Basic Financial Statements

Statement of Financial Position

The balance sheet shows the financial position of the business. It presents the assets of the business, its
liabilities and the equity of the owner in the business.

Assets

Assets are physical things (tangible) or rights (intangible) which have monetary values and are owned by
the business entity. They are economic resources of business that are expected to be of future benefit.
Assets are commonly subdivided into two major classifications:

Current assets are generally those which can be expected to provide benefits to the business within the
normal operating cycle of the business or one year, whichever is longer.

Non-current assets are those which are used to provide the business entity with benefits over a number
of years.

Typical Account Title for Assets

Current Assets

Cash – any medium of exchange that a bank will accept at face value. It includes coins, currency, checks,
money orders, bank deposits and drafts.

Cash Equivalent – these are short-term, highly liquid investments which are readily convertible to cash
and with original maturities of three months or less.

Short-term investments – investments which are readily marketable and represents temporary
investments of fund available for current operations and are intended to meet working capital
requirements.

Notes Receivable – a notes receivable 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 sale of services or goods on
credit. This type of receivable offers less security than a promissory note.

Inventory – these constitute items of tangible personal property which are (a) held for sale in the
ordinary course of business, (b) in the process of production for such sale, or (c) to be currently
consumed in the production of goods or services to be available for sale.

Prepaid Expenses – these are expenses paid for by the business in advance. It is an asset because the
business avoids having to pay cash in the future for a specific expense.
Non-current Assets

Long-term Investments – these are assets not directly identified with the operating activities of the
company or involved in the sale or production of goods and services.

Equipment – these account records the acquisition of office machines, desk, cars, trucks, file cabinets,
and similar items. They are used in the conduct of business and are not intended for sale in the ordinary
course of business.

Buildings – included in this account are factories, warehouses, and office buildings.

Land – owned and used by the business entity.

Intangibles – these are relatively long-lived assets without physical characteristics which value lies in
rights, privileges and competitive advantages, which they give the owner. These include patents,
copyrights, licenses, franchises, goodwill, trademarks, secret processes, subscription lists and non-
competition agreement.

Liabilities

Liabilities are debts owed to outsiders (creditors). The economic obligations are often identified by the
account titles that include the word “payable.”

They are typically fall into two major groups:

Current liabilities are obligations which are reasonably expected to be settled through the use of
existing current assets or the creation of other current liabilities within the normal operating cycle or
one year, whichever is longer. Long-term Liabilities are obligations which are payable beyond the
normal operating cycle or one year, whichever is longer or those obligations which though payable
within one year will not be liquidated by existing current assets.

Common Liability Accounts

Current Liabilities

Notes Payable – is like a note receivable but in the reverse sense. In the case of a note payable, the
business entity is the maker of the note; that is, the business entity is the party who promises to pay the
other party a specified amount of money on a specified future date.

Accounts Payable – this account represents the reverse relationship of accounts receivable. By
accepting the goods or services, the buyer agrees to pay for them in the future.

Accrued Liabilities – Amounts owed to others for unpaid expenses.

Unearned Revenues – When the business entity receives payment before providing its customers with
goods or services, the amounts received are recorded in the unearned revenue account.

Long-term 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.

Bonds Payable – business organizations often obtain substantial sums of money from lenders to finance
the acquisition of equipment and other needed assets. They obtain the fund by issuing bonds. The
bond is a contract between the issuer and the lender specifying the terms of repayment and the interest
to be charge.

Owner’s Equity

It is the claim held by the owner against the assets of the business after the total liabilities are deducted

Common Owner’s Equity account

Capital – this account is used to record the original and additional investments of the owner if the
business entity. This account title bears the name of the owner.

Withdrawals – when the owner of a business entity withdraws cash or other assets, such are recorded in
the drawing or withdrawal account rather than directly reducing the owner’s equity account,

Statement of Financial Performance (Income Statement)

Revenues

These are the increases in the owner’s equity as a result of the performance services or the sales of
merchandise by the business.

Common Revenue Accounts

Service Revenue – revenues earned by performing services for a customer or client.

Sales Revenue – revenues earned as a result of sale of merchandise.

Expenses

Expenses are the decrease in the owner’s equity caused by the revenue generating activities of the
business.

Common Expense Accounts

Cost of Sales – this cost incurred to purchase or to produce the products sold to customers during the
period; also called cost of goods sold.

Salaries or Wages Expense – includes all payments as a result of an employer-employee relationship

such as salaries or wages, 13th month pay, cost of living allowances and other related fringe benefits.

Telecommunications, Electricity, Fuel and Wages Expense – expense related to use of

telecommunications facilities, consumption of electricity, fuel and water.

Rent Expense – expense for space, equipment or other asset rentals

Supplies Expense – expense using supplies in the conduct of daily business.

Depreciation Expense – the portion of the cost of a tangible asset allocated or charged as expense
during an accounting period.

Uncollectible Accounts Expense – the amount of receivables estimated to be doubtful of collection and
charged as expense during an accounting period.

Interest Expense – an expense related to use of borrowed funds.

Transaction is defined as an exchange of value. In business transaction, there
is a value received and a value parted with. Each transaction has an effect on
the accounting equation (Asset, Liability and Owner’s Equity).

Accounting Equation

The Account

The basic summary device of accounting is the account. A separate account is maintained for each item
that appears on the balance sheet (assets, liabilities and owner’s equity) and on the income statement
(revenues and expenses). Thus, an account may be defined as a detailed record of the increases,
decreases and balance of each item that appears in an entity’s financial statements.

The basic form of an account is the “T” account because of its similarity to the letter “T”.

A listing of all the accounts and their account numbers in the ledger is known as chart of accounts. The
chart is arranged in the financial statement order, that is, assets first (from current assets to non-current
assets), followed by liabilities (from current to non-current liabilities), owner’s equity, revenues and
expenses. The amount should numbered in a flexible manner to permit indexing and cross-referencing.

When analyzing transactions, the accountant refers to the chart of accounts to identify the pertinent
accounts to be increased or decreased. If an appropriate account title is not listed in the chart, an
additional account may be added.

Journalizing of Single Proprietorship Account Title

Journalizing is the process of recording business transaction in the journal. The journal is a chronological
record of business transactions. A journal entry shows all the effects of a business transaction in terms
of debits and credits. Transactions are initially recorded in the journal instead of directly recording in
the ledger. The journal is called the book of original entry. The simplest type of journal is called a
general journal.

The standard content of the general journal are as follows:

Date. The year and month are nor rewritten for every entry unless the year or month changes or a new
page is needed.
Account Titles and Explanation. The account to be debited is entered at the extreme left of the first line
while the account credited is entered slightly indented on the next line. A brief description of the
transaction is usually made on the line below the credit. Generally, a blank line is left between the
explanation and the next entry.

P.R. (Posting Reference). This will be used when entries are posted, that is, until the amounts are
transferred to the related ledger accounts

Debit. The debit amount for each account is entered in this column.

Credit. The credit amount for each account is entered in this column.

The sum of the debits for every transaction equals the sum of the credits.

The equality of the accounting equation is always maintained.

Initial Investment

Jan. 1 Rosita Guamos invested P200,000 in her Cleaning Agency

Analysis Increase in Asset – Increase in Owner’s Equity
Rule Increases in assets are recorded by debits and Increases in owner’s equity is recorded by a
credit to Guamos, Capital.
Entry Debit Credit

Jan 1 Cash P200,000

Guamos capital 200,000

To record initial investment

Note Issued for Cash

Jan. 1 Rosita Guamos issued a promissory note for P50,000 loan from Alcantara Financing. This will
be used as working capital of the agency. The note carries a 20% interest per annum. Both the interest
and the principal are payable in full in one year.
Analysis Increase in Asset – Increase in Liability
Rules Increases in assets are recorded by debits and increases in liabilities are recorded by credits
Entry debit Credit

Prepaid Expenses. These are expenses paid in advance like rentals (Prepaid Rent) and insurances
(Prepaid Insurance). In the asset method of recording prepaid expenses, these accounts is categorized
as asset and will only be regarded as expense during maturity.
Jan. 2 Paid for two month’s rent for the office space, P10,000.
Analysis Increase in Asset – Decrease in Asset
Rules increases in assets are recorded by a debit to Prepaid Rent and decreases in asset are
recorded by a credit to cash.

Entry debit Credit

Jan 2 Prepaid Rent P10,000

Cash 10,000

Purchase of Asset for Cash

Jan. 5 Acquired P5,000 worth of office supplies.
Analysis Increase in Asset – Decrease in Asset
Rules Increases in assets are recorded by debits and decreases in asset are recorded by credits.
Entry

Purchase of Asset on Account

Jan. 6 Purchased computers from ABC Tech Hub on account P45,000.
Analysis Increase in Asset – Increase in Liability
Rules Increases in assets are recorded on the debit side and increases in liabilities are recorded on
the credit side.
Entry

Purchase of Asset on Account with Down Payment

Jan. 5 Purchased tables and chairs from Corcega Furniture and Supplies, P45,000. Mrs. Guamos
paid P15,000 and the remaining balance payable in 3 months.
Analysis Increase in Asset – Decrease in Asset, Increase in Liability
Entry

Settlement of Accounts Payable

Jan. 8 Paid P30,000 for the account owed to ABC Tech Hub.
Analysis Decrease in Asset – Decrease in Liability
Rules Decreases in liabilities are recorded on the debit side and decreases in assets are recorded on
the credit side.
Entry

Revenues Earned and Collected

Jan. 9 Performed cleaning services to various customers and collected P10,000.

Analysis Increase in Asset – Increase in Owner’s Equity

Rules Increases in assets are recorded on the debit side and increases on owner’s equity are
recorded by a credit to Service Income

Entry

Revenues Earned but Collected Partially

Jan. 10 Performed cleaning services to ABC Corporation. ABC Corporation initially paid P10,000 with
the balance of P10,000 to be settled at the end of the month.

Analysis Increase in Asset – Increase in Owner’s Equity

Entry

Unearned Revenues Collected. Unearned revenues are considered a liability until the service is
rendered.

Jan. 11 Received P15,000 from XYZ Company as advance payment to cleaning service to be rendered
the following week.
Analysis Increase in Asset – Increase in Liability

Entry

When the service is rendered the journal entry will be like this:

Revenues Earned on Account

Jan. 13 Billed Bellen Dance Studio for cleaning services rendered, P15,000.
Analysis Increase in Asset – Increase in Owner’s equity

Entry

Collection of Receivables
Jan. 15 Collected P15,000 from Bellen Dance Studio for the cleaning service rendered last January 13.
Analysis Increase in Asset – Decrease in Asset
Entry

Withdrawal by Owner
Jan. 15 Rosita Guamos withdraw P 15,000 from the business for personal use.
Analysis Decreases in Asset – Decrease in Owner’s Equity
Entry

Expenses Incurred and Paid

Jan. 15 Paid the salaries of employees, P45,000

Analysis Decrease in Asset – Decrease in Owner’s Equity

Entry

Expenses Incurred but Unpaid

Jan. 18 Receive the telephone bill from PLDT P1,300.
Analysis Increase in Liability – Decrease in Owner’s Equity

Entry
Basic competencies
Lead workplace communication

Lead small team

Develop and practice negotiation skills

Solve problems related to work activities

Use mathematical concept and techniques

Use relevant technologies

Common competencies
Apply quality standards

Perform computer operations

Maintain an effective relationship with clients and customers

Manage own performance

Core competencies

Journalize transactions
Prepare chart of accounts

Analyze documents

Prepare journal entry

Post transactions
Prepare ledger

Transfer journal entry

Summarize ledger

Prepare trial balance

List account titles

Transfer balances from the ledger

Summarize trial balance

Prepare financial reports

Prepare financial statements

Analyze financial statements

Review internal control system

Check policy compliance

Prepare policy compliance report