LESSON 8:

BASIC ACCOUNTING
ELEMENTS OF FINANCIAL STATEMENTS

 Asset  Income
 Liability  Gains
 Equity  Expenses
 Losses
ELEMENTS OF FINANCIAL STATEMENTS

 Asset  Income
 Liability  Gains
 Equity  Expenses
 Losses
 ASSETS
• These are present economic resources
controlled by the entity as a result of past
events.
• Anything of value owned by the business
 ASSETS
• It includes:
 Cash, cash equivalent, notes receivable,
accounts receivable, inventories, prepaid
expenses, property, plant and equipment,
investments, intangible assets and other
assets
 LIABILITY
• These are present obligation of the
enterprise arising from past events, the
settlement of which is expected to result
in an outflow from the enterprise of
resources embodying economic benefits
 LIABILITY
• It includes:
 Notes payable, accounts payable,
accrued liabilities, unearned revenues,
mortgage payable, bonds payable and
other debts of the enterprise.
 EQUITY
• The residual interest in the assets of the
enterprise after deducting all its
liabilities.
 INCOME
• Revenue arises in the course of the
ordinary activities of an enterprise and
is referred to by a variety of different
names including sales, fees, interest,
dividends, royalties, and rent.
 GAINS
• Represent other items that meet the
definition of income and may, or may
not, arise in the course of the ordinary
activities of an enterprise.
 EXPENSES
• Decrease in economic benefits during
the accounting period in the form of
outflows or depletions of assets or
incurrences of liabilities that return in
decreases in equity, other than those
relating to distributions to equity
participants
 LOSSES
• Represent other items that meet the
definition of expense and may or may
not, arise in the course of the ordinary
activities of an enterprise.
ACCOUNT
MAJOR ACCOUNTS
 Asset
 Income
 Liability
 Expenses
 Equity
 “T” ACCOUNT
• The simplest form of account.
• It has three parts
ACCOUNT TITLE
Left side or Right side or
DEBIT side CREDIT side
 DEBITS AND CREDITS
• A debit side entry must have a
corresponding credit side entry. The
total debits for a transaction must
always equal the credits.
• Debit (Dr.)
• Credit (Cr.)
 NORMAL BALANCE OF AN
• ACCOUNT
Normal balance of any account refers to the side
of the account – debit or credit – where increases
are recorded.
BASIC ACCOUNTING
EQUATION
 BASIC ACCOUNTING
EQUATION + OWNER’S
ASSETS = LIABILITIES
EQUITY
• The most basic tool of accounting
BASIC ACCOUNTING
EQUATION
ACTIVITY
BASIC ACCOUNTING
ACTIVITY
EQUATION
ASSETS LIABILITIES OWNER'S EQUITY
760,000 360,000 ?
860,000 ? 592,000
? 108,000 760,000
626,600 376,240 ?
? 800,000 (100,000)
COMMON ACCOUNT
TITLES USED
COMMON ACCOUNT TITLES
USED
ASSETS INCOME
LIABILITI
EXPENSES
ES
OWNER’S
EQUITY
COMMON ACCOUNT TITLES
USED

ASSETS
 2 CLASSIFICATIONS OF ASSETS
• Current Assets
a. Expects to realize the asset, or intends to sell or
consume it, in its normal operating cycle
b. It holds the asset primarily for the purpose of trading
c. It expects to realize the asset within twelve months after
the reporting period
d. The asset is cash or cash equivalent unless the asset is
restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting
period
 2 CLASSIFICATIONS OF ASSETS
• Non-Current Assets
 cannot be classified as current
 OPERATING CYCLE
• The average time it takes the business to
turn the cash used in the business to cash
received from selling goods or rendering
services.
• When the entity’s normal operating cycle
is not clearly identifiable, it is assumed to
be twelve months.
 SOME EXAMPLES OF CURRENT
ASSETS
• Cash
 It is any medium of exchange that a
bank will accept for deposit at face
value.
 It includes coins, currency, checks,
money orders, bank deposits, and drafts.
 SOME EXAMPLES OF CURRENT
ASSETS
• Cash Equivalents
 Short-term, highly liquid investments
that are readily convertible to known
amounts of cash and which are subject to
an insignificant risk of changes in value.
 SOME EXAMPLES OF CURRENT ASSETS
• Notes Receivable
 It is a written pledge that the customer will pay the
business a fixed amount of money on a certain date.
• Accounts Receivable
 These are claims against customers arising from
sales of services or goods on credit.
 This type of receivable offers less security than a
promissory note.
 SOME EXAMPLES OF CURRENT ASSETS
• Inventories
 these are assets that are:
a. held for sale in the ordinary course of business;
b. In the process of production for such sale;
c. In the form of materials or supplies to be
consumed in the production process or in the
rendering of services
 SOME EXAMPLES OF CURRENT ASSETS
• Prepaid Expenses
 Expenses that are paid for by the business in
advance.
 It includes insurance and rent
 These prepaid items represent future
economic benefits – assets – until the time
these start to contribute to the earning
process; these, then become expenses.
 SOME EXAMPLES OF NON-CURRENT ASSETS
• Property, Plant, and Equipment
 Tangible assets that are held by an enterprise
for use in the production or supply of goods or
services, or for rental to others, or for
administrative purposes and which are expected
to be used during more than one period.
 It includes land, building, machinery, furniture
and fixtures, motor vehicles and equipment
 SOME EXAMPLES OF NON-CURRENT ASSETS
• Accumulated Depreciation
 It is a contra account that contains the sum
of the periodic depreciation charges.
 SOME EXAMPLES OF NON-CURRENT ASSETS
• Intangible Assets
 Identifiable, nonmonetary assets without physical
substance held for use in the production or supply
of goods or services, for rental to others, or for
administrative purposes.
 It includes goodwill, patents, copyrights, licenses,
franchises, trademarks, brand names, secret
processes, subscription lists, and non-competition
agreements.
COMMON ACCOUNT TITLES
USED
ASSETS INCOME
LIABILITI
EXPENSES
ES
OWNER’S
EQUITY
COMMON ACCOUNT TITLES
USED

LIABILIT
IES
 2 CLASSIFICATIONS OF LIABILITIES
• Current Liability
a. Expects to settle the liability in its normal operating
cycle;
b. It holds the liability primarily for the purpose of trading;
c. The liability is due to be settled within twelve months
after the reporting period; or
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period.
 2 CLASSIFICATIONS OF LIABILITIES
• Non-Current Liability
 Cannot be classified as current
 SOME EXAMPLES OF CURRENT LIABILITIES
• Accounts Payable
 Reverse relationship of the accounts
receivable
 By accepting the goods or services, The
buyer agrees to pay for them in the near
future
 SOME EXAMPLES OF CURRENT LIABILITIES

• Notes Payable
 The business entity is the maker of the note;
the business entity is the party who promises
to pay the other party a specified amount of
money on a specified future date.
 SOME EXAMPLES OF CURRENT LIABILITIES
• Accrued Liabilities
 Amounts owed to others for unpaid
expenses.
 It includes salaries payable, utilities
payable, interest payable and taxes payable.
 SOME EXAMPLES OF CURRENT LIABILITIES
• Unearned Revenues
 When the business entity receives payment
before providing its customers with goods or
services.
 SOME EXAMPLES OF NON-CURRENT LIABILITIES
• Mortgage Payable
 This account records long-term debt of the
business entity for which the business entity has
pledged certain assets as security to the creditor.
 In the event that the debt payments are not
made, the creditor can foreclose or cause the
mortgaged asset to be sold to enable the entity
to settle the claim.
 SOME EXAMPLES OF NON-CURRENT LIABILITIES
• Bonds Payable
 Business organizations often obtain
substantial sums of money from lenders to
finance the acquisition of equipment and
other needed assets.
 The bond is a contract between the issuer
and the lender specifying the terms of
repayment and the interest to be charged.
COMMON ACCOUNT TITLES
USED
ASSETS INCOME
LIABILITI
EXPENSES
ES
OWNER’S
EQUITY
COMMON ACCOUNT TITLES
USED

OWNER’S
EQUITY
SOME EXAMPLES OF OWNER’S EQUITY
• Capital
 This account is used to record the original
and additional investments of the owner of
the business entity.
• Withdrawal
 When the owner of a business entity
withdraws cash or other assets.
SOME EXAMPLES OF OWNER’S EQUITY

• Owner’s Capital – for Sole Proprietorship

• Partner’s Capital – for Partnership
• Stockholder’s Equity – for Corporation
COMMON ACCOUNT TITLES
USED
ASSETS INCOME
LIABILITI
EXPENSES
ES
OWNER’S
EQUITY
COMMON ACCOUNT TITLES
USED

INCOME
 SOME EXAMPLES OF INCOME
• Service Income
 Revenues earned by performing services for a
customer or client
• Sales
 Revenues earned as a result of sale of
merchanise
COMMON ACCOUNT TITLES
USED
ASSETS INCOME
LIABILITI
EXPENSES
ES
OWNER’S
EQUITY
COMMON ACCOUNT TITLES
USED

EXPENS
ES
 SOME EXAMPLES OF EXPENSES
• Cost of Sales
 The cost incurred to purchase or to produce
the products sold to customers during the
period; also called Cost of Goods Sold
• Salaries and Wages Expense
 The amount paid to services rendered by the
employees in the operation of the business
 SOME EXAMPLES OF EXPENSES
• Telecommunications, Electricity, Fuel and
Water Expense
 Expenses related to the use of
telecommunications facilities, consumption of
electricity, fuel and water.
• Rent Expense
 Expense for space, equipment or other asset
rentals
 SOME EXAMPLES OF EXPENSES
• Supplies Expense
 Expense of using the supplies in the conduct of
daily business
• Insurance Expense
 Portion of premiums paid on insurance coverage
which was expired
 SOME EXAMPLES OF EXPENSES
• Depreciation Expense
 The portion of the cost of a tangible asset
allocated or charged as expense during an
accounting period
• Interest Expense
 An expense related to use of borrowed funds.
 ACCOUNTING CYCLE

Step 1 Analyze business transactions

Journalize business
Step 2
transactions (Journalizing)
 ACCOUNT TITLE MAJOR ACCOUNT NORMAL BALANCE

CASH
SANTOS, DRAWING
1 CRUZ, CAPITAL
2 SALARIES AND WAGES PAYABLE
3 OFFICE EQUIPMENT
4 OFFICE SUPPLIES
5 INTEREST EXPENSE
6 RENT EXPENSE
7 SALARIES AND WAGES EXPENSE
8 NOTES PAYABLE
9 TAXES AND LICENSES EXPENSE
10 UTILITIES PAYABLE
11 NOTES RECEIVABLE
12 PEREZ, DRAWING
13 LOAN PAYABLE
14 PREPAID RENT
15 INVENTORIES