Fundamental of Accountancy, Business, and Management 2

Review on FABM 1: Asset, Liabilities & Equity

Asset is the resources or things of value that are owned by a company as the result of company transactions.
Liabilities are obligations of a company or organizations. Amounts owed to lenders & suppliers.
Equity reflects residual claims or net assets of the owners of the business entity.

CLASSIFICATION OF ASSETS
Current Assets – it is normally cash and other resources that are expected to turn to cash or to be used up within one year of the
balance sheet date.
Examples:
 Cash and Cash Equivalents – include bill and coins on hand, bank accounts and operating funds.
 Accounts Receivable – amounts owed by customers to the business.
 Notes Receivable – evidenced by a promissory note. Three elements of notes receivable: principal amount, maturity date
and interest.
 Financial Assets at Fair Value Through Profit or Loss (FAFVPL) – These assets are conventionally called trading
securities, FAFVPL are either debt or equity instruments of another entity held by the reporting entity.
 Inventories – Three items as part of inventories: good for resell (finished goods), goods in the process of production (goods in
process) and supplies to be consumed in the production process (raw materials).
 Supplies and Other Prepaid Assets – includes supplies to be consumed by the business and prepaid rent.
Non-current Assets – are company’s long-term investments for which the full value will not be realized within the accounting
year. Example:
 Property, Plant and Equipment (PPE) – fixed assets used in the normal operating cycle or production of the business.
Example of PPE are building, manufacturing plants, manufacturing equipment, vehicles, furniture & fixtures and leasehold
improvements).
 Intangible Assets – those assets meeting the definition of an asset but without physical substance (trademarks, patents, and
copyrights).

CLASSIFICATION OF LIABILITIES
Current Liabilities – Obligations due within one year of the balance sheet date.
Example:
 Accounts Payable – open accounts relating to purchase of goods and/or raw materials.
 Notes Payable – same with notes receivable but the difference is the company issued the promissory note.
 Interest Payable – interest are considered cost for borrowing money.
 Other Accrued Expenses – expenses incurred but not yet paid.
Non-current Liabilities – are a company’s long term investment for which the full value will not be realized within the accounting
year. Example:
 Long-term Debt – these accounts represent bank loans as a source of financing for the entity, long term debt can be a span
for 5 years to almost 25 years, it also includes mortgage payable if certain properties are held as collateral for such loans.
 Bonds Payable – are contracts of indebtedness sold to certain individuals.

EQUITY reflects the residual claims or net assets of the owners of the entity. Equity comes from two sources: investment of owner
(capital) and from the income of the business from its normal operation.

STATEMENT OF FINANCIAL POSITION (SFP)

Statement of Financial Position – Also known as the balance sheet. This statement includes the amounts of the company’s total
assets, liabilities, and owner’s equity which in totality provides the condition of the company on a specific date. (Haddock, Price, &
Farina, 2012)
Permanent Accounts – As the name suggests, these accounts are permanent in a sense that their balances remain intact from
one accounting period to another. (Haddock, Price, & Farina, 2012) Examples of permanent account include Cash, Accounts
Receivable, Accounts Payable, Loans Payable and Capital among others.
 Basically, assets, liabilities and equity accounts are permanent account because the accounts are retained permanently in the
SFP until their balances become zero. This is in contrast with temporary accounts which are found in the Statement of
Comprehensive Income (SCI). Temporary accounts unlike permanent accounts will have zero balances at the end of the
accounting period.
Contra Assets – Contra assets are those accounts that are presented under the assets portion of the SFP but are reductions to
the company’s assets. These include Allowance for Doubtful Accounts and Accumulated Depreciation. Allowance for Doubtful
Accounts is a contra asset to Accounts Receivable. This represents the estimated amount that the company may not be able to
collect from delinquent customers. Accumulated Depreciation is a contra asset to the company’s Property, Plant and Equipment.
This account represents the total amount of depreciation booked against the fixed assets of the company

FORMS OF STATEMENT OF FINANCIAL POSITION

1. Report Form – shows assets account first and then liabilities and owner’s equity after.
2. Account Form – shows assets on the left side and liabilities and owner’s equity on the right side just like the debit and credit
balances of an account.
 STATEMENT OF COMPREHENSIVE INCOME (SCI)

Statement of Comprehensive Income – Also known as the income statement. Contains the results of the company’s operations
for a specific period of time
 net income (if the income is greater than expenses)
 net loss (if the expenses is greater than income)

Temporary Accounts – also known as nominal accounts. All balance in this account will be transferred to capital account,
resulting to zero beginning balance on the following year. Examples are revenues, sales, utilities expenses.

FORM OF STATEMENT OF COMPREHENSIVE INCOME

1. Single-step Method
2. Multiple-step Method

1. Single-step Method – Called single-step because all revenues are listed down in one section while all expenses are listed in
another. Net income is computed using a “single-step” which is Total Revenues minus Total Expenses.
Key Features of SCI
1. The Title – This should include name of the entity, the title of the report and the period cover (emphasis on the wording –
“for the”)
2. Revenues – revenues can be in the form of sales, fees, interest, dividend, royalties and rent.
3. Expenses – arising in the course of ordinary activities of the entity include for example, cost of sales, wages and
depreciation.
4. Gains and Losses – Gains meet the definition of income while Losses meet the definition of expenses.
5. Other Items – best example is income tax.

Sample of a Single-step SCI

i. First part is Revenues – this is the total amount of revenue that the company was able to generate from providing services
to customers
ii. Second part is expenses (can be broken down into General and Administrative and Selling Expenses)
iii. Revenues less Expenses. Net income for a positive result and net loss for a negative result

2. Multiple-Step Method – called multi-step because there are several steps needed in order to arrive at the company’s net
income.
 Exact opposite of Single Step Method
 Provide details on how the cost of goods sold or manufactured was calculated.
 Provides relevant data on sales return and discounts

Key Terms:
1. Sales Return – Deduction to sales when the customers return the product.
2. Sales Discount – reduction in the price of product or service
3. Purchases – amount of goods bought during the current accounting period.
4. Contra Purchases – account credited being “contrary to the normal balance or purchase account”.
5. Purchase Discount – used to record early payments by the company to supplier of merchandise.
6. Purchase Returns – account used to record return of purchase.
7. Freight in – records transportation cost of merchandise purchased by the company.
8. Freight out – records transportation cost associated with delivery of goods from supplier to customer. Also considered as
selling expenses.
9. Administrative Expenses – expenses not directly related to the merchandising function of the company but are necessary
for the business to operate effectively.
10. Selling Expenses – expenses that are directly related to the main purpose of merchandising business.

Sample of a Multi-step SCI

Note 1: Net Sales
First Part is Net sales, the amount of sales calculated after sales returns, discounts, and allowances are deducted from gross
sales.
1. Sales – This is the total amount of revenue that the company was able to generate from selling products
2. Less: Contra Revenue – called contra because it is on the opposite side of the sales account. The sales account is on the
credit side while the reductions to sales accounts are on the debit side. This is “contrary” to the normal balance of the sales or
revenue accounts.
2.1 Sales Returns – This account is debited in order to record returns of customers or allowances for such returns. Sales
returns occur when customers return their products for reasons such as but not limited to defects or change of preference.
2.2. Sales Discount – This is where discounts given to customers who pay early are recorded. Also known as cash discount.
This is different from trade discounts which are given when customers buy in bulk. Sales discount is awarded to
customers who pay earlier or before the deadline.
3. Calculate: Net Sales = Sales – Sales Return and Sales Discount

Note 2: Net Purchases

Second Part is Net purchases – the gross amount of purchases made, less deductions for purchase discounts, returns, and
allowances.
1. Purchases – amount of goods bought during the current accounting period.
2. Add: Freight In – This account is used to record transportation costs of merchandise purchased by the company. Called
freight in because this is recorded when goods are transported into the company.
3. Less: Contra Purchases –An account that is credited being “contrary” to the normal balance of Purchases account.
3.1. Purchase Discount – Account used to record early payments by the company to the suppliers of merchandise. This is
how buyers see a sales discount given to them by a supplier.
3.2. Purchase Returns – Account used to record merchandise returned by the company to their suppliers. This is how buyers
see a sales return recorded by their supplier
4. Calculate: Net Purchases = Purchases + Freight in – Purchase discount and purchase returns
Note 3: Gross Profit
Third Part is Gross profit – the profit a business makes after subtracting all the costs that are related to manufacturing and selling
its products or services.
1. Cost of Sales – This account represents the accumulated total of all costs used to create a product or service, which has
been sold.
1.1. Beginning Inventory – This is the amount of inventory at the beginning of the accounting period. This is also the amount
of ending inventory from the previous period.
1.2. Add: Net Purchases = Purchases + Freight In
1.3. Cost of Goods Available for Sale = Beginning Inventory + Net Purchases
1.4. Less: Ending inventory – amount if inventory presented in the Statement of Financial Position. Total cost of inventory
unsold at the end of the accounting cycle.
1.5. Calculate: Cost of Sales = Cost of Goods Available for Sale - Ending inventory
2. Calculate: Gross Profit = Net Sales – Cost of Sales

Note 4: Selling Expenses

Fourth Part is Selling Expenses – These expenses are those that are directly related to the main purpose of a merchandising
business: the sale and delivery of merchandise (Freight out). This does not include cost of sales and contra revenue accounts.
Examples of selling expenses include sales commissions, delivery expenses, advertising expense

Note 5: Administrative Expenses

Fifth Part is General and Administrative Expenses –These expenses are not directly related to the merchandising function of
the company but are necessary for the business to operate effectively. For Example, the Cost of Information technology, Finance
& Accounts, Human resources division, etc. Other examples include utilities for home office, salaries of admin personnel.

o Example difference between Selling Expenses and General and Administrative Expenses
 For example, an organization engaged in manufacturing clothes has its manufacturing unit (Selling). Still, along with its
manufacturing unit, it also has to invest in acquiring office shops to maintain its accounts, ensure sales of goods, monitor
various business departments, etc. (Administrative)

Net Income = Gross Profit - General and Administrative Expenses - Selling Expenses
Lastly, calculate for Net Income. Gross Profit less General and Administrative Expenses less Selling Expenses is Net Income for
a positive result while Net Loss for a negative result.

STATEMENT OF CHANGES IN EQUITY (SCE)

Statement of Changes In Equity – Explains the changes in company’s Share Capital, accumulated reserves and retained
earnings.
 All changes, whether increases or decreases to the owner’s interest on the company during the period are reported here. This
statement is prepared prior to preparation of the Statement of Financial Position to be able to obtain the ending balance of the
equity to be used in the SFP.

Initial Investment – The very first investment of the owner to the company.
Additional Investment – Increases to owner’s equity by adding investments by the owner
Withdrawals –Decreases to owner’s equity by withdrawing assets by the owner

Different parts of the Statement of Changes in Equity

1. Heading
1.1. Name of the Company
1.2. Name of the Statement
1.3. Date of preparation (emphasis on the wording – “for the”)
2. Increases to Equity
2.1. Net income for the year
2.2. Additional investment
3. Decreases to Equity
3.1. Net loss for the year
3.2. Withdrawals by the owner

The Statement of Changes in Partners’ Equity is used by a partnerships instead of the Statement of Changes in Owner’s
Equity. The differences between the two are as follows:
A. Title – instead of owner’s, partners’ is used to denote that this is a partnership
B. There are two or more owners in a partnership thus, the changes in the capital account of each partner is presented
C. The net income is divided between partners (not always equal. Based on the agreement. Example: 60:40, 40:60, etc.)

The Statement of Changes in Shareholders’ Equity is used by a corporation instead of the Statement of Changes in Owner’s
Equity. The differences between the two are as follows:
A. Title – instead of owner’s, shareholders’ is used to denote that this is a corporation
B. There are an unlimited number of shareholders but unlike the partnership, the names of the shareholders are not
indicated here. Instead, the corporation keeps an official list with the corporate secretary
C. The capital account is called share capital (just like owner’s being shareholders)
D. Instead of additional investment, share issuances (happens when shares are sold to shareholders) increases the share
capital of a corporation
E. Instead of withdrawals, distribution of net income to shareholders decreases the Capital of the corporation