Fundamentals of Accountancy, Business, and

Management

Prepared by:
Mr. Ariel D. Castillo
ABM 12 – St. Teresa of Avila
Topic Overview:
1.Elements of Financial Statements in the Balance Sheet
2.Elements of Financial Statements in the Income Statement

Chapter Objective:
At the end of this chapter, students must be able;
1.Explain the concept of asset, liability and equity;
2.Explain the concepts of income, expense and drawings;
3.Explain the concept of capital expenditure and period
expenditure;
4.Distinguish drawings and expense and income from capital
contributions;
5.Analyze business transactions and identify the accounting
elements affected.

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THE ELEMENTS OF FINANCIAL STATEMENTS

a.Assets
b.Liabilities
c.Owner’s Equity or Equity or Capital
d.Income
e.Expense

ELEMENTS OF FINANCIAL POSITION

a.ASSETS
b.LIABILITIES
c.OWNER’S EQUITY OR EQUITY OR CAPITAL

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What is an Asset?
An asset is a resource controlled by the business as
a result of past transaction and events and from
which future economic benefits are expected to
flow to the business.

Elements of an Assets:
a.Assets are resources controlled by the enterprise.
b.Assets are results of past transactions or events.
c.Assets are expected to provide future economic
benefits.
d.Assets have cost or value that can be measured
reliably.

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Some examples of ASSETS are the followings:

*Cash
*Account Receivable
*Notes Receivable
*Inventories
*Equipment
*Land and Building
*Intangible Assets
*Furniture

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What is a Liability?
Liability is a present debt of the business arising
from past events, the settlement of which is
expected to result in an outflow of assets from the
business.

Elements of a Liability:
a.A liability is a present obligation.
b.A liability requires a future outflow of resources.
c.A liability arises from past event.

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Some examples of LIABILITY are the
followings:

*Accounts Payable
*Notes Payable
*Bonds Payable
*Mortgage Payable
*Accrued Liabilities
*Other Payables

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What is Owner’s Equity or Equity or Capital?
Owner’s Equity or Equity means the capital or the wealth of
the owners on the business enterprise. It is the residual
interest of the owner/owners of the enterprise in the assets
of the enterprise after deducting all its liabilities from its
assets.

Some examples of Owner’s Equity or Equity or Capital are

the followings:

*Common Stock
*Preferred Stock
*Additional Paid-in Capital
*Treasury Stock
*Retained Earnings

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What is an Income?
Income is an increase in asset or a decrease
in liability that results in an increase of equity
other than contribution from owner/s of the
enterprise.

Elements of Income:
1.Income is an increase in equity resulting
from:
a.Increase in asset
b.Decrease in liability
2. Not a capital infusion by the owner/s of
the business.
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What is an Expense?
Expenses are decrease in asset in the form of outflows or
depletion of assets or incurrences of liabilities that results in
decrease in equity, other those relating to returns of capital
or income to owner/s of the enterprise.

Elements of an Expense:
a.Expense is a decrease in equity.
b.Not a return of capital to the owner/s of the business.

Some examples of Expense are the followings:

*Salaries Expense
*Utility Expense
*Depreciation Expense
*Office Supplies Expense
*Rental Expense
*Bad Debt Expense
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 All businesses have three parts to their
financial condition:
• The things or property that the company owns. We call
these things ASSETS.
ASSETS

• The money that the company owes to other people.

We call these obligations LIABILITIES.
LIABILITIES
• The claim of the owner of the business to the Assets after
the Liabilities are paid.
We call this claim OWNER’S EQUITY (or just EQUITY)
or Capital.

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 Business
Example:
A delivery service company is
purchasing a vehicle (truck) for
Php100,000. A Php25,000 cash
down payment and borrowing
Php75,000 from the bank.
Property = Creditor’s Claim + Owner’s Claim

Truck
Php100,000 = + Php75,000 + Php25,000
 Business
ASSETS LIABILITIES OWNER’S EQUITY

Property = Creditor’s Financial Claim + Owner’s Financial Claim

Truck
Php100,000 = Php75,000 + Php25,000

LIABILITIES
OWNER’S EQUITY or CAPITAL
ASSETS
 The Accounting
Equation
OWNER’S
ASSETS LIABILITIES EQUITY OR CAPITAL

Liabilities &
Assets Owner’s Equity
 Accounting Equation
ASSETS = LIABILITIES +
OWNER’S
EQUITY

Computer Accounts Riaz,

Cash Equipment Supplies Capital
Payable

- 25,000 + 100,000 + 75,000

 Transaction 1:
ASSETS INVESTED BY OWNERS
July 1 - Paolo Reyes started a delivery service on July 1,
2013. The following transactions occurred during the
month of July. He invested PHP800,000 cash and Cars
amounting to PHP200,000

Assets = Liabilities + Owner’s Equity

=
Cash 800,000 Reyes, Capital 1,000,000

Car 200,000 =
 Transaction 2:
Borrowings from the bank
July 2 – Reyes borrowed PHP100,000
cash from PNB for use in his business.

Assets = Liabilities + Owner’s Equity

Cash 100,000 Loans Payable 100, 000

 Transaction 3:
Asset purchased for cash
July 7 – Bought tables and chairs from
Orocan and paid PHP45,000.

Assets = Liabilities + Owner’s Equity

Cash (45,000)

Furnitures 45,000
 Transaction 4:
Assets purchased on account
July 15 – Various equipment were
purchased on account from Fortune for
PHP55,000

Assets = Liabilities + Owner’s Equity

Equipment 55,000 Accounts Payable 55,000

 Transaction 5:
Cash withdrawal by the owner
July 18 – Reyes made a cash withdrawal
of PHP5,000 for personal use

Assets = Liabilities + Owner’s Equity

Cash (5,000)
Reyes, Drawing (5,000)
 Transaction 6:
Payment of liability
July 20 – The account due to Fortune
was paid in cash

Assets = Liabilities + Owner’s Equity

Cash (55,000) Accounts Payable (55,000)

Determining profit through operation
• Accrual basis of accounting vs Cash basis of
accounting – accrual basis recognizes revenue when
earned and recognizes expenses when incurred.
• Under the expense recognition principle, expenses
can be recognized either as:
(1)matching;
(2)systematic allocation, or;
(3)direct association.

• Profit measures the performance of the company.

If the revenue exceeds expenses, then it is a net
profit; otherwise, it is a net loss.
 Transaction 7:
Received cash for revenue earned
July 21 – A customer hired the services of
Reyes. Cash of PHP15,000 was received
from the customers

Assets = Liabilities + Owner’s Equity

Cash 15,000 Service Revenue 15,000

 Transaction 8:
Paid cash for expenses incurred
July 22 – Cash was paid for the following :
gas and oil, PHP500 and car repairs,
PHP1,000.

Assets = Liabilities + Owner’s Equity

Cash (1,500) Gas & Oil (500)

Repair Expense (1,000)

 Transaction 9:
Revenue rendered on account
July 24 – Another customer hired the
services of Reyes and promised to pay
PHP16,000 on July 31.

Assets = Liabilities + Owner’s Equity

Accounts
Service Revenue 16,000
Receivable 16,000
 Transaction 10:
Paid for expenses incurred
July 25 – Paid PHP500 for telephone bill .

Assets = Liabilities + Owner’s Equity

Cash (500) Telephone Expense (500)

 Transaction 11:
Received cash for revenue earned
July 27 – Another customer hired the
services of Reyes. A bill was issued to them
for PHP20,000, 50% of which was collected .

Assets = Liabilities + Owner’s Equity

Cash 10,000 Service Revenue 20,000

Accounts
Receivable 10,000
 Transaction 12:
Customer’s account collected in cash
July 30 – The customer on July 24 paid 50%
of his account in cash.

Assets = Liabilities + Owner’s Equity

Cash 8,000

Accounts
Receivable (8,000)
 Transaction 13:
Paid cash for expenses incurred
July 31 – Paid PHP10,000 for rental of
office space, and salaries of PHP9,000

Assets = Liabilities + Owner’s Equity

Rent Expense (10,000)

Cash (19,000)
Salaries Expense (9,000)
 Activity#5.1
Identifying elements of financial statements, indicate
whether each item listed below is an Asset, Liability,
Capital, Income and Expense.
______1. Cash
______2. Accounts Receivable
______3. Office Supplies Expense
______4. Accounts Payable
______5. Interest Payable
______6. Balderama, Capital
______7. Calderas, Drawing
______8. Notes Payable
______9. Mortgage Payable
______10. Accrued Interest Expense
Activity#5.2