t t The Aceguntily sation anid tie Drlite Eni 319 1. Use of Assets (UA) An neve necntint decreares and a earrenponding chaimt (abilities ar equity) account decreases, Exarngila, (1) Gettied accounts payabse; (2) Paid salaries of einployoos, Inline (liabilities oF owner's equity) account increases and another clainny (abilities oF owner's equity) account decreases, Framgle: feceived utilities bill but did not pay, Every accountable event has a dual but salf-balancing affect on the accounting equation, Recognizing these events will not In any manner affect the equality of the basic accounting model, The four types of transactions above may be further expanded into nine types of effects as follows: Increase In Assets» Increase In Lisblties (SA) Increase In Assets * Increase In Owner's Equity (SA) « Decrease In another Assot (EA) Decrease In abilities (UA) Decrease In Assets » Decrease In Owner's Equity (UA) Increase in Liabilities # Decrease In Owner's Equity (EC) Increase In Owner's Equity = Decrease In Liabilities (EC) incre bility « Decrease In another Liability (EC) |. Increase in one Owner's Equity * Oncrease In another Owner's Equity (EC) yon TYPICAL ACCOUNT TITLES USED ‘STATEMENT OF FINANCIAL POSITION Assets Assets are should be classified only Into two: current assets and non-current assets. Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify assets as current when: . a. it expects to realize the asset, or Intends to sell or consume It, In Its normal. operating cycle; 'b. it holds the asset primarily for the purpose of trading; c. It expects to realize the asset within twelve months after the reporting period; or d. the asset Is cash or a cash equivalent (as defined In’PAS No. 7) unless the asset Is restricted from being exchanged or used to settle a lability for at least twelve months after the reporting period, All other assets should be classified as non-current assets, Operating cycle is the time between the acquisition. of, assets. for.procassing and their realization in cash or cash equivalents, When the entity’s normal- operating cycle |s not clearly Identifiable, it is assumed to be twelve months,Current Assets Cash. Cash is any medium of exchange that a bank will accept e deposit at foe vatoe, 4 It includes cons, currency, checks, money orders, bank deposits and drafts: ‘ Cash Equivalents, Pet PAS No. 7, these afe short-term, highly liquid investments that are readily convértible to known amounts of cash and which are subject to an insignificant risk of changes In value, Notes Receivable. A note receivable is a written pledge that the customer will pay the business a fixed amount of money on a certain date, Accounts Receivable, These are claims against customers arising from sale of services ‘or goods on credit. This type of receivable offers less security than a promissory note. Inventories. Per PAS No, 2, these are assets whiich are (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form: of materials or supplies to be consumed in the production process or in the rendering of services. Prepaid Expenses. These are expenses paid for by the business in advance. It is an asset because the business avoids having to pay cash in the future for 2 specific expense. These include insurance and rent. These prepaid items represent future economic benefits—assets—until the time these start to contribute to the earning process; these, then, become expenses. Non-current Assets Property, Plant and Equipment. Per PAS No. 16, these are tangible assets that are held by an enterprise for use in the production or supply of goods or services, or for rectal to others, or for administrative purposes and which are expected to be used during mare: than one period. Included are such items as land, building, machinery and equipment. furniture and fixtures, motor vehicles and equipment. Accumulated Depreciation. jIt is a contra account that contains the sum of the periodic depreciation charges. The balance in this account Is deducted from the cost of the related asset—equipment or bulldings—to obtain book value, Intangible Assets. Per PAS No. 38, these are identifiable, nonmonetary assets without physical substance held for use In the production or supply of goods oF services, for rental to others, or for administrative purposes, These include goodwill, patests. copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists and non-compatition agreements. abilities Per revised Philippine Accounting Standards (PAS) No, 1, an ent classify @ tabi as current when: freak :| | The Accounting Equation and the Double Entry System | 3-15 it expects to settle the liability in its normal operating eycle; b. itholds 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. Ail other liabilities should be classified as non-current lial Current Liabilities Accounts Payable. This account represents the reverse relationship of the accounts #Scevable. By accepting the goods or services, the buyer agrees to pay for them in the asr future. Notes Payable. A note payable is like a note receivable but in a reverse sense. In the c2se of a note payable, the business entity is the maker of the note; that is, the business entity is the party who promises to pay the other party a specified amount of money on 2 specified future date. Accrued Liabilities. Amounts owed to others for unpaid expenses. This account ‘udes salaries payable, utilities payable, interest payable and taxes payable. Unearned Revenues. When the business entity receives payment before providing its customers with goods or services, the amounts received are recorded in the unearned .e account (liability method): When the goods or services are provided to the tomer, the unearned revenue is reduced and income is recognized. rev Current Portion of Long-Term Debt. These are portions of mortgage notes, bonds and ether long-term indebtedness which are to be paid within one year from the balance neet date. $ i on ‘von-current Liabilities, Mortgage Payable, This account records long-term debt of the business entity for which the business entity has pledged certain assets as security to the creditor. In the event that the debt payments are not made, the creditor can foreclose or cause the" mortgaged asset to be sold to enable the entity'to settle the claim, Bonds Payable, Business organizations often obtain substantial sums of money from Jenders to finance the acquisition of equipment and other needed assets. They obtain these funds by issuing bonds. The bond Is a contract between the issuer and the lender specifying the terms of repayment and the Interest to be charged,3-16 | Basic Accounting ei i nT ‘Owner's Equity : Capital (from the Latin copitalis, meaning “property"). This account is used to record ‘the original and additional investments of the owner of the business entity. It is increased by the amount of profit earned during the year or Is decreased by a loss. Cash ‘or other assets that the owner may withdraw from the business ultimately reduce it. This account title bears the name of the owner, Withdrawals. When the owner of a business entity withdraws cash or other assets, such are recorded In the drawing or withdrawal account rather than directly reducing the owner's equity account. Income Summary. It is a temporary account used at the end of the accounting period to close income and expenses. This account shows the profit or loss for the period before closing to the capital account. INCOME STATEMENT Income Service Income. Revenues earned by performing services for a customer or client; for example, accounting services by a GPA firm, laundry services by a laundry shop. Sales. Revenues earned as a result of sale of merchandise; for example, sale of building materials by a construction supplies firm, Expenses Cost of Sales. The cost incurred to purchase or to produce the products sold to customers during the period; also called cost of goods sold. Salaries or Wages Expense. Includes all payments as a result of an employer-employee relationship such as salaries or wages, 13 month pay, cost of living allowances and other related benefits. Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of telecommunications facilities, consumption of electricity, fuel and water. Rent Expense. Expense for space, equipment or other asset rentals. Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct of daily ° business, Insurance Expense, Portion of premiums pald on insurance coverage (e.g. on motor vehicle, health, life, fire, typhoon or flood) which has expired. Depreciation Expense, The portion of the cost of a tangible asset (e.g. buildings and equipment) allocated or charged as expense during an accounting period. Uncollectible Accounts Expense. The amount of receivables estimated to be doubtful ‘of collection and charged a8 expense during an accounting period, Interest Expense, An expense related to use of borrowed funds.