LESS

ON 3
A CON
PRINC TINUATIO
IPLES N
AND ATO OTHER
SSUM
PTION
S
 U NT ING
ER A CC O
OTH C I PLES
PR IN

1. Matching Principle
expenses are recognized in the same period as the
related revenue. Revenues of a business always come
with expenses. No business can generate revenues
without incurring expenses. The matching principle
states that related revenues and expenses should always
go together. In other words, if the revenues are recorded
in period 1, the related expenses should also be
recorded in period 1. 2
 U NT ING
ER A CC O
OTH C I PLES
PR IN

2. Use of Judgment and Estimates

Accounting estimates are approximations made by
accountants or the management in the preparation of
financial statements. The use of reasonable estimates
is an essential part of the preparation of financial
statements and does not undermine their reliability.
EX. WARRANTY
3
 U NT ING
ER A CC O
OTH C I PLES
PR IN

3. Prudence / Conservatism Principle

Prudence in the accounting sense is also called conservatism. Some financial

transactions are sometimes uncertain (like the warranty expense in the above
example) when they will occur. Nevertheless, we still need to report these
transactions
if they pertain to a specific period. In reporting these transactions, an
accountant needs to apply the concept of prudence.
When applying the concept of prudence, an accountant makes sure that income
and assets are not overstated and liabilities and expenses are not understated.
4
 U NT ING
ER A CC O
OTH C I PLES
PR IN

4. Substance over Form

Information presented in the financial statements of a company
should truthfully and faithfully represent the financial condition
and financial performance of the company. For this to be possible,
an accountant should look at the substance of every financial
transaction rather than its legal form. Most of the time, the
substance of a transaction does not differ from its legal form.
When the substance differs from the legal form, follow the
substance of the transaction. 5
 ACCOUNTING

BUSINESS

ORGANIZATION OPERATION

SOLE
MERCHANDISI MANUFACTURI
PROPRIETORSH PARTENRSHIP CORPORATION SERVICE
NG NG
IP
6
 FEB
202 3

THE
ACCO
EQU UNT
ATIO ING
N
FUND
A
ABM MENTALS
1 O F
 A=L+E

Assets = Liabilities + Equity/Capital

8
 assets are resources that an entity OWNS in
order to derive some future benefit. These
ASSET assets are used by the company in its normal
operations such as the manufacture of goods or
delivery of services.
ELEMENTS OF
ACCOUNTING
EQUATION The main feature of these assets is their
capability to give benefits to the entity. These
benefits are usually in the form of their ability
to directly or indirectly increase the inflow of
cash to the entity or a reduction of its outflows
9
1. Cash
We all know what cash is. Generally, it is the money that we use comprising of the bills and
coins we use in our everyday lives in order to buy the goods that we want and also avail the
services that we need. However, when accounting for cash, we also consider cash as the
money that is deposited in the banks and even undeposited checks from customers.

2. Accounts Receivable
This represents amounts that are collectible from customers. They arise when a business sell
its goods or services on account or on credit.

3. Inventories
When going to a sari-sari store, you would notice piles of assorted products being offered to
be sold. One can easily find various items such as food and household items to satisfy
whatever he or she needs. Such products are normally owned by the sari-sari store. These
products are inventory which are normally held for sale by the store in its normal
operations.
10
4. Equipment
• Pandesal shops would need ovens and furnaces in order to properly and actually
create their goods. The product of these ovens are the pandesals which would be sold
later on and eventually increase the cash of the shop.
5. Land and Building
• In most businesses, a physical store is necessary for them to operate. For example,
how can a local carenderia function without an actual store? Where will a barber
shop operate without its building? Such buildings are also assets of the businesses.
These buildings are owned by the company so that they can use them for their
business to operate normally.
6. Intangible Assets
• When we think of the things we can own, we normally think of tangible things or
those that can be seen and touched. However, assets also encompass intangible things
that can neither be seen nor touched. For example, the software used by computer
shops are actually assets that they own. Even though one cannot actually touch the
software, it is still an asset of the computer shop that will earn the shop future
11
benefits.
 L IT IES
LIABI Liabilities are one of the claims of
external parties from the entity.
Basically, they are the debts of the entity
to external creditors. These debts do not
ELEMENTS OF
ACCOUNTING always have to be paid in money. Some
EQUATION
of these liabilities are in the form of
obligations to do some service or even
give something. (short-term/long-term)

ADD A FOOTER 12
1. Accounts Payable
• When a local supermarket or convenience store like 7-Eleven buys its goods, it is
unusual for it to immediately pay cash for such goods. Normally, it would only incur
an obligation to pay its supplier after a certain number of days. For example, when it
gets a delivery of milk, it might have an agreement to pay its supplier only after 30
days, Thus, in the meantime that the product has not been paid yet, it would only
carry a "payable" in its books.

2. Unearned Revenue
• Telecommunication companies such as Globe and Smart normally offer prepaid load
to customers. These load credits can be later on used by customers for text messages
or to call other people. On the other hand, when Globe or Smart receive payments
from customers, it creates an obligation for them to actually deliver their services.
Such obligations to give their service are recorded as liabilities.

13
3. Notes payable
• long-term liabilities that indicate the money a company owes its
financiers—banks and other financial institutions as well as other sources
of funds such as friends and family. They are long-term because they are
payable beyond 12 months, though usually within five years.

14
 The equity reflects the residual claims or net assets of the
owners of the entity. This is similar to the "net worth"
Equity part of the SALN of our public servants. Take note that
these are only residual claims of the owners since the
creditors get their share of the entity first before the
owners are given their share.

ELEMENTS OF This is also why the "net worth" of individuals is

ACCOUNTING
EQUATION computed by subtracting their liabilities from their assets.
Generally, equity comes from two sources.
1. The first one comes directly from the owner in the
form of investments of capital.
2. The other comes from the income/loss of the
business from its normal operations.

15
 The net income or net loss of the business
from its operations can be determined by
using the following equation:

Revenues – Expenses = Net Income OR (Net Loss)

16
 E NUE S
REV
• A business earns revenue when it sells its products or
its services. When you go to a store and buy a phone,
the store earns revenue. When you get a haircut from
a barber shop, the shop also earns revenue. Generally,
we can say that a business earns revenue when it
expects to earn an economic benefit in the form of an
increase in assets such as cash or a decrease in
liabilities. Other terms used for revenue are sales,
rent, fees, etc.
17
 N SE S
EXPE
• Matching principle states that no revenue can be
earned without incurring corresponding
expenditures. As such, when a store sells a phone,
aside from getting cash for the phone, it also
incurs costs for the goods it has sold. On the other
hand, such is also true when services are also
rendered. In the barber shop, when someone gets
a haircut, the barber shop incurs costs in the form
of salary for its employees 18
CAPI T A L
The capital account of the equity represents the net investments of the business.
This means that any contribution of the owner which increases the assets of the
business or decreases its liabilities will increase the capital account.
For example,
when creating a business, an owner normally contributes a significant amount of
cash to kickstart the business. Such transaction increases the capital account of the
business.

Note that it does not only have to be cash to increase the capital account. An
owner may even contribute equipment or land to increase his or her capital.
Moreover, since capital represents the net investments of the investments,
withdrawals by the owner are also taken into consideration. As such, when an
owner gets cash from the business to use for its personal use, its capital accounts
are deducted.
19
 LIABILITIE
ASSET EQUITY
S

NOTE: accounts
CASH
ACCOUNTS
are not limited to
REVENUES
ACCOUNTS
PAYABLE this list. There are
RECEIVABLE still many other
accounts which are
INVENTORIES
UNEARNED
EXPENSE
not discussed.
REVENUE
EQUIPMENT

LAND AND
BUILDING
NOTES
CAPITAL
INTANGIBLE PAYABLE
20
ASSETS
A = L + E

USING THE
ACCOUNTING
EQUATION

21
 obl e m s ..
l e p r
samp

We will try some examples of an

economic transaction that affects the
accounting equation.

22
1. Initial Investment.
Manang Rosie has been well known for her delicious variety of
barbecues. As such, she decided to open up a barbecue store in her
neighborhood. The store would be a sole proprietorship business. In
order to do so, she invested P25,000 as initial capital.

23
2.Purchase of equipment.
To actually create her famous barbecue, she would need the proper equipment to cook it.
Thus, she went to the local hardware store and bought the necessary equipment such as grills
and utensils for P20, 000.

24
3. Purchase of inventories through credit.
Manang Rosie's barbecues require only the freshest meat which can be bought from Ate
Shayne's store in the market. Since they cost P10,000, Manang Rosie does not have
enough money to purchase this. Despite that, Manang Rosie is already a trusted suki of
this store. As such, Ate Shayne decided to give the meat to Manang Rosie on the
condition that she will have to pay her in 30 days.

25
4. Payment of expenses.
To actually set up a business, one of her friends told her that she has
to obtain business and other permits from the local government. As
such, she paid P1,000 to obtain such permits

26
5. Sale of barbeques.
With everything in place, Manang Rosie can now sell her famous barbecues.
During the first day of her new business venture, she was able to sell 1,000
barbecues with a selling price of Php 20,000. Half of which was paid cash.
The other half was to be paid in 5 days.

27
 6. cost of sales
Correspondingly, the 1,000 barbecues account for half of the
total supply of Manang Rosie.

In this case, when one sells goods, aside from earning money and revenue from the transaction,
one would also have to incur expenses. In this case, when Manang Rosie sells barbecue,
naturally, her barbeques should also decrease. It would be unfair to the customers if they do not
receive their barbecues. As such, the transaction also included a decrease in Manang Rosie's28
assets (inventory) and a decrease in equity (expense)
Summary of Transactions

29
Than
k You!
BY: H
L G AB
UTAN
A.Directions: Listed below are ten business transactions for Puring
Company during its first month of operations:
a. Owner invested cash in the business amounting to Php 300,000.
b. Purchased equipment for cash amounting to Php 50,000.
c. Purchased inventories through credit amounting to Php 35,000.
d. Paid cash to the local government for business permit (Php 9,000).
e. Made sales of Php 17 000 – Php 12 000 cash sales, Php 5 000 credit sales.
f. The cost of the sales made in (e) amounted to Php 8,500.
g. Paid the accounts payable in (c).
h. Paid employees’ salaries Php 12,000
In summary……

32
a.Increase in Assets = Increase in Owner’s Equity
• Example: Calma started his new business by depositing Php
350,000.00 in a bank account in the name of Calma Graphics
Design at Masa Bank.
b.Increase in Assets = Increase in Liabilities
• Example: Calma acquired computer equipment by issuing a
Php 40,000.00 note payable to Microsoft Office Systems. The
note is due in six months.
c. Increase in one Asset = Decrease in another Asset
• Example: Calma paid Php 10,000.00 to El Grande Suites for
rent on the office studio for the months of June, July, and
August.
33
a.Decrease in Assets = Decrease in Liabilities
• Example: Calma partially paid Php 15,000.00 for the
purchase of computer supplies on account.
b.Decrease in Assets = Decrease in Owner’s Equity
• Example: Calma paid Php 5,000.00 to Bills Express for
the semi-monthly utilities.
c.Increase in Liabilities = Decrease in Owner’s
Equity
• Example: Yola Company billed Calma for Php 25,000.00
for the ads. Calma will pay next month. 34
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