TYPES OF FINANCIAL STATEMENTS 3.

Marketable securities – are stocks and bonds purchased by the enterprise

The key product or the end product of the accounting process is a set of and are to be held for only a short span of time or duration. They are usually
documents called financial statements comprised of the following: purchased when a business has excess cash.

1. Statement of Financial Position or Balance Sheet 4. Trade and Other Receivables – includes the amounts
➢ shows the financial position of a business as of a collectible from any of the following accounts:
given period. It consists of the assets, liabilities, and capital
(owners’ equity). ➢ Accounts Receivable - amount collectible from
the customer to whom sales have been made or
2. Statement of Profit and Loss and other Comprehensive Income services have been rendered on account or credit.
or Income Statement ➢ Notes Receivable – promissory note issued by the
➢ shows the result of operations for a given period. It consists of client or the customer in exchange for services or
revenue, cost and expenses. goods received as evidence of his/her obligation to pay
➢ Interest Receivable – amount of interest collectible on
3. Statement of Changes in Owner’s Equity or Statement of promissory notes received from customers and clients.
Owner’s Equity ➢ Advances to employees - certain amount of money
➢ shows the changes in the capital or owner’s equity as a result of loaned to employees payable in cash or through salary
additional investment or withdrawals by the owner, plus or minus deductions.
the net income or net loss for the year. ➢ Accrued income – income already earned but not yet
received.
4. Statement of Cash Flows
➢ summarizes the cash receipts and cash disbursement for the 5. Inventories – represent the unsold goods at the end of the
accounting period. It summarizes the cash activities of the period. This is applicable only to merchandising business.
business by classifying cash inflows (receipts) and cash outflows 6. Prepaid Expenses – include supplies bought for use in
(payments) in operating, investing, and financing activities. It the business or services and benefits to be received by
shows the net increase or decrease of cash in a the business in the future paid in advance.
given period and the cash balance at the end of the 7. Short – term investments – are the investments made by the company
period. that are intended to be sold immediately
➢ This allows management to assess the business’
ability to generate cash and project future cash flows.

Contra –Asset Accounts –are accounts deducted from the related assets
TYPICAL ACCOUNT TITLE USED: accounts.
Balance Sheet a. Allowance for bad debts - losses due to uncollectible
accounts. This is deducted from the accounts receivable
➢ Balance sheet accounts namely assets, liabilities, and owner’s account to get the net realizable value. This is line with
equity, are classified as real or permanent accounts. the financial statements’ qualitative characteristic of
➢ Assets – economic resources owned by the business expected for conservatism wherein no profits would be anticipated
future gain. They are property and rights of value owned by the but all probable or estimated losses should be provided.
business. b. Accumulated depreciation - represents the expired
➢ Liabilities - include debts, obligations to pay, and claims of the cost of property, plant, and equipment as a result of
creditors on the assets of the business. usage and passage of time. This is deducted from the
➢ Owner’s Equity or Capital – includes the interest of the owners on cost of the related asset account to get the carrying
the business; claims of the owners on the assets of the business; value or book value of the asset.
and the investment of the owner plus or minus the results of
operations. Owner’s equity or capital come from two main
sources: investment of owners and earnings of the business. CLASSIFICATION OF NON-CURRENT ASSETS:

ASSETS 1. Long-term investments – are assets held by an enterprise for the accretion
CLASSIFICATION OF CURRENT ASSETS: of wealth through capital distribution such as interests, royalties, dividends
When it is… and rentals, for capital appreciation or for other benefits to the investing
➢ Expected to be realized in, or is intended for sale or consumption in enterprise such as those obtained through trading relationships. Investments
the entity’s normal operating cycle; are classified as long term when they are intended to be held for an extended
➢ Held primarily for the purpose of being traded period of time.
➢ Expected to be realized within twelve months of the balance sheet
date; or 1. Property, Plant and Equipment – are tangible assets that are held by an
➢ Cash or cash equivalent unless it is restricted from being exchange enterprise for use in the production or supply of goods or services, or for
or used to settle a liability for at least twelve months after the administrative purposes. These assets are expected to be used for more than
balance sheet. one period.
Examples of PPE:
Examples of CURRENT ASSETS are as follows: a. Land - a piece of lot or real estate owned by the enterprise on which a
building can be constructed for
1. Cash – includes coins, currencies, checks, bank deposits, and other cash business purposes.
items readily available for use in the operations of the business. b. Building - edifice or structure used to accommodate the
office, store, or factory of a business enterprise in
2. Cash equivalents (non-cash) – are short-term investments that are readily the conduct of its operations.
convertible to known amount of cash which are subject to an insignificant risk
to changes in value.
 e) Unearned Revenues – represent obligations of the business
arising from advance payments received before goods or services
c. Equipment - includes typewriter, air-conditioner, calculator, filing cabinet, are provided to the customer. This will be settled when certain
computer, electric fan, trucks, and cars used by the business in its office, store, goods or services are delivered or rendered. Example Unearned
or factory. Specific account titles may be used such as office equipment, store Rent. Advance receipt of cash representing the payment for future
equipment, delivery equipment, transportation equipment and machinery rent.
equipment.
f) Accrued Liabilities – include amounts owed to others for
d. Furniture and fixtures - include tables, chairs, carpets, curtains, lamp and expenses already incurred but are not yet paid. Examples of these
lighting fixtures, and wall decors. Specific account titles may be used such as are salaries payable, utilities payable, taxes payable, and interest
office furniture and fixtures, and store furniture and fixtures. payable.

e. Intangible assets - identifiable, non-monetary assets without physical

substance held for use in the production or supply of goods or services, for CLASSIFICATION OF NON - CURRENT LIABILITIES:
rental to others, or for administrative purposes. These include goodwill,
Non-current Liabilities are long term liabilities or obligations which are payable
patents, copyrights, licenses, franchises, trademarks, brand names, secret for a period longer than one year.
processes, subscription lists, and non-competition agreements.
Examples of non-current liabilities are as follows:
1. Mortgage Payable– is a long-term debt of the business with security
GOODWILL or collateral in the form of real properties. In case the business fails
➢ An intangible asset that accounts for the excess purchase price of to pay the obligation, the creditor can foreclose or cause the
another company. mortgaged asset to be sold and used the proceeds of the sale to
➢ Items included in goodwill are proprietary or intellectual property settle the obligation.
and brand recognition, which are not easily quantifiable.
➢ Companies are required to review the value of goodwill on their 2. Bonds Payable– is a certificate of indebtedness under the seal of a
financial statements at least once a year and record any corporation, specifying terms of repayment and the rate of interest
impairments. to be charge.
➢ Goodwill has an indefinite life, while most other intangible assets
have finite useful life. OWNER’S EQUITY
➢ Goodwill is calculated by taking the purchase price of a company
Capita or owners’ equity are the owner’s claims in the business. It is the
and subtracting the difference between the fair market value of the
residual interest in the assets of the enterprise after deducting all its liabilities.
assets and liabilities.
➢ Example of Goodwill computation:
1. Capital is an account bearing the name of the owner representing
o If the fair value of Company ABC’s assets minus liabilities
the original and additional investment of the owner of the business
is $12 billion, and a company purchases Company ABC
increased by the amount of net income earned during the year.
for $15 billion, the premium paid for the acquisition is $3
It is decreased by the cash or other assets withdrawn the owner or
billion ($15 billion - $12 billion). This $3 billion will be
as well as the net loss incurred during the year.
included on the acquirer’s balance sheet as goodwill.
Examples:
LIABILITIES 1. Drawing– represents the withdrawals made by the
CLASSIFICATION OF CURRENT LIABILITIES: owner of the business in cash or other assets.
➢ it is expected to be settled in the entity’s normal operating cycle; 2. Income Summary– is a temporary account used at the
➢ it is held primarily for the purpose of being traded; end of the accounting period to close income and
➢ it is due to be settled within twelve months after the balance sheet expense accounts. The balance of this account shows
date; or the net income or net loss for the period before it is
➢ the entity does not have an unconditional right to defer settlement closed to the capital account.
of the liability for at least twelve months after the balance sheet
date. Chart of Accounts – is a listing of the accounts used by companies in their
financial records.
1. Trade and Other Payables- These refer to the amounts payable to a person ➢ The chart of accounts helps to identify where the money is coming
or a company: from and where it is going.
a) Accounts Payable – include debts arising from the purchase of an ➢ The chart of accounts is the foundation of the financial statements.
asset or the acquisition of services on account. (Amount payable to
suppliers or creditors for services, supplies, goods or property.)

b) Notes Payable – includes debts arising from the purchase of

an asset or the acquisition of services on account evidenced
by a promissory note. (Represents the principal amount of the face
value of the promissory note which is issued by the maker.)

c) Loan Payable – is a liability to pay the bank or other

financing institution arising from funds borrowed by the
business from these institutions payable within twelve months or
shorter.

d) Utilities Payable – is an obligation to pay utility companies for

services received from them. Example of this are telephone services
to PLDT, electricity to MERALCO, and water services to MAYNILAD.
THE ACCOUNTING EQUATION:
ASSETS = LIABILITIES + OWNER’S EQUITY or A = L + OE
For every transaction, the accounting equation should always be balanced. QUESTION:
➢ Assets are resources owned by the business. What is the dual effect in accounting equation?
➢ Liabilities are obligations by the business
➢ Owner’s Equity is the residual interest of the owner of the business. ANSWER:
(Meaning, any assets left after paying liabilities is the right of the Each transaction of the entity would have to affect at least two accounts in
owner of the business) order for the equation to remain in balance.

EFFECTS OF OWNERS INVESTMENT/WITHDRAWAL AND

CASH ACQUISITION OF ASSETS

Give the effect of the following transactions on the assets and owner’s equity.

Transaction Assets Liabilities Owner’s Analysis Transaction Assets Liabilities Owner’s Analysis
Equity Equity
1. Owner Assets Capital Cash increases because 5. Owner Assets Cash increases because
invests cash increase increases owner invests cash in gets cash increase/ of the refund but
in the the business which is an refund for decrease supplies decrease
business. asset. Owner’s interest returning because of the return.
in the business increases damaged Since both are assets,
as represented by an supplies one asset increases
increase in capital. bought on while another asset
cash. correspondingly
decreases.

Transaction Assets Liabilities Owner’s Analysis

Transaction Assets Liabilities Owner’s Analysis Equity
Equity 6. Owner Assets Furniture increases
2. Owner Assets Capital Assets increase because purchases increase/ because of the
invests increase increases owner invests furniture in furniture decrease purchase but cash
furniture. the business which is using cash. decreases because of
asset. Owner’s interests in the payment. Since
the business increases both are assets, one
because of the asset increases while
investment as another asset
represented by an correspondingly
increase in capital. decreases.

Transaction Assets Liabilities Owner’s Analysis Transaction Assets Liabilities Owner’s Analysis
Equity Equity
3. Owner Assets Capital Assets decrease because 7. Owner Assets Capital Furniture increases
withdraws decrease decreases owner withdraws cash makes increase increases because of the
cash for which is an asset. additional purchase but cash
personal Owner’s interest in the cash decreases because of
use. business decreases investment. the payment. Since
because of the both are assets, one
withdrawal as asset increases while
represented by a another asset
decrease in capital. correspondingly
decreases.
Transaction Assets Liabilities Owner’s Analysis
Equity Transaction Assets Liabilities Owner’s Analysis
4. Owner Assets Supplied increase Equity
purchases increase/ because of the purchase 8. Owner Assets Assets decrease
supplies decrease but cash decreases withdraws decrease because owner
using cash. because of the payment. supplies for withdraws supplies
Since both are assets, personal from the business
one asset increases while use. which is an asset.
another asset Owner’s interest in the
correspondingly business decreases
decreases. because of the
withdrawal which is
represented by a
decrease in capital.
THE JOURNAL SPECIAL JOURNAL
The journal is a chronological record of events or business transactions
showing all the effects of each transaction in terms of debits and credits. 1. Cash Receipts Journal - Used to record all cash that has been
received.
Because transactions are initially recorded in the journal, it is called the book 2. Cash Disbursement Journal -Used to record all transactions
of original entry. The simplest journal is the general journal. involving cash payments.
There are two types of journals, the general journal and the special journal. 3. Sales Journal (Sales on Account Journal)-Used to record all sales
on credit (on account).
Chronological order – the order in which they occur 4. Purchase Journal (Purchase on Account Journal)- Used to record
Two types of journals – the general journal and the special journal all purchases of inventory on credit (or on account).
The small organizations with only a limited number of transactions usually
use a single journal known as general journal or journal proper. In large
organizations where hundreds or even thousands of transactions occur each USE OF T - ACCOUNTS:
month, the use of a single journal is not adequate. Such organizations usually
An account is a form of record that summarizes the increase or decrease of
maintain many journals in addition to general journal. These journals are
any specific accounting value. The simplest form of an account is the T-
collectively known as special journals.
account because the accounting equation resembles the capital letter “T”. It
is an informal tool used to analyze the effect of a transaction in the assets,
Other names used for special journals are books of original entry and
liabilities, owner’s equity, revenue, and expenses.
subdivision of journal.
In large businesses use of modern accounting software is more preferred The three elements of an account are:
However, accounting software programs are expensive and most of the smaller
and medium-sized organizations cannot afford to buy and maintain them. Such 1. Account Title
small and medium entities make use of special journals to organize their 2. Debit
business transactions. 3. Credit

JOURNALIZING THE TRANSACTIONS:

➢ Journalizing is the process of recording a transaction in the journal POSTING JOURNAL ENTRIES IN THE LEDGER
after it has been recognized and measured.
➢ In journalizing transactions, the double-entry system is used. In this The trial balance is the schedule of all balances to prove the equality of the
case, two or more accounts are affected by each transaction. It debit and credit. It is a listing of all account titles which their respective debit
follows that for every debit, a corresponding credit is made. or credit balances taken from the ledger. However, it does not check or vouch
The total debits should equal total credits for every transaction. the accuracy of the report.
Double Entry System – The transaction has a dual effect which means that The following are the steps in the preparation of the trial balance:
every transaction affects at least two accounts. 1. In their report numerical order, make a listing of all account titles.
For every debit, there is corresponding credit. 2. Get the account balance of each ledger account and write them
The total amount of the accounts debited must equal the total amount of the under their corresponding debit or credit column.
accounts credited. 3. Foot or add the debit and the credit columns of the trial balance.
In this way, the equality of the accounting equation is maintained. 4. Check whether the debit totals and credit totals are equal. They
must be equal; otherwise, there is error in your trial balance.
A journal entry should contain the following:
POSSIBLE ERROR IN TRIAL BALANCE
1. Date Write the month of the first transaction unless there is a
change in month for the succeeding transactions or a new page is Transposition – occurs when order of two numbers is reversed.
used.
Example:
2. Account Titles and Explanation Write the debit account on the ➢ 48 was erroneously written as 84
extreme left of the first line and indent the credit account half- ➢ 234 was erroneously written as 432
inch on the next line. The explanation describing the transaction is
written on the extreme left of the next line below the credit.
Remember to skip one line before proceeding to the next Transplacement or Slide – occurs when a decimal point has been moved or
transaction. misplaced.

3. P.R. (Posting Reference) Write the corresponding account number ➢ 100 was erroneously written as 10
here once the entry is posted. However, it is left blank until the ➢ 67.89 was erroneously written as 678.90
posting has been done.

4. Debit Under this column, write the debit amount for each debit
account.

5. Credit Under this column, write the credit amount for each credit
account.

The difference between a simple entry and a compound entry:

When only two accounts are affected, you call this a simple entry where
there is only one debit account and one credit account.

In some cases, a transaction would require the use of three or more

accounts, in which case the entry is called compound entry.0
DEBITS AND CREDITS THE GENERAL JOURNAL

❖ The accountant uses the term debit (“debire”) in lieu of saying ❖ Before a business transaction may be recorded, evidential matter
“place an entry on the left side of the T-account” and credit must exist. Transaction must be supported by documents which
(“credire”) for “Place an entry on the right side of the T-account.” prove that the transaction did in fact occur. Examples of these
❖ The difference between the total debits and the total credits on an documents are invoices from suppliers, bills of sale, issued checks,
account is called account balance; an account may have either a bank statements, employee time cards, etc.
debit balance or a credit balance. ❖ Many business maintain several types of journals. The nature of the
❖ If the sum of debits exceeds the sum of credits, the result is a debit business operations and the volume of transactions determine the
balance; conversely, if the sum of credits exceeds the sum of debits, type and number of journals needed. The simplest type of journal
the result is a credit balance. is called the GENERAL JOURNAL.
❖ Debits and credits are an accounting technique used to record ❖ The process of recording a transaction is called JOURNALIZING the
business transactions. transactions. This type of journal is unique among journals because
it may be used to record any type of business transactions.
RULES OF DEBITS AND CREDITS Recording all transactions in the general journal is not cost effective
❖ Assets are on the left side of the accounting equation. Therefore, and time consuming.
increases are entered on the left (debit) side on an asset account
and decreases are entered on the right (credit) side. The General Journal is a two-column, general purpose journal. The
format of the general journal is shown below:
❖ Liabilities and Owner’s Equity are on the right side of the equation. The general journal is used to record the following types of entries:
Therefore, increases are entered on the right (credit) side and
decreases are entered on the left (debit) side. 1. Entries to record transactions which have not been provided for in
the special journals.
NORMAL BALANCES 2. Correcting entries. These are any entries to correct previous entries
which were erroneous.
ACCOUNT ACCOUNTING INCREASE DECREASE NORMAL
3. Adjusting entries. These are end-of-month entries made to comply
EQUATION BALANCE
with the matching principles in which expenses incurred during the
Assets Left Debit Credit Debit
accounting period are matched with the revenue generated during
Liabilities Right Credit Debit Credit
the same period.
Owner’s Right Credit Debit Credit
4. Reversing entries. These are beginning-of-month entries that are
Equity
required on certain types of adjusting entries recorded in the
previous month.
❖ Revenues increases owner’s equity. Revenues could be recorded 5. Closing entries. These are end-of-year entries that set the revenue,
directly on the credit side of the owner’s capital account. However, expenses and temporary contra-equity accounts (such as
readers of financial statements are interested in the specific types withdrawals) to zero. The purpose of closing entries is to clear these
of revenues earned. Therefore, specific revenue accounts like accounts for the next accounting period.
delivery fees, sales and service fee are used. These specific
accounts are credited when revenue is earned. THE SPECIAL JOURNAL
❑ To speed up and simplify the recording process, most businesses
❖ Expenses decreases owner’s equity. Expenses could be recorded make use of special journals. Each special journal is designed to
on the debit side of the owner’s capital account. However, readers record a particular type of transaction efficiently and quickly.
of financial statements want to see the types of expenses incurred Examples of special journals and their use are the following:
during the accounting period. Thus, specific expenses accounts are 1. Cash Receipts Journal – is used to record all cash that
maintained for items like rent, wages, advertising, and utilities. had been received.
These specific accounts are debited as expenses are incurred. 2. Cash Disbursements Journal – is used to record all
transactions involving cash payments
❖ Drawing – Withdrawals of cash and other assets by the owner for 3. Sales Journal (Sales on Account Journal) – is used to
personal reasons decrease owner’s equity. Withdrawals could be record all sales on credit (or on account)
debited directly to the owner’s capital account. However, readers 4. Purchases Journal – is used to record purchases of
of financial statements want to know the amount of withdrawals merchandise of inventory on credit (or on account).
for the accounting period. Thus, it is easier to maintain this 5. Payroll Journal – is a check register used to record all
information in a separate account. payroll checks issued.

THE IMPORTANCE OF USING A JOURNAL

BOOKS OF ACCOUNTS
❑ The journal shows all information concerning a particular
transaction.
Accounting records are chronological history of the business ❑ The journal provides a chronological record (day-by-day) of all
transaction for a company. They are used to record and classify business financial events in the business over time. If we want to know about
transactions and from where financial statements are prepared. a certain transactions of the year or months back, we can trace the
The basic accounting records used by a business to document the history of its said transactions as long as we have the date of the said
business transactions are: transaction. The entries in the journal are arranged by date that
❑ Journals (general ; special) makes it necessary to locate a particular event.
❑ Ledger (general ; subsidiary) ❑ Journal is called book of original because it is the accounting record
All business transactions are first recorded in a journal by a process called in which transactions are first recorded.
journalizing. The format and design of journals may vary in style and content
from one business to another.
COMPOUND JOURNAL ENTRY
❖ An entry that involved two accounts only, one debit and one
credit is called a simple journal entry. Some transactions, ACCOUNT ACCOUNT TITLE CLASSIFIED BY TYPE OF MAJOR
however, require more than two accounts in journalizing. An CODE ACCOUNTS
entry that requires three or more accounts is a compound entry. Statement of Financial Position Accounts

4000 Service Revenue INCOME

LEDGER 4100 Sales
Accounts are separate bookkeeping records kept for each individual item
in the asset, liability, equity, revenue and expense classification. These 4101 Sales Return and
accounts are also called ledger accounts. Allowances
4102 Sales Discounts
GENERAL LEDGER 4150 Interest Income
The entire group of accounts is called the general ledger. The general
ledger is a term that represents all of the accounts used in the accounting 5000 Cost of Sales EXPENSES
system. The general ledger may be binder having all accounts printed in a
5100 Purchases
continuous form. The account in the general ledger are arranged according to
their sequence in the chart of accounts. 5101 Purchase Returns &
After the transaction is recorded in the journal, the debit and credit Allowances
charges in the individual accounts are entered in the ledger. 5102 Purchase Discounts

THE USE OF GENERAL LEDGER 5103 Freight In

❑ The ledger is called book of final entry because all the balances in
6100 Salaries Expense
the ledger are used in the preparation of financial statements.
❑ A ledger is a means of accumulating in one place all the information 6150 Supplies Expense
about changes in an asset, liability, equity, income, and expense
accounts. A sample of the general ledger is shown below: 6200 Utilities Expense
❑ A general ledger is often called a T-Account because of its 6220 Communication Expense
resemblance to the letter T. A T-Account is a simplified form of
general ledger.
ACCOUNT ACCOUNT TITLE CLASSIFIED BY TYPE OF MAJOR
DETERMINING THE BALANCE OF A T-ACCOUNT
CODE ACCOUNTS
Shown below is the Chart of Accounts
Statement of Financial Position Accounts
ACCOUNT ACCOUNT TITLE CLASSIFIED BY TYPE OF MAJOR
CODE ACCOUNTS 4000 Service Revenue INCOME
Statement of Financial Position Accounts 4100 Sales
1000 Cash ASSETS
1200 Accounts Receivable 4101 Sales Return and
1201 Allowance for Bad Debts Allowances
1300 Inventory 4102 Sales Discounts
1400 Prepaid Expenses 4150 Interest Income
1500 Supplies
1600 Office Equipment 5000 Cost of Sales EXPENSES
1601 AccumDeprn – Off Eqpt 5100 Purchases
1650 Store Equipment
5101 Purchase Returns &
1651 AccumDeprn – Store Eqpt
Allowances
5102 Purchase Discounts
ACCOUNT ACCOUNT TITLE CLASSIFIED BY TYPE OF MAJOR 5103 Freight In
CODE ACCOUNTS
6100 Salaries Expense

6150 Supplies Expense

Statement of Financial Position Accounts
1680 Transportation Equipment ASSETS 6200 Utilities Expense
1681 AccumDeprn – Trans Eqpt 6220 Communication Expense
1750 Building
1751 AccumDeprn – Building
1800 Land
1900 Intangible Assets
2000 Accounts Payable LIABILITIES
2100 Notes Payable
2200 Accrued Expenses
2201 Salaries Payable
2202 Utilities Payable
3000 Owner’s Capital EQUITY
3100 Owner’s Withdrawal