Cost and benefit
10. The purchase of an asset on account will
a. Increase total liabilities and decrease total assets
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and decrease owner’s equity
11. Amounts owed by a business are referred to as
a. Assets
b. Equities
c. Liabilities
d. Capital
12. Which of the following equations is the fundamental accounting equation?
a. Assets – Liabilities = Owner’s Equity
b. Assets = Liabilities + Owner’s Equity
c. Assets – Owner’s Equity = Liabilities
d. Assets – Owner’s Equity = Liabilities
13. When an owner deposits cash in an account in the name of the business, it
is an increase to
a. Cash and Accounts receivable
b. Cash and withdrawals
c. Cash and capital
d. Cash and expenses

23
14. Which of the following is not considered an account?
a. Equipment
b. Revenues
c. Accounts Payable
d. Cash
e. Accounts Receivable
15. If an owner invests her computer and printer in the business, there is an
increase to
a. Cash and capital
b. Computer Equipment and withdrawals
c. Cash and withdrawals
d. Computer equipment and capital
16. The owner invested P50,000 in the business. What are the effects on the
fundamental accounting equation?
a. Assets increase P50,000; liabilities no effect; owner’s equity increase
P50,000
b. Assets increase P50,000; liabilities decrease P50,000; owner’s equity
increase P50,000
c. Assets increase P50,000; liabilities increase P50,000; owner’s equity
no effect
d. Assets increase P50,000; liabilities no effect; owner’s equity decrease
P50,000
17. The purchase of an asset for cash will
a. Increase total assets and decrease total liabilities
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and increase total owner’s equity
18. When the rent for the business is paid with a check
a. Cash is decreased and rent expense is decreased
b. Cash is decreased and rent income is increased
c. Cash is decreased and rent expense is increased
d. Cash is decreased and accounts payable is decreased
19. The purchase of supplies for cash will
a. Increase supplies and decrease cash
b. Increase supplies expense and decrease cash
c. Decrease cash and increase accounts payable
d. Decrease cash and increase capital
20. Which of the following transactions does not include an increase to
expense?
a. Received and paid the phone bill
b. Bought office supplies on account
c. Received cash for services performed

24
d. Paid the week’s salaries

25
ACTIVITY NO. 2

NAME:
COURSE:

PROBLEM #1

 Fill the amount of the missing element of the financial position.

PROBEM #1

Income Expense Profit (Loss)

1 840,000 360,000
2 2,400,000 540,000
3 1,300,000 860,000
4 2,000,000 720,000
5 1,800,000 (400,00)
6 750,000 500,000
7 500,000 600,000
8 700,000 150,000
9 600,000 (150,000)
10 900,000 900,000

 Fill the amount of the missing element of the financial performance.

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #2

Instruction: Indicate on the space provided,(1)(X)on the element where the

account belong (2) BS if the account is Balance Sheet account and IS if the
account is income statement account; Dr (debit) or Cr (credit) to identify
the normal balance of the account.
OWNER’S
Accounts ASSET LIABILITES BS or IS Dr or Cr
EQUITY
1. Repairs and Maintenance
Expense
2. Salaries and Wages

26
 Expense
3. Notes Payable
4. Notes Receivable
5. Service Vehicle
6. Mortgage Payable
7. Utilities Expense
8. Furniture and Fixtures
9. Communication Expense
10. Employees’ benefits
payable
11. Office Equipment
12. Prepaid Insurance
13. Owner’s Withdrawal
14. Professional fees
earned
15. Accounts Receivable
16. Representation Expense
17. Salaries Payable
18. Office Supplies Expense
19. Office Supplies
20. Accounts payable
21. Cash
22. Inventory
23. Land
24. Accumulated
Depreciation
25. Miscellaneous Expense
26. Prepaid Rent
27. Rent Expense
28. Juan, Capital
29. Insurance Expense
30. Depreciation Expense

ACTIVITY NO. 3
NAME:
COURSE:

27
PROBLEM #1 Identifying the effects of a transaction
Instruction: Indicate the following sign in the appropriate column; (+) for
increases, (-) for decreases, and (+/-) for both increase and decrease.

Owner’s
Assets Liabilities
Equity
1. Cash payment by the owner
(investment)
2. Payment for taxes and licenses
expense
3. Repair and maintenance of office
4. payment of rent expense
5. Purchase of office supplies on
account
6. Purchase of office supplies for
cash
7. Payment of accounts payable
8. Provide services for cash
9. Purchase of equipment and
furniture for cash
10. Purchase of equipment and
furniture giving a 30day promissory
note
11. Payment of salaries of employees
12. Personal transaction like
withdrawal of the owner
13. Provide services on account
14. Provide services for cash
15. Collection of account from a
customer
16. Payment of utility bills
17. Provide services receiving a
30day promissory note
18. Payment for other expenses
19. Bought supplies paying 50% on
cash, and the remaining on account.
20. Rendered service receiving
partial payment on cash and the
remaining on account.

28
29
30