Mamangun, Zyrene Suzette D.

11 – Altruism
Accounting 1

Liabilities – is defined as a company's legal financial debts or obligations that arise

during the course of business operations. Liabilities are settled over time through the
transfer of economic benefits including money, goods or services. Recorded on the right
side of the balance sheet, liabilities include loans, accounts payable,
mortgages, deferred revenues and accrued expenses.

Examples of Liabilities

Current Liability Accounts (due in less than one year):

 Accounts payable. Invoiced liabilities payable to suppliers.

 Accrued liabilities. Liabilities that have not yet been invoiced by a supplier, but
which are owed as of the balance sheet date.

 Accrued wages. Compensation earned but not yet paid to employees as of the
balance sheet date.

 Customer deposits. Payments made by customers in advance of the seller

completing services or shipping goods to them. If the goods or services are not
provided, the company has an obligation to return the funds.

 Current portion of debt payable. Any portion of long-term debt that is due for
payment within one year.

 Deferred revenue. A payment by a customer that has not yet been earned by the
company.

 Income taxes payable. Income taxes payable to the government.

 Interest payable. Interest accrued on debt that has not yet been invoiced by the
lender.

 Payroll taxes payable. Taxes payable that result from the completion of a recent
payroll transaction.

 Salaries payable. Compensation owed to employees, typically to be paid out in the

next payroll cycle.
 Sales taxes payable. Sales taxes charged to customers, which the company must
remit to the applicable taxing authority.

 Use taxes payable. Use taxes are essentially sales taxes that are remitted directly
to the government having jurisdiction, rather than through a supplier who would
otherwise remit the tax.

 Warranty liability. A reserve for any warranty liability associated with sales, for
which warranty claims have not yet been received.

Long Term Liability Accounts (due in more than one year):

 Bonds payable. The remaining principal balance on bonds outstanding that is due
for payment in more than one year.

 Loan payable. Debt that is due for payment in more than one year.

Notes Payable

When a corporation formally signs a promissory note to pay a specified sum of

money in the future, this becomes known as a note payable. Notes payable can be
classified as a short term note payable or a long term note payable depending upon
when it must be repaid. If the note is due in 1 year or less, it is a short term payable,
however if the note is due after 1 year or more, then it becomes a long term note
payable.

Unearned Revenue

Unearned revenue is when cash payments from customers is received in

advance of actually providing the service or selling the goods. Because cash is received
from these transactions before actual revenue is earned (service is performed), this
revenue must be recorded in an Unearned Revenue account. Unearned revenue is a
liability that is satisfied or ‘earned’ by delivering the products/services in the future.
Examples of unearned revenue include sales of gift certificates by stores, airline tickets
sold in advance, prepaid rent collected in advance, etc.

When cash is received in advance for products/services, the seller would record
it in a liability account such as Unearned Ticket Revenue, Unearned Professional Fees
or Unearned Advance Subscriptions. When the products / services are delivered to the
buyer, the earned portion of this revenue is transferred to revenue account such as
Subscription fees, Rent revenue or Professional fees.
Assets - is any resource owned by the business. Anything tangible or intangible that
can be owned or controlled to produce value and that is held by a company to produce
positive economic value is an asset. Simply stated, assets represent value of ownership
that can be converted into cash.

Examples of Assets
Cash

Increases & decreases in the amount of cash every day is recorded in a ‘Cash’ or ‘Bank’
account. Accepted cash includes money including coins, cheques, money orders &
checking account balances. Most large organizations have several cash accounts with
different banks and usually employ Bank accountants to keep track of banking
transactions.

Receivables

A receivable is an amount of cash that the business expects to collect in the future from
its debtors. The type of receivable an organization will collect depends on the business
nature of the organization but the 2 main types of receivables are:

i) Accounts Receivable – When goods are sold to customers or service is

performed and the customer promises to pay in the future, this gives rise to
an entry to Accounts Receivable. Accounts receivable is increased by
services performed or goods sold on credit (Debit) and decreased when a
customer makes payment (credit).
ii) Notes Receivable – A note receivable, also known as a promissory note is an
unconditional promise to pay a specified sum of money in the future on a
specific date. The company that is expecting to receive this promised sum of
money will record a note receivable asset on its balance sheet.

Prepaid Expenses

Prepaid expense is an asset account containing payments that are made now but for
services that will be received or will be used in the future. As these assets are used up,
the costs of this usage becomes expenses. The 3 most common types of prepaid
expenses are Office supplies, Store supplies & prepaid insurance. Other types of
prepaids include prepaid rent, advance payments, etc.

i) Office Supplies –Large organizations use a lot of office supplies such as

stationery, paper & pens. These supplies stay as assets until they are used
up. When they are used up, their cost is reported as an expense. The cost of
unused supplies remains an asset and is recorded in an Office Supplies
account.
ii) Store Supplies – Most large retail organizations keep supplies for packaging
purchased goods for customers. For instance when you stand at the check
counter at Costco, they put your purchased goods in bags that are free.
Costco would thus record the cost of these bags in a Store supplies account.
 The cost of unused supplies stays as an asset in the Store supplies account
and as they are used up, an expense is recorded.
iii) Prepaid Insurance – Most insurance companies like their premiums to be paid
in advance. The fee is known as a premium and covers the company against
unfortunate losses such as fire, theft, accidents and so on. When insurance
premiums are paid in advance, the cost is recorded to an asset account
known as Prepaid Insurance. Over time as the prepaid policy is used up, the
associated cost is recorded as an expense on the income statement. The
unexpired portion of the insurance policy remains in the prepaid insurance
account & is reported on the balance sheet.

Office Equipment

Most large companies own lots of equipment including computers, chairs, office desks,
printers, books, scanners, etc. The costs incurred to buy this equipment are recorded in
an Office Equipment account on the balance sheet. The costs of assets used in stores
such as showcases, displays, cash stands & registers or counters are recorded in a
Store Equipment account.

Buildings

Buildings owned by a corporation provide space for warehouse & factory operations and
allows employees to support the front line employees of the organization by working in
those buildings. The cost of acquiring & owning a building is recorded in a Buildings
asset account. When several buildings are owned, separate accounts are used for each
of them.

Land

The land account records the cost of land owned by a business and is separated from
the buildings account to provide more relevant information to viewers of their financial
statements.

Goodwill

is the excess of the purchase price paid for an acquired entity and the amount of the
price not assigned to acquired assets and liabilities. It arises when an acquirer pays
a high price to acquire another business. This asset only arises from an acquisition;
it cannot be generated internally. Goodwill is an intangible asset, and so is listed
within the long-term assets section of the acquirer's balance sheet.

Negative goodwill arises when an acquirer pays less for an acquiree than the fair
value of its assets and liabilities. This situation usually only arises as part of a
distressed sale of a business.
Equity - is the net amount of funds invested in a business by its owners, plus any
retained earnings. It is also calculated as the difference between the total of all recorded
assets and liabilities on an entity's balance sheet.

Types of Equity Accounts

Capital – Capital consists of initial investments made by owners. Stock purchases or

partnership buy-ins are considered capital because both are comprised of cash
contributions made by the owners to the company. Capital accounts have a credit
balance and increase the overall equity account.

Withdrawals – Owner withdrawals are the opposite of contributions. This is where the
company distributes cash to its owners. Withdrawals have a debit balance and always
reduce the equity account.

Revenues – Revenues are the monies received by a company or due to a company for
providing goods and services. The most common examples of revenues are sales,
commissions earned, and interest earned. Revenue has a credit balance and increases
equity when it is earned.

Expenses – Expenses are essentially the costs incurred to produce revenue. Costs like
payroll, utilities, and rent are necessary for business to operate. Expenses are contra
equity accounts with debit balances and reduce equity.

Partnership Equity Accounts

Owner’s or Member’s Capital – The owner’s capital account is used by partnerships

and sole proprietors that consists of contributed capital, invested capital, and profits left
in the business. This account has a credit balance and increases equity.
Owner’s Distributions – Owner’s distributions or owner’s draw accounts show the
amount of money the owner’s have taken out of the business. Distributions signify a
reduction of company assets and company equity.

Corporate Equity Accounts

Common Stock – Common stock is an equity account that records the amount of
money investors initially contributed to the corporation for their ownership in the
company. This is usually recorded at the par value of the stock.

Paid-In Capital – Paid-in capital, also called paid-in capital in excess of par, is the
excess dollar amount above par value that shareholders contribute to the company. For
instance, if an investor paid $10 for a $5 par value stock, $5 would be recorded as
common stock and $5 would be recorded as paid-in capital.
 Treasury Stock – Sometimes corporations want to downsize or eliminate investors by
purchasing company from shareholders. These shares that are purchased by the
company are called treasury stock. This stock has a debit balance and reduces the
equity of the company.

Dividends – Dividends are distributions of company profits to shareholders. Dividends

are the corporate equivalent of partnership distributions. Both reduce the equity of the
company.

Retained Earnings – Companies that make profits rarely distribute all of their profits to
shareholders in the form of dividends. Most companies keep a significant share of their
profits to reinvest and help run the company operations. These profits that are kept
within the company are called retained earnings.

 Share capital (common stock) - is the portion of a corporation's equity that has been
obtained by the issue of shares in the corporation to a shareholder, usually for cash.

 Preferred stock - is a type of stock which may have any combination of features not
possessed by common stock including properties of both an equity and a debt
instrument, and is generally considered a hybrid instrument.

 Capital surplus - is an account which may appear on a corporation's balance sheet, as

a component of shareholders' equity, which represents the amount the corporation
raises on the issue of shares in excess of their par value (nominal value) of the shares
(common stock).

 Retained earnings - is the accumulated net income of the corporation that is retained
by the corporation at a particular point of time, such as at the end of the reporting
period. At the end of that period, the net income (or net loss) at that point is transferred
from the Profit and Loss Account to the retained earnings account. If the balance of the
retained earnings account is negative it may be called accumulated losses, retained
losses or accumulated deficit, or similar terminology.

 Treasury stock - is stock which is also bought back by the issuing company, reducing
the amount of outstanding stock on the open market ("open market" including insiders'
holdings).

 Stock options - is a contract which gives the buyer (the owner or holder of the option)
the right, but not the obligation, to buy or sell an underlying asset or instrument at a
specified strike price prior to or on a specified date, depending on the form of the option.

 Reserve - can be any part of shareholders' equity, except for contributed or basic share
capital. In nonprofit accounting, an "operating reserve" is the unrestricted cash on hand
available to sustain an organization, and nonprofit boards usually specify a target of
maintaining several months of operating cash or a percentage of their annual income,
called an Operating Reserve Ratio.
 What Is the Accounting Equation?
The accounting equation is considered to be the foundation of the double-entry
accounting system. The accounting equation shows on a company's balance
sheetwhereby the total of all the company's assets equals the sum of the
company's liabilities and shareholders' equity.

The accounting equation for a corporation is:

References:

https://www.accountingscholar.com/double-entry-accounting.html
https://www.accountingtools.com/articles/what-are-examples-of-liabilities.html
https://www.myaccountingcourse.com/accounting-basics/equity-accounts
https://www.accountingcoach.com/accounting-equation/explanation
Alexander Cheng
ABM11 – Altruism

What is an Asset?
Assets include cash and cash equivalents or liquid assets, which may include Treasury
bills and certificates of deposit. Accounts receivables are the amount of money owed to the
company by its customers for the sale of its product and service. Inventory is also considered an
asset.

Examples

Cash – accepted cash includes money including coins, cheques, money orders & checking
account balances. Most large organizations have several cash accounts with different banks and
usually employ Bank accountants to keep track of banking transactions.

Receivables – amount of cash that the business expects to collect in the future from its debtors.
The type of receivable an organization will collect depends on the business nature of the
organization but the 2 main types of receivables are:

iii) Accounts Receivable – When goods are sold to customers or service is performed and
the customer promises to pay in the future, this gives rise to an entry to Accounts
Receivable. Accounts receivable is increased by services performed or goods sold on
credit (Debit) and decreased when a customer makes payment (credit).
iv) Notes Receivable – A note receivable, also known as a promissory note is an
unconditional promise to pay a specified sum of money in the future on a specific
date. The company that is expecting to receive this promised sum of money will
record a note receivable asset on its balance sheet.

Prepaid Expenses

Prepaid expense is an asset account containing payments that are made now but for
services that will be received or will be used in the future. As these assets are used up, the costs
of this usage becomes expenses. The 3 most common types of prepaid expenses are Office
supplies, Store supplies & prepaid insurance. Other types of prepaids include prepaid rent,
advance payments, etc.

Office Supplies –Large organizations use a lot of office supplies such as stationery, paper &
pens. These supplies stay as assets until they are used up. When they are used up, their cost is
reported as an expense. The cost of unused supplies remains an asset and is recorded in an Office
Supplies account.

Store Supplies – Most large retail organizations keep supplies for packaging purchased goods
for customers. For instance when you stand at the check counter at Costco, they put your
purchased goods in bags that are free. Costco would thus record the cost of these bags in a Store
supplies account. The cost of unused supplies stays as an asset in the Store supplies account and
as they are used up, an expense is recorded.

Prepaid Insurance – Most insurance companies like their premiums to be paid in advance. The
fee is known as a premium and covers the company against unfortunate losses such as fire, theft,
accidents and so on. When insurance premiums are paid in advance, the cost is recorded to an
asset account known as Prepaid Insurance. Over time as the prepaid policy is used up, the
associated cost is recorded as an expense on the income statement. The unexpired portion of the
insurance policy remains in the prepaid insurance account & is reported on the balance sheet.

Office Equipment

Most large companies own lots of equipment including computers, chairs, office desks, printers,
books, scanners, etc. The costs incurred to buy this equipment are recorded in an Office
Equipment account on the balance sheet. The costs of assets used in stores such as showcases,
displays, cash stands & registers or counters are recorded in a Store Equipment account.

Buildings

Buildings owned by a corporation provide space for warehouse & factory operations and allows
employees to support the front line employees of the organization by working in those buildings.
The cost of acquiring & owning a building is recorded in a Buildings asset account. When
several buildings are owned, separate accounts are used for each of them.

Land

The land account records the cost of land owned by a business and is separated from the
buildings account to provide more relevant information to viewers of their financial statements.

What is a liability?

Liabilities are what a company typically owes or needs to pay to keep the company
running. Debt including long-term debt are liabilities as well as rent, taxes, utilities, salaries, and
wages as well as dividends payable.

Examples

 Notes Payable - The amount of principal due on a formal written promise to pay. Loans
from banks are included in this account.
 Contra liabilities are liability accounts with debit balances.
 Accounts Payable - This current liability account will show the amount a company owes
for items or services purchased on credit and for which there was not a promissory note.
This account is often referred to as trade payables (as opposed to notes payable, interest
payable, etc.) To learn more about accounts payable, see our Accounts Payable Outline.
 Salaries Payable - The current liability account which reports the amount of salaries
earned by a company's employees, but which have not yet been paid by the company.
 Wages Payable - A current liability account that reports the amounts owed to employees
for hours worked but not yet paid as of the date of the balance sheet.
 Interest Payable - This current liability account reports the amount of interest the
company owes as of the date of the balance sheet. (Future interest is not recorded as a
liability.)
 Other Accrued Expenses Payable - Obligations that a company has incurred, but have not
yet been routinely recorded in Accounts Payable. For example, if the interest on a bank
loan is paid on the 10th of each month, then on the last day of each month approximately
20 days of interest expense is an accrued expense payable.
 Income Taxes Payable - A current liability account which reflects the amount of income
taxes currently due to the federal, state, and local governments.
  Customer Deposits - A liability account on the books of a company receiving cash in
advance of delivering goods or services to the customer. The entry on the books of the
company at the time the money is received in advance is a debit to Cash and a credit to
Customer Deposits.
 Warranty Liability - A liability account that reports the estimated amount that a company
will have to spend to repair or replace a product during its warranty period. The liability
amount is recorded at the time of the sale. (It is also the time when the expense is
reported.) The liability will be reduced by the actual expenditures to repair or replace the
product. Warranty Payable or Warranty Liability is considered to be a contingent liability
that is both probable and capable of being estimated.
 Lawsuits Payable - A liability account that reports the amount payable as of the balance
sheet date. For the account to show a balance, a loss/obligation must be probable and the
amount can be estimated. If the lawsuit is remote or only possible, it will not be shown as
a liability. If the lawsuit is possible but not probable, it should be disclosed in the notes.
 Unearned Revenues - A liability account that reports amounts received in advance of
providing goods or services. When the goods or services are provided, this account
balance is decreased and a revenue account is increased. To learn more, see Explanation
of Adjusting Entries.
 Bonds Payable - Generally a long term liability account containing the face amount, par
amount, or maturity amount of the bonds issued by a company that are outstanding as of
the balance sheet date. To learn more about bonds payable, see our Bonds Payable
Outline.

What is Shareholder’s Equity?

Shareholders' equity is a company's total assets minus its total liabilities. Shareholders' equity
represents the amount of money that would be returned to shareholders if all of the assets were
liquidated and all of the company's debt was paid off. Retained earnings is part of
shareholders' equity and is the percentage of net earnings that were not paid to
shareholders as dividends. Think of retained earnings as savings since it represents a cumulative
total of profits that have been saved and put aside or retained for future use.

Examples

Owner’s or Member’s Capital – The owner’s capital account is used by partnerships and sole
proprietors that consists of contributed capital, invested capital, and profits left in the business.
This account has a credit balance and increases equity.
Owner’s Distributions – Owner’s distributions or owner’s draw accounts show the amount of
money the owner’s have taken out of the business. Distributions signify a reduction of company
assets and company equity.

Common Stock – Common stock is an equity account that records the amount of money
investors initially contributed to the corporation for their ownership in the company. This is
usually recorded at the par value of the stock.

Paid-In Capital – Paid-in capital, also called paid-in capital in excess of par, is the excess dollar
amount above par value that shareholders contribute to the company. For instance, if an investor
paid $10 for a $5 par value stock, $5 would be recorded as common stock and $5 would be
recorded as paid-in capital.
Treasury Stock – Sometimes corporations want to downsize or eliminate investors by
purchasing company from shareholders. These shares that are purchased by the company are
called treasury stock. This stock has a debit balance and reduces the equity of the company.

Dividends – Dividends are distributions of company profits to shareholders. Dividends are the
corporate equivalent of partnership distributions. Both reduce the equity of the company.

Retained Earnings – Companies that make profits rarely distribute all of their profits to
shareholders in the form of dividends. Most companies keep a significant share of their profits to
reinvest and help run the company operations. These profits that are kept within the company are
called retained earnings.
There is a basic overview of equity accounts and how their interact with the overall equity of the
company.

Accounting Equation

The fundamental accounting equation, also called the balance sheet equation, represents
the relationship between the assets, liabilities, and owner's equity of a person or business. It is the
foundation for the double-entry bookkeeping system. For each transaction, the total debits equal
the total credits.

Assets = Liabilities + Owner’s Equity