FUNDAMENTALS OF

ACCOUNTANCY,
BUSINESS, and
MANAGEMENT 1
Presented by:
Kim Rodulph O. Soriano
ACCOUNTING FOR
THE SERVICE
BUSINESS
Part 2
Assets, Liabilities, Capital, Revenue,
and Expenses of the Financial
Statement
Chapter 2
THE FINANCIAL STATEMENT
Lesson 2-1
Lesson Objectives

At the end of the lesson, students should be able to:

• classify the types of financial statements

• Identify the typical accounts used in financial statement

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TYPES OF FINANCIAL
STATEMENTS
1. Statement of Financial Position or Balance Sheet
- shows the financial condition/position of a business of a given period. It
is consists of the assets, liabilities, and capital.

2. Income Statement or Statement of Comprehensive Income

- the IS shows the results of operations for a given period. It is consists of
the revenue, cost, and expenses.
- the statement of comprehensive income consists of the revenue, cost,
and expenses, and also contains components of other comprehensive
income (including reclassification adjustments) as follows:

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TYPES OF FINANCIAL
STATEMENTS
changes in revaluation surplus, gains and losses on benefit plans, gains and
losses from investments in equity instruments, finance cost, share of
associates, and joint ventures under the equity method, tax expense, gain or
loss from discontinued operation, gain or loss on realization of assets from
discontinued operations, gains or loss from foreign operations, and all other
operating and financial events affecting the owner’s equity in the business.

International Accounting Standards 1 defines Total Comprehensive Income as the

“change in equity during a period resulting from transactions and other events
other than those changes resulting from transactions with owners in their
capacity as owners”.

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TYPES OF FINANCIAL
STATEMENTS
3. Statement of Changes in Owner’s Equity or Statement of
Owner’s Equity
- shows the changes in the capital or owner’s equity as a result of
additional investment or withdrawals by the owner, plus or minus the net
income or net loss for the year.

4. Statement of Cash Flows

- summarizes the cash receipts and cash disbursements for the accounting
period. It summarizes the cash activities of the business by classifying
cash inflows (receipts) and cash outflows (payments) into operating,
investing, and financing activities. Shows the net increase of decrease of
cash in a given period and the cash balance at the end of the period. 8
TYPICAL ACCOUNT TITLES
USED
Balance Sheet

• Assets – economic resources owned by the business expected for future

gain. They are property and rights of value owned by the business.

• Liabilities – include debts, obligations to pay, and claims of creditors on

the assets of the business.

• Owner’s Equity or Capital – includes interest of the owners on the

business; claims of the owners on the assets of the business; and the
investment of the owners plus or minus the results of operation. 9
THE FUNDAMENTAL ACCOUNTING
EQUATION

Assets = Liabilities + Owner’s Equity

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ASSETS
Lesson 2-2
Lesson Objective

At the end of the lesson, students should be able to:

• classify and identify assets as a basic element of accounting

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ASSETS
Classification of Assets

Improvements to International Accounting Standards 1 (December 2003) classify

an asset as current asset when:
1. expected to be realized in, or is intended for sale or consumption in the
entity’s operating cycle;
2. held primarily for the purpose of being traded;
3. expected to be realized within twelve months of the balance sheet date; or
4. cash or cash equivalent unless it is restricted from being exchanged or
use to settle a liability for at least twelve months after balance sheet date.
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Examples of Current Assets are as follows:

1. Cash
• includes coins, currencies, checks, bank deposits, and other cash items
readily available for use in the operation of the business.

2. Cash Equivalents
• short-term investments that are readily convertible to known amounts of
cash which are subject to an insignificant risk to changes in value.

3. Marketable Securities
• stocks and bonds purchased by the enterprise and are to be held for only
a short span of time or short duration. They are usually purchased when a 14
business has excess cash.
Examples of Current Assets are as follows:

4. Trade and Other Receivables

• Accounts Receivable – it is the amount collected from the customer to

whom sales have been made or services have been rendered on account
or credit.
• Notes Receivable – is a promissory note issued by the client or the
customer in exchange for services of goods received as evidence of
his/her obligation to pay.
• Interest Receivable – amount of interest collectible on promissory notes
received from customers and clients.
• Advances to Employees – certain amount of money loaned to employees
payable in cash or through salary deductions.
• Accrued Income – income already earned but not yet received. 15
Examples of Current Assets are as follows:

5. Inventories
• represents the unsold goods at the end of the accounting period. This is
applicable only to merchandizing business.

6. Prepaid Expenses
• include supplies bought for use in the business or services and benefits to
be received by the business in the future paid in advanced.

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Examples of Current Assets are as follows:

7. Contra-Assets
- accounts deducted from the related asset accounts.

• Allowance for Bad Debt are losses due to uncollected accounts.

This is deducted from the accounts receivable account to get the net
realized value.

• Accumulated Depreciation represents the expired cost of property,

plant, and equipment as a result of usage and passage of time. It is
deducted from the cost of the related asset account to get the
carrying value of book value of the assets.
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ASSETS
Classification of Non-Current Assets
1. Long-term Investments
- are assets held by an entrepreneur for the accretion of wealth through
capital distribution such as interests, royalties, dividends, and rentals,
for capital appreciation or for other benefits to the investing
enterprise such as those obtained through trading relationships

2. Property, plant, and equipment

- Are tangible assets that are held by an enterprise for the use in the
production or supply of goods and services, or for administrative
purposes and which are expected to be used for more than one 18
period (IAS No. 16).
ASSETS
• Land
- is a piece of lot or real estate owned by the enterprise on which a
building can be constructed for business purposes.

• Building
- is an edifice or structure used to accommodate the office, store, or
factory of a business enterprise in the conduct of its operations.

• Equipment
- includes typewriter, air-conditioner, calculator, filing cabinet,
computer, electric fan, trucks and cars used by the business. 19
ASSETS
• Furniture and Fixtures
- includes tables, chairs, carpets, Curtains, lamps and lighting
fixtures, and wall decors.

• Intangible Assets
- are identifiable, nonmonetary assets without physical substance
held for use in the production or supply of goods and services, for
rental to others, or for administrative purposes – goodwill, patents,
copyrights, licenses, fracnhise, trademarks, brand names, secret
processes, subscription lists and noncompetition agreements (IAS
No. 38)
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LIABILITIES
Lesson 2-3
Lesson Objectives
At the end of the lesson, students should be able to:

• classify and identify liabilities as basic elements of accounting

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LIABILITIES
Classification of Current Liabilities

Improvements to International Accounting Standards 1 (December 2003)

classify a liability as a current liability when it is:

a) expected to be settled in the entity’s normal operating cycle;

b) held primarily for the purpose of being traded; and
c) due to be settled within twelve months after the balance sheet
date;
d) the entity does not have an unconditional right to defer settlement
of the liability for at least twelve months after the balance sheet
date.
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Examples of Current Liabilities are as follows:

Trade and Other Payables

- include payables from any of the following accounts:

1. Accounts Payable includes debts arising from purchase of an asset or

acquisition of services on account.

2. Notes Payable includes debts arising from the purchase of an asset or

acquisition of services on account evidenced by a promissory note.

3. Loan Payable is a liability to pay the bank or other financing institution

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arising from funds borrowed by the business from these institutions
payable within twelve months or shorter.
Examples of Current Liabilities are as follows:

4. Utilities Payable is a liability is an obligation to pay utility companies

for services received from them.

5. Unearned Revenues represents obligations of the business arising

from advance payments received before goods or services provided to
customers.

6. Accrued Liabilities include amounts owed to others for expenses

already incurred but not yet paid. 25
LIABILITIES
Classification of Non-Current Liabilities
- are long-term liabilities or obligations which are payable for a
period of longer than 1 year. Examples of non-current liabilities
are as follows:

1. Mortgage Payable is a long-term debt of the business with security

or collateral in the form of real properties.

2. Bonds Payable is a certificate of indebtedness under the seal of a 26

corporation, specifying the terms of repayment and the rate of interest

OWNER’S EQUITY
Lesson 2-4
Lesson Objectives

At the end of the lesson, students should be able to:

• define and identify owner’s equity as a basic element of

accounting

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OWNER’S EQUITY

The Statement of Changes in Owner’s Equity or Statement of Owner’s

Equity shows the changes in the Capital or Owner’s Equity as a result of
additional investment or withdrawals by the owner, plus or minus the net
income or net loss for the year.

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OWNER’S EQUITY

• Capital is an account baring the name of the owner representing the original
and additional investment of the owner of the business increased by the
amount of net income earned during the year.

• Drawing represents the withdrawals made by the owner of the business either
in cash or other assets

• Income Summary is a 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 for the
capital account. 30
INCOME AND EXPENSES
Lesson 2-5
Learning Objectives
At the end of the lesson, students should be able to:

• Classify and identify income and expense as basic elements of

accounting

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INCOME STATEMENT

Income Statement accounts namely revenue and expense, are classified

as nominal or temporary account:

a. Service Income includes revenues earned or generated by the business in

performing services for a customer or client.

▫ Example:

• Laundry services by a laundry shop (Laundry Income)

• Medical Services by a doctor (Medical Fees)
• Dental services by a dentist (Dental Fees)
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INCOME STATEMENT

b. Salaries or Wages Expense includes all payment made to employees or

workers for rendering services to the company.

c. Utilities Expense is an expense related to the use of electricity, fuel, water,

and telecommunications facilities.

d. Supplies Expense covers office supplies used by the business in the conduct
of its daily operations.

e. Insurance Expense expired portion of the premiums paid on insurance

coverage such as premiums paid for health insurance, motor vehicles or other 34
properties.
INCOME STATEMENT

f. Depreciation Expense is the annual portion of the cost of a tangible asset

such as buildings, machineries, and equipment charged as expense for the year.

g. Uncollectible Accounts Expense / Doubtful Account Expense / Bad

Debt Expense is he amount of receivables charged as expense for the period
because they are estimated to be doubtful of collection.

h. Interest Expense is the amount of money charged to the borrower for the
use of borrowed funds.

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THE SINGLE STEP
INCOME STATEMENT
Lesson 2-6
Learning Objectives
At the end of the lesson, students should be able to:

• To be able to prepare the single-step income statement of a

service business

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SINGLE-STEP INCOME
STATEMENT

Natural Form
– otherwise called the nature of expense method, it
represents expenses according to nature. Used in a service
business. It is also called as single-step income statement.

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THANKS!
Any questions?

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