Elements of Financial Statement

The elements of financial statements refer to the quantitative information shown in the statement of
financial position and statement of comprehensive income, namely: Assets, Liabilities, Equity, Income
and Expense. These elements are classified into:

Elements directly related Entity’s

Financial Position/Balance Sheet Financial Performance/Income Statement
Asset Income
Liability Expense
Equity

Assets – a present economic resource controlled by the entity as a result of a past event. An
economic resource is a right that has the potential to produce economic benefits.
The essential characteristics of an asset are:
a) The asset is controlled by the entity.
b) The asset is the result of a past transaction or event.
c) The asset has potential to produce economic benefits.
d) The economic resource is a right.
NOTE: Tangibility and ownership are not essential characteristics of assets. Also, the presence or
absence of expenditure is not necessary in determining the existence of assets.

Liability – is a present obligation of an entity to transfer an economic resource as a result of past

event.
a) The entity has an obligation
b) The obligation is to transfer an economic resource
c) The present obligation is a result of a past event.
NOTE: Identification of payee and certainty of timing of settlement and amount of liability are not
essential characteristics of liabilities.

Equity - is the residual interest in the assets of the entity after deducting all of its liabilities.

Income – is the increase in economic benefit during the accounting period in the form of an inflow or
increase of asset or decrease of liability that results in increase in equity, other than contribution from
equity participants. Simply stated, income is an inflow of future economic benefit that increases
equity, other than contribution by owners.

Types of Major Accounts

1. Assets

Current Assets - are assets that can be realized (collected, sold, used up) one year after year-end date.

Cash - is money on hand, or in banks, and other items considered as medium of exchange in business
transactions.

Accounts Receivable are amounts due from customers arising from credit sales or credit services.

Notes Receivable are amounts due from clients supported by promissory notes.

Inventories are assets held for resale

Supplies are items purchased by an enterprise which are unused as of the reporting date.

Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and become
expenses through the passage of time.

Accrued Income is revenue earned but not yet collected

Short term investments are the investments made by the company that are intended to be sold
immediately

Non-current Assets are assets that cannot be realized (collected, sold, used up) one year after year-
end date. Examples include Property, Plant and Equipment (equipment, furniture, building, land), long
term investments, etc.

Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.

Long term Investments are the investments made by the company for long-term purposes

Intangible Assets are assets without a physical substance. Examples include franchise and copyright.

2. Liabilities

Current Liabilities are liabilities that fall due (paid, recognized as revenue) within one year after year-
end date. Examples include Accounts Payable, Utilities Payable and Unearned Income.

Accounts Payable are amounts due, or payable to, suppliers for goods purchased on account or for
services received on account.

Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable, taxes
payable)

Unearned Income is cash collected in advance; the liability is the services to be performed or goods
to be delivered in the future.

Non-current Liabilities are liabilities that do not fall due (paid, recognized as revenue) within one year
after year-end date. Examples include Notes Payable, Loans Payable, Mortgage Payable, etc.

Notes Payable are amounts due to third parties supported by promissory notes.

Loans Payable a liability for money, property, or other material goods given to another party in
exchange for future repayment of the loan value amount with interest.

Mortgage Payable the liability of a property owner to pay a loan that is secured by property.

3. Equity

Capital is the value of cash and other assets invested in the business by the owner of the business.

Drawing is an account debited for assets withdrawn by the owner for personal use from the business.

Income Accounts

Service revenue for service entities, Sales for merchandising and manufacturing companies.

Expense Accounts

Salaries Expense, Interest Expense, Utilities Expense, Rent Expense, etc.

 Forms of Business Organizations

1. Sole Proprietorship
 A form of business is owned by one person; the simplest, and the most common form of business
organization.
 It is not separate from the owner. The business and the owner are inseparable

a. Advantage of Sole Proprietorship

 The owner keeps all the profits

 The owner makes all the decisions
 It is easy to form and operate

b. Disadvantages of Sole Proprietorship

 The life of the business is limited to the life of the owner. Once the owner dies, the business will
cease to operate under the name of the proprietor.
 The amount of capital is limited only by the wealth of the proprietor.

2. Partnership
 A form of business owned by two or more persons. The details of the arrangement between the
partners are outlined in a written document called articles of partnership.
 Profits are divided among partners based on their agreed sharing.
 The owner is called a partner.

a. Advantages of partnership

• Higher capital because two or more persons will contribute to the common fund.

• It is easy to operate like a sole/single proprietorship.

b. Disadvantages of partnership
 The profits are divided among the partners.
 A partner can be held liable for the acts of the other partners.
 In a lawsuit, the personal properties of the partners can be held beyond their contributions and
may be used to answer for any liability of the partnership.

3. Corporation
 A corporation is a business organized as a separate legal entity (artificial person) under the
corporation law with ownership divided into transferable shares of stocks
 Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.
 The corporation begins its existence from the date the Articles of Incorporation is approved by the
Securities and Exchange Commission (SEC).
 The SEC (Securities and Exchange Commission) is the government agency primarily tasked to
regulate private corporations in the Philippines.
 The owners are called stockholders or shareholders.
 The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
 The voting rights of a shareholder is generally based on the percentage of ownership.
 The management of the business is delegated by the shareholders to the Board of Directors
 The ownership is divided into shares and the value of one share may be denominated at a smaller
amount, for example at PHP10 per share.
 The proof of ownership is evidenced by a stock certificate.

a. Advantage of Corporation
 Can easily raise additional funds by selling shares of stocks to the public.
 Shareholders are not personally liable for the debts of the corporation. The extent of their liability is
limited to their equity (ownership) in the corporation.

b. Disadvantages of Corporation
 It is relatively complicated to set up.
 Subject to several legal restrictions as listed in the Corporation Code of the Philippines.

4. Cooperatives
 A cooperative is a duly registered association of persons with a common bond of interest, voluntarily
joining together to achieve their social, economic and cultural needs.
 The owners are called members who contribute equitably to the capital of the cooperative.
 The members are expected to patronize their products and services.
 The word ‘cooperative’ appears in the name of the entity.
 This form of business organization is regulated by the Cooperative Development Authority (CDA).

a. Advantages of Cooperative
 Enjoys certain tax exemption privilege
 Promotes the concept of sharing resources

b. Disadvantage of a Cooperative
 Limited distribution of surplus
 Requires continuous education programs for members.
 The members have active and direct participation in the business of the cooperative.

Types of Business According to Activities

3 types of business organizations:

• Service Business

This type of business offers professional skills, advice and consultations.

Examples: barber shops and beauty parlors, repair shops, banks, accounting and law firms

• Merchandising Business

This type of business buys at wholesale and later sells the products at retail. They make a profit by selling
the merchandise or products at prices that are higher than their purchase costs. This type of business is
also known as "buy and sell".
Examples are: book stores, sari-sari stores, hardware stores

• Manufacturing Business

This type of business buys raw materials and uses them in making a new product, therefore combining
raw materials, labour and expenses into a product for sale later on.

Examples are: shoe manufacturing businesses, car manufacturing plants

Sample Activity:

Jerome Garcia started a new business and completed these transactions during August:

Aug. 1 Garcia invested PHP48,000 cash in the business.

1 Rented office space and paid PHP800 cash for the August rent.

3 Purchased exploration equipment for PHP22,000 by paying PHP12,000 cash and agreeing to
pay the balance in 3 months.

5 Purchased office supplies by paying PHP1,500 cash.

6 Completed exploration work and immediately collected PHP420 cash for the work.

8 Purchased PHP1,350 of office equipment on credit.

15 Completed exploration work on credit in the amount of PHP8,000.

18 Purchased PHP700 of office supplies on credit.

20 Paid cash for the office equipment purchased on August 8.

24 Billed a client PHP2,400 for work completed; the balance is due in 30 days.

28 Received PHP5,000 cash for the work completed on August 15.

30 Paid the assistant’s salary of PHP1,100 cash for this month.

30 Paid PHP340 cash for this month’s utility bill.

30 Garcia withdrew PHP1,050 cash from the business for personal use.

Required

1. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Office
Supplies; Office Equipment; Exploration Equipment; Accounts Payable; Jerome Garcia, Capital;
Jerome Garcia, Withdrawals; Revenues; and Expenses.