COURSE MODULE `PRELIM MODULE

WEEK 3
Northern Bukidnon Community College
Kihare, Manolo Fortich Bukidnon, 8703

BUSINESS ADMINISTRATION
ACCTG1: Accounting Elements and Account Titles
Semester of A.Y. 2020-2021

Introduction

In this module, accounting elements and account titles are the focus of the discussion. The module will
introduce to the students the nature of accounting elements, classification of accounting elements, concept of
operating cycle and merchandising account titles. This lesson then will be used in succeeding topics especially the
application of accounting

Rationale

This course studies the of Accounting element and account titles. This allows the students to understand
the terms being used in accounting and its definition, the classification of each elements as being presented in
financial statements, and the concept of the operating cycle.

Intended Learning Outcomes

A. Understand the nature if accounting elements

B. Identify the broad classification of accounting elements
C. Identify the classification of assets
D. Described the requisites for an item to be classified as current assets
E. Understand the concept of the operating cycle
F. Enumerate the different account titles classified as assets
G. Understand the concept of “contra account”
H. Describe the characteristics and requirements of liability
I. Identify the elements affecting owner’s equity
J. Discuss the merchandising account titles

Discussion

Financial Statements

1. Statement of Financial Position – Assets, Liabilities and Owner’s Equity or Capital

2. Statement of Financial Performance – Revenue and Expenses
3. Statement of Changes in Equity – Increase/decrease of capital after the accounting period
4. Statement of Cash Flows – Cash inflow and outflow
5. Notes,
ACCOUNTING comprising of a summary of significant accounting policies and other explanatory information
ELEMENTS

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Broad classification of accounting values in which similar business transactions and events are grouped.
The different accounting elements are:
1. Assets
2. Liabilities
3. Capital or Equity
4. Revenue
5. Expenses

Assets are resources owned or controlled by an entity and that have expected future benefits
For an item to be classified as an asset, it must satisfy the ff:
A. Resources of the Business
B. Controlled by the Enterprise
C. Result of past transactions or events
D. Expected future benefits that may be derived

Classifications of Assets
The assets in the field of accounting are broadly classified as
A. Current Assets
B. Non-Current Assets

An asset is classified as current when it satisfies any of the following criteria:

A. It is expected to be realized in, or is intended for sale or consumption in the entity’s normal operating cycle
B. It is held primarily for the purpose of being traded
C. It is expected to be realized within twelve months after balance sheet date; or
D. It is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve
months after balance sheet date.

It is emphasized that the asset should not satisfy all the four criteria to be classified as current asset.

All other assets not meeting the requirements of current assets are classified as non-current.

Below are the list of examples (but not limited to) under Assets classified as Current Asset and Non-current Assets

Current Assets
1. Cash and cash equivalents - Cash inlcudes money and medium of exchange that a bank accepts for deposits such
as checks, coins & money orders. Cash equivalents are short term and highly liquid investments that are readily
convertible into cash which is acquired three months before maturity. Meaning to be considered cash equivalents, the
maximum term of the investments is 90 days or 3months or less.

2. Accounts Receivables - represents collectibles from customers arising from credit sale of goods or services, and
not supported by promissory notes.

3. Allowance for Bad Ddebts - Contra-asset account which provides for possible losses from uncollected accounts
receivable. This account title is also called Allowance for doubtful accounts.

4. Notes Receivable - represents collectibles from customers arising from credit sale of goods or services supported
by promissory notes executed by customers.

5. Advances to officers and employees - represents amounts colelctible from officers or employees within arising from
cash advances. The cash advances in most instances are deductible against the salary of the employees and officers

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6. Supplies or Supplies on Hand - represents the cost of stationery, paper, pensil, ink and other related supplies
purchased, and used but still on hand at the end of the accounting period.

7. Prepaid Expenses - represents expenses that are paid in advance but not yet incuured or remain unexpired at the
end of the period.

Non-current Assets
1. Property, Plant and Equipment - represents tangible assets which are held by and enterprise for use in production or supply
of goods and services, for rentals to others or for administrative purposes and are expected to be used during more than one
period. (example: Land, Building, Machinery, Equipment)

2. Accumulated Depreciation - Contra-asset account that is deducted from the related property and equipment except land.
This refers to the sum of depreciation. Depreciation represents the expense portion of the asset because of the wear and tear.

3. Long term Investments - are assets held by an entity for the accretion of wealth through distribution such as interest,
dividends and rental, royalties and for capital appreciation

Liabilities are present obligation of an entity arising from past transaction or events, the settlement of which is
expected to result in an outflow from the business of resources embodying benefits.
For an item to be classified as a Liability, it must satisfy the ff:
A. Present obligations
B. Arises from past transactions
C. Settlement results to outflow of resources
D. The transactions provide economic benefits

Classifications of Liabilities
The liabilities in the field of accounting are broadly classified as
A. Current Assets
B. Non-Current Assets

A liability shall be classified as current when is satisfies any of the following criteria:
A. It is expected to be settled in the entity’s normal operating cycle, or
B. It is held primarily for the purpose of being traded, or
C. It is due to be settled within twelve months after the balance sheet date, or
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.

All other liabilities shall be classified as non-current.

Below are the list of examples (but not limited to) under Liabilities classified as Current Liabilities and Non-current
Liabilities

Current Liabilities
1. Accounts Payable - denotes obligations or debts of the business arising from services received, merchandise,
supplies, or property, plant and equipment acquired on account. Accounts Payable is an open account obligation
because it is not supported by promissory note
2. Notes Payable - The same with accounts payable however this account is supported by a promissory note
executed by the business in favor of the creditor or supplier of goods and services.

3. Bank Payable or Loan Payable - represents the financial obligations to banks and other financialinstitutions. Bank
loan arises because of borrowings made by the business
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4. Unearned revenue - the liability that is settled in the future when a company delivers its products or services. It is
the income received in advance but not yer earned as of a given date.

5. Accrued expenses - expenses already incurred but not yet paid as of a given date (example: salaries, utilities)

Non-current Liabilities
1. Mortgage payable - represents the amount of long-term liability that is supported or backed up by collateral

2. Long-Term Bank Loan - represents bank load with maturity period that is beyond one year.

3. Finance Lease Liability - represents the liability portion of the asses acquired through finance lease.

Equity or Owner’s Equity is a residual interest that contains the net difference between total assets and liabilities.It
represents ownership and its terminology changes depending on the form of business organization (Owner’s equity or
partners’ capital or shareholder’s equity)

Equity are usually categorized as follows:

A. Capital
B. Withdrawal or Drawing
C. Net Income or Net Loss

Capital represents the initial investment of the owner at the start of the operation or the beginning capital of
succeeding years.

Withdrawal or Drawing represents temporary withdrawal of capital by the owner from the business for his personal
use

Net Income or Net Loss is a line item in the equity section that will be added to the Equity if it is an income or gain or
deducted to the Equity if it is a loss.

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increase in equity, other than those relating to contribution from equity
participants
Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names
depending on the nature of business.
Gains on the other hand, represent other items that meet the definition of income and may or may not arise in the
course of ordinary business.

The following are income accounts:

1. Service Income - represents the income realized for all types of income derived from services rendered

2. Professional Income - represents the amount of income earned by professionals from the practice of their
profession

3. Rental Income - represents the income earned from buildings, space and other properties rented or leased out by
the business.

4. Interest Income - represents the amount of income realized arising from lending operations

5. Miscellaneous Income - represents income earned that could be properly classifies on the above income
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classifications

6. Gain from Sale of Asset - represents the income realized from sale of asset not intended for sale in the ordinary
course of business operation

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of
assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity
participants

The following are expense accounts:

1. Salaries and Wages - represents payments of services render by workers and employees

2. Rent Expense - represents the amount paid for the use of office space, store space, or factory area

3. Supplies Expense - represents for the different materials used by the business in its office but not limited to coupon
bonds, carbon paper, worksheets, ledgers, ballpens, erasers, envelops, plastic bags, tapes, staples, fillers. Supplies
expense can be office supplies expense or store supplies expense

4. Insurance Expense - represents the expired portion of premiums paid on insurance coverage

5. Interest expense - represents the amount of interest paid or incurred during the accounting period because of the
borrowings.

6. Taxes and Licenses - represents the payments for or incurrence of taxes, licenses, government fees

7. Utilities expense - represents the amount incurred or paid for the use of light, water, gas, electricity for the business

8. Bad debts expense or Doubtful accounts expense - reoresents the amount of receivable estimated to be doubtful of
collection.

9. Depreciation Expense - represents the expired portion of the cost of building, machinery, equipment, and other
types of property plant and equipment except land.

10. Government Contributions - represents the employer’s share in SSS, Philhealth and PAGIBIG as mandated by
law.

11. Miscellaneous Expense - represents the amount paid or incurred where it cannot be identified on the listed
expenses above. These are likely immaterial, uncommon and infrequent expenses

The following accounts are also present especially on merchandising businesses

A. Sales - used when products are sold to customers. This can either be on cash or on credit
B. Sales Returns and Allowances - represents amount of goods or merchandise sold but returned by customers. This
occurs when there is wrong specification or the products is defective
C. Sales discounts - represents the amounts granted as discount to customers
D. Purchases - represents the amount of goods or merchandise bought from suppliers
E. Freight in - represents the amount paid for the fare of the merchandise bought by the business from various
suppliers
F. Purchase Returns and Allowances - represents the amounts of merchandise returned by the business to suppliers
G. Purchase discounts - represents the discounts granted by the supplier because of prompt payment on credit
purchases
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H. Merchandise Inventory - represents the amount of goods still unsold at the end of the accounting period
I. Cost of Sales or Cost of Goods Sold - represents to the cost of products sold during the accounting period
J. Freight-Out - represents the fare of goods sold to customers

Activity:

This will be the first assignment for your final project. To make it easier and divide the work load of the final project I will let
you do it by group with 8 members. Your chosen group will then be your group for the rest of the assignments on your final
project.

Please just maximize texts or messenger in doing every assignment. I discourage everyone to meet face to face.

1. Choose a service/merchandising business (please identify if it is a service or a merchandising business) and identify the
account titles and elements present in the chosen business and describe each account titles and element.

You can choose on existing businesses or make your own. The purpose of the final project is to make you experience doing
the accounting cycle (please read on the course guide to know more about the final project)

Exercise:
Identify if the stated item is Asset, Liability, Owner’s Equity, Income or Expense

1. Petty Cash
2. Advances from suppliers
3. Unused office supplies
4. Interest payable
5. Refundable deposits
6. Patent
7. Computer Set
8. Postage Stamps
9. Deferred revenue
10. Bad debts

Reflection

Resources
Main Resources:
1. Nick L. Aduana, Fundamentals of Accounting (sole proprietorship accounting for service and merchandising with
introduction to manufacturing)

Additional Resources:
William B. Baltazar, Fundamentals of Accounting