PURING COMPANY

ASSETS LIABILITIES EQUITY REVENUE EXPENSE

1 300,000 300,000
2 50,000
2 (50,000)
3 50,000 50,000
4 30,000
4 (10,000) 20,000
5 (1,000) 1,000
6 12,000
6 5,000 17,000
7 (8,500) 8,500
8 (20,000) (20,000)
9 2,500
9 (2,500)
10 (12,000) 12,000
11 (5,000) (5,000)
12 5,000 5,000
13 (12,000)
13 12,000
14 25,000 25,000
15 50,000     50,000  
420,500 50,000 320,000 72,000 21,500
50,500 50,500
420,500 420,500
 Accounts Loan Owner's
Cash Receivable Inventory Equip't. Payable Payable Equity Revenue Expenses
10,000 2,000 30,000 50,000 20,000 72,000
1 20,000 20,000
2 3,000 3,000
3 (1,000) 1,000
4 (20,000) (20,000)
5 5,000 5,000
6 5,000 (5,000)
(10,000) 10,000
7 - -
8 (3,000) (3,000)
(500) 500
9 (1,000) 1,000
10 (2,000) 2,000
11 -
12 50,000 10,000 60,000
13 (32,500) 32,500
14 4,000)           (4,000)    
33,500 12,000 15,500 56,000 20,000 - 68,000 65,000 36,000
              29,000   29,000
  33,500 12,000 15,500 56,000 20,000 - 97,000 65,000 65,000
Elements of Financial Statements

1. Financial Position (Balance Sheet)

a. Asset – valuable resources owned by the
entity
b. Liabilities - obligations of the entity to
outside parties
c. Equity – residual interest in the assets of
the enterprise after deducting liabilities
Elements of Financial Statements

2. Performance (Income Statement)

a. Income - increase in economic benefits
during the accounting period
b. Revenue - arises in the ordinary course
of the ordinary activities of an
enterprise
c. Gains - other items that meet the
definition of income
Elements of Financial Statements

2. Performance (Income Statement)

d. Expenses – decreases in economic
benefits during the accounting period
e. Losses – other items that meet the
definition of expense and may or may
not arise in the course of the ordinary
activities of the enterprise
 THE ACCOUNT
 Basic summary device of accounting. A
separate account is maintained for each
element that appears in the balance sheet
and in the income statement.

Account Title
Left side or Right side or
Debit side Credit side
 THE ACCOUNTING
EQUATION

 Financial statements tell how a business is

performing.
 Basic tool of accounting is the accounting
equation.

Liabilities
Assets Owner’s
Equity
 DEBITS AND CREDITS
The Double Entry System
 Accounting is based on a double-entry
system.
 For every transaction, there must be one
or more accounts debited and one or
more accounts credited.
 An account is debited when an amount is
entered on the left side and credited when
an amount is entered on the right side.
 Normal Balance of an Account
Increases Normal Balance
Account Category Recorded by
Debit Credit Debit Credit

Assets
Liabilities
Owner’s Equity
Owner’s Capital
Withdrawals
Income
Expenses
FUNDAMENTAL ACCOUNTING EQUATION

OWNER’S
ASSETS = LIABILITIES
= + +
EQUITY

1. ? = 40,000 + 60,000

2. 150,000 = ? + 70,000

3. 200,000 = 110,000 + ?
ASSETS
1. Current Assets – International Accounting
Standards classifies assets as current when it
is:
 Expected to be realized in, or is intended for sale or
consumption in , the entity’s normal operating cycle;
 Held primarily for the purpose of being traded;
 Expected to be realized within 12 mos. of the
balance sheet date; or
 Cash or cash equivalent unless it is restricted from
being exchanged or used to settle a liability for at
least 12 mos. after the balance sheet date.
Classification of Current Assets
a. Cash – includes coins, currencies, checks, bank
deposits and other cash items readily available for
use in the operations of the business
b. Cash Equivalents – short term investments readily
convertible to known amount of cash which are
subject to an insignificant risk to changes in value
c. Marketable Securities – stocks and bonds puchased
by the enterprise and are to be held for only a short
span of time or short duration. Purchased fro excess
cash
d. Accounts Receivable – amount collectible from the
customer to whom sales have been made or services
have been rendered on account or credit
e. Notes Receivable – promissory note issued by the
client or customer in exchange for services or
goods received as evidence of an obligation
f. Inventories – unsold goods at the end of the
accounting period
g. Prepaid Expenses – items to be used in the
operations of the business that have been paid in
advance.
Classification of Non-Current Assets
a. Long-Term Investments – assets held for the
accretion of wealth through capital distribution.
Intended to be held for extended period of time
usually more than 1 year.
b. Property, Plant and Equipment – tangible assets
for use in the production or supply of goods or
services or for administrative purposes,
expected to be used for more than one period.
c. Accumulated Depreciation – contra account that
contains the sum of periodic depreciation
d. Intangible Assets – identifiable, non-monetary
assets
LIABILITIES
1. Current Liabilities – International Accounting
Standards classifies assets as current when it is:
 Expected to be settled in the entity’s normal operating
cycle;
 Held primarily for the purpose of being traded;
 Due to be settled within 12 mos. after the balance
sheet date

2. All other liabilities should be classified as non-current

liabilities
Classification of Current Liabilities

a. Accounts Payable – includes debt arising from

purchase of an asset or acquisition of service on
account
b. Notes Payable – includes debts arising from
purchase of an asset or acquisition of services
evidenced by a promissory note
c. Loan Payable – liability to pay the bank or other
financing institution arising from funds borrowed by
the business
d. Utilities Payable – obligation to pay utility companies
for services received
e. Unearned Revenues – obligations of the business
arising from advance payment of goods by clients
f. Accrued Liabilities – includes amounts owed to
others for expenses already incurred but not yet
paid.

Classification of Non-Current Liabilities

a. Mortgage Payable – long-term debt of the business
with security or collateral in the form of real
properties
b. Bonds Payable – certificate of indebtedness under
the seal of a corporation, specifying the terms of
payment and interest to be paid.
OWNER’S EQUITY
a. Capital – account bearing the name of the owner
representing the original and additional investment
of the owner of the business.
b. Drawing – represents the withdrawals made by the
owner of the business either in cash or other assets.
c. Income Summary – temporary account used at the
end of the accounting period to close income and
expense accounts. The balance of this account
shows the net income or net loss for the period
before it is closed to the capital account.
 Rules for debit and credit
 You debit to show:  You credit to show:
1. Increase in assets 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in owner’s 3. Increase in owner’s
equity equity
 owner’s withdrawal  Initital investment
 expenses  Additional investment
 Revenue/income
Ref. # Assets Ref. # Revenues
101 Cash 400 Sales
111 Accounts Receivable 405 Interest Income
121 Inventories 411 Dividend Revenue
141 Land
145 Furniture
150 Eqauipment

Ref. # Liabilities Ref.# Expenses

201 Accounts Payable 600 Cost of Goods Sold
212 Notes Payable 611 Salaries Expense
221 Acrued Liabilities 621 Utility Expense
250 Other Payables 640 Depreciaiton Expense
6500 Office Supplies Expense
Ref. # Equity
301 Common Stock
305 Preferred Stock
311 Additional Paid-in Capital
320 Retained Earnings