AE 112-

MODULE 1
(Introduction to
Accounting)

COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. define accounting;
2. know the brief history of
accounting;
3. identify the elements of
accounting;
4. understand the effects of
transactions on accounting
FINANCIAL equation; and
ACCOUNTING AND 5. know how to prepare the financial
statements.
REPORTING

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 “You have to understand accounting and you have to understand the nuances of accounting.

It's the language of business and it's an imperfect language, but unless you are willing to put in

the effort to learn accounting - how to read and interpret financial statements - you really

shouldn't select stocks yourself.”

Warren Buffett

COURSE INTRODUCTION
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This course provides an introduction to accounting, within the context of business
related picture or quote here
and business decisions. Students explore the role of accounting information in the
decision-making process and learn how to use various types of accounting information
found in financial statements and annual reports. This course starts with a discussion of
(adjust size and borders depending on the text
accounting thought and the theoretical background of accounting and the accounting
profession. The next topic is the accounting cycle - recording, handling, and summarizing
below)
accounting data, including the preparation and presentation of financial statements for
merchandising and service companies. Moreover, it continues with transactions, financial
statements, and problems peculiar to the operations of partnerships and corporations as
distinguished from sole proprietorships. Topics include accounting for partnership formation
and operations; share capital issuances, treasury shares, other related transactions
affecting accumulated profits. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an adequate
background on the recording, classification, and summarization functions of accounting to
enable them to appreciate the varied uses of accounting data.

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 ACCOUNTING AS THE LANGUAGE OF BUSINESS
Accounting is often described as the language of business because it is the medium
of communication between a business firm and the various parties interested in its financial
activities, its stakeholders. It involves the systematic recognition, measurement, reporting
and interpretation of data that are related to the financial activities of a natural or artificial
entity. The management of the firm, its owners, creditors, employees, investors, and the
government have particular interests in the financial aspects of a business organizations.

ACCOUNTING, DEFINED
Early definitions of accounting generally focused on the traditional recordkeeping
functions of the accountant. In 1941, the American Institute of Certified Public Accountants
(AICPA) defined accounting as "the art of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and events which are, in part at
least, of a financial character, and interpreting the results thereof."

 As an ART

Accounting emphasizes more on the accountant's creative skills and ability to apply
his accounting knowledge to a given problem than on the extent of his knowledge.

Others say that accounting is a science. Accounting is governed by rules, principles,

postulates and theory and this leads others to conclude that accounting is a science.
However, since the rules, principles, postulates and theory that are used in accounting are
not exact and are constantly adapting in the overall situations. Thus, accounting is not an
exact science.

In 1970, the AICPA stated that Accounting is a service activity. Its function is "to
provide quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions." An economic entity
is a unit such as a business that has an independent existence.

 As SERVICE ACTIVITY

Vital service is provided by supplying the quantitative financial information to decision

makers who need to make “reasoned choices among alternative uses of scarce
resources in the conduct of business and economic activities.

The modern accountant, therefore, is concerned not only with record keeping
but also with a whole range of activities involving planning and problem solving;
control and attention directing; and evaluation, review and auditing. Today's
accountant focuses on the ultimate needs of those who use accounting
information, whether these users are inside or outside the business.

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 So accounting "is not an end in itself"". Instead it is defined as an
information system that measures, processes, and communicates financial
information about an identifiable economic entity. This information allows users
to make "reasoned choices among alternative uses of scarce resources in the
conduct of business and economic activities".

BRIEF HISTORY OF ACCOUNTING

Accounting is a system of recording and summarizing business and financial

transactions. For as long as civilizations have been engaging in trade or organized systems
of government, methods of record keeping, accounting, and accounting tools have been
in use.

Some of the earliest known writings discovered by archaeologists are accounts of

ancient tax records on clay tablets from Egypt and Mesopotamia dating back as early as
3300 to 2000 BCE. Historians hypothesize that the primary reason for the development of
writing systems came out of a need to record trade and business transactions.

Accounting Revolution

When medieval Europe moved toward a monetary economy in the 13th century,
merchants depended on bookkeeping to oversee multiple simultaneous transactions
financed by bank loans.

In 1458 Benedetto Cotrugli invented the double-entry accounting system, which

revolutionized accounting. Double-entry accounting is defined as any bookkeeping system
that involves a debit and/or credit entry for transactions. Italian mathematician and
Franciscan monk Luca Bartolomes Pacioli, who invented a system of record keeping that
used a memorandum, journal, and ledger, wrote many books on accounting.

Father of Accounting

Born in 1445 in Tuscany, Luca Pacioli is known today as the father of accounting and
bookkeeping. He wrote Summa de Arithmetica, Geometria, Proportioni et
Proportionalita ("The Collected Knowledge of Arithmetic, Geometry, Proportion, and
Proportionality") in 1494, which included a 27-page treatise on bookkeeping. His book was
one of the first published using the historical Gutenberg press, and the included treatise
was the first known published work on the topic of double-entry bookkeeping.

One chapter of his book, "Particularis de Computis et Scripturis" ("Details of

Calculation and Recording"), on the topic of record keeping and double-entry
accounting, became the reference text and teaching tool on those subjects for the next
several hundred years. The chapter educated readers about the use of journals and
ledgers; accounting for assets, receivables, inventories, liabilities, capital, income and
expenses; and keeping a balance sheet and an income statement.

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 After Luca Pacioli wrote his book, he was invited to teach mathematics at the Court
of Duke Lodovico Maria Sforza in Milan. Artist and inventor Leonardo da Vinci were one of
Pacioli's students. Pacioli and da Vinci became close friends. Da Vinci illustrated Pacioli's
manuscript De Divina Proportione ("Of Divine Proportion"), and Pacioli taught da Vinci the
mathematics of perspective and proportionality.

Chartered Accountants

The first professional organizations for accountants were established in Scotland in

1854, starting with the Edinburgh Society of Accountants and the Glasgow Institute of
Accountants and Actuaries. The organizations were each granted a royal charter.
Members of such organizations could call themselves "chartered accountants."

As companies proliferated, the demand for reliable accountancy shot up, and the
profession rapidly became an integral part of the business and financial system.
Organizations for chartered accountants now have been formed all over the world. In the
U.S., the American Institute of Certified Public Accountants was established in 1887.

BUSINESS TRANSACTIONS

All business enterprises become a party, directly or indirectly, to various

financial activities or events. If these activities and events occurring during a given
period of time, affect the business' financial position and are capable of being
assigned monetary values, they are referred to as business transactions. These
transactions are the raw materials of accounting reports.

A transaction is defined as exchange of values that are equal or which are

presumed to be equal. In other words, accounting presupposes that in any
transaction, for every value given away, there is an equal and compensating value
received. It must have the following characteristics:
1. It must be for a sum certain in money;
2. It must be supported by a genuine source document, such as a sale of
goods or services, must be evidenced by an invoice; a collection of
cash, by an official receipt; a cash payment, by a disbursement voucher;
3. It must have a two-fold effect on the elements of accounting.

ELEMENTS OF ACCOUNTING
a. Assets - are the economic resources a business owns that are expected to be
of benefit in the future. Cash, office supplies, furniture, land, and building are
examples.
Assets are increased when acquired by the business. These are decreased when
given up, i.e. Cash being paid to an individual or organization to settle a business
obligation; or cash withdrawn by owner or owners for personal use; Buildings
being disposed through sale.
b. Liabilities - are the economic obligations/debts payable to other entities
or persons whether within the business or outside the business; these are

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 however, usually claims owing to people outside the business. Debts owed
to banks and lenders (outsiders), payable to the government in the form of
taxes, salaries owed to employees (within the business) are examples.
Liabilities are increased when assets or services are purchased on credit or on
account. They may also be created by accepting payments from customers
for goods to be delivered or services to be rendered in the future. These are
decreased through payments to creditors; or obligations to creditors may also
be settled through issuances of promissory notes which actually Is another form
of liability.
c. Capital - claims held by the owners of the business after claims of creditors
(those the business have obligations to) are satisfied. It is the excess of
total assets over total liabilities.
An increase in capital results from investment by owners of the business and a
decrease in capital results from withdrawals of asset (e.g. cash) from the
business by the owners.

Increase in capital resulting from transactions other than with the owners of the
business is known as INCOME. I ncome resulting from the business' main or
normal operations is known as REVENUE while those arising other than from
main or normal operations (say, peripheral operations) is known as GAINS.
Decrease in capital resulting from transactions other that with owners of the
business is known as EXPENSES.

 The two-fold effect of the business transaction over the accounting

elements is the very foundation of the double entry bookkeeping
system.

For example, the purchase of a computer for office use, paying P50,000 cash
as evidenced by official receipt No.14344, received from the supplier of the
computer, is a business transaction that must be recorded, based on the following
attributes that characterizes a transaction:
1. Sum certain in money – P50,000
2. Genuine Source Document - Official Receipt No. 14344
3. Two-fold effect on
a. Asset is increased due to the acquisition of the Computer Equipment
b. Asset is decreased due to the payment of cash.

ACCOUNTING PROCESS
Accounting, as defined, covers four distinct constructive and mechanical
functions or phases of the accounting process: Recording, Classifying,
Summarizing and Interpreting.
1. RECORDING - This phase translates the financial transactions and events
into written accounting data. It deals with the writing of transactions or
events on the books or records of business. The term "JOURNALIZING" is also
used because transactions are recorded in the Books of Original Entry
known as "Journals". There are two kinds of journals: General Journal and
Special Journal. A general journal is used to record all kinds of transactions
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 while a special journal is used to record transactions which are repetitive in
nature. Below is a sample of a general journal.
GENERAL JOURNAL
Date Particulars PR Debit Credit

Another technical term used is "Bookkeeping" which is defined as the

systematic and chronological recording of business transactions or events
in accordance with established accounting rules and procedures. It is
systematic because it involves the recording of business data in a prescribed
manner. It is chronological because transactions are recorded in
accordance to their dates of occurrence and/or discovery.
Bookkeeping, which is a process or phase of accounting, is the
means of recording transactions and keeping records. It is defined as the
mechanical and repetitive phase of accounting. Bookkeeping is only a
small and simple, but important part of accounting. Accounting, on the
other hand, includes the design of an information system that meets user
needs. The major goal of accounting is analysis, interpretation, and use
of information.

2. CLASSIFYING - Under this function, similar and interrelated transactions and

event are sorted or grouped together into their respective classes. For
instance, the transactions affecting Sales-Shoes, Sales-Shirts, and Sales-Jackets
are grouped into one single sales figure. In recording, transactions are grouped
per date of occurrence while in classifying, they are grouped per account.
Actually, this phase is performed by "Posting to the Ledger". The ledger is also
known as Book of Final Entry. There are also two kinds of ledgers: General
Ledger and Subsidiary Ledger. A general ledger is the principal ledger, when
used in conjunction with subsidiary ledgers, that contains all of the statement of
financial position and statement of comprehensive income accounts. A
subsidiary ledger is a ledger containing individual accounts with a common
characteristic. Below is a sample of a general ledger.

GENERAL LEDGER
Date Particulars PR Debit Date Particulars PR Credit

3. SUMMARIZING - At the end of a certain period of time, which can be a

month, a quarter semester or a year, owners of the business or other
interested users of accounting data ask accountant information about the
condition of the business. The accountant then groups summarizes the
details of the data in the accounting records through the preparation of
financial statements such as the Statement of Financial Position, Statement of
Comprehensive Income, Statement of Changes in Equity, Statement of

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 cash Flows, and Notes to Financial Statements.
a. Statement of Financial Position (Also known as the Balance Sheet) is
an accounting statement showing the financial condition or financial
position of a business at a given specific date. It is actually a summary
of the assets, liabilities and capital of business, systematically
arranged so as to set forth its financial condition in understandable
form. It is a financial statement that describes where the enterprise
stands at a specific date.
b. Statement of Comprehensive Income (Also known as the Income
Statement) is an accounting statement that provides information on
the enterprises’s results of operations. It is a summarization of the
company's income and expense transactions for a designated period of
time. The statement provide information about the business profitability.

c. Statement of Changes in Equity is an accounting statement that

provides information on the changes, increases and decreases, in a
business entity’s equity or capital for a specific period of time. It
includes transactions that affect the capital classified as (1) Investments
made by owners, (2)Distributions to owners, by way of withdrawals, (3)
Net income or net loss and (4) Other capital adjustments.
d. Statement of cash Flows is an accounting statement that provides
information about cash receipts and cash payments of a business entity
during a specific period of time. The term cash flows Include both cash
receipts (cash Inflows) and cash payments (outflows). It is intended to
provide information about the activities of the business entity, namely:
operating, investing and financing activities. Operating activities the
principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities. Therefore, they
generally result from the transactions and other events that enter into
the determination of net income or loss. Investing activities involve the
acquisition and disposal of long-term assets and other investments not
included in cash equivalents are investing activities. Financing
activities are activities that result in changes in the size and composition
of the capital and borrowings of the enterprise.
e. Notes to Financial Statements is a summary of significant accounting
policies and other explanatory notes. It provides information necessary
for the statements to be interpreted properly. Preparing these notes can
be one of the most challenging tasks that accountants face at the end of
the period because the content of these notes often cannot be drawn
directly from the accounting records. Drafting these notes requires an in-
depth understanding of the company and its operations of accounting
principles and of how decision makers interpret and use accounting
information.

4. INTERPRETING - Due to technical and specialized nature of accounting,

reports submitted by the accountant require further interpretation for the
guidance of management and other users. The liquidity, solvency,
profitability and financial flexibility of an enterprise are analyzed in this
function. Plans and actual performance are compared, variances are
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 determined, analyzed and corrective measures are undertaken when
necessary.

ELEMENTS OF ACCOUNTING
In order to understand better the accounting equation as it relates to the financial
position and results of operations of a business enterprise, the relationship of the
accounting elements should be clearly defined. There are three elements of accounting
namely: ASSETS, LIABILITIES, CAPITAL.

ASSETS

Assets are resources owned by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise. In short, they are
properties and rights owned by the firm. There are two major classifications of assets:
Current Assets and Non-current Assets.

A. CURRENT ASSETS - under Philippine Accounting Standards 1 (PAS 1), "Presentation

of Financial Statements" an entity shall classify assets as current when:
a. It expects to realize the asset, or intends to sell or consume it, in its
normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. It expects to realize the asset within twelve months after the reporting
period; or
d. The asset is cash or cash equivalent, unless, the asset is restricted from
being exchanged or used to settle a liability for at least twelve months
after the reporting date.
Current assets include cash and those assets which can be readily converted into cash or
sold or consumed within one year or the normal operating cycle whichever is longer.
Normal operating cycle refers to the time span during which cash is used to acquire goods
and services, which in turn are sold to customers, who in turn pay for their purchases with
cash. Common examples include the following:

1. Cash - normally consists of coins and currencies on hand, money orders and some
checks from customers, and deposits in bank accounts.

2. Trading Securities - also known as Temporary Investments. These are short-term

investments of funds which are available for current operations and intended to be held
for generating short-term profits from fluctuations in value.

3. Receivables - represent amounts collectible from customers, clients and other persons
for goods, services or money given. These include:

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 a. Accounts Receivable - these are collectibles from customers arising from sale of
goods or services on open accounts without any formal written promise to pay.

b. Notes Receivable - these are collectibles which are supported by formal

promises to pay in the form of promissory notes.

c. Other Receivables such as Accrued Interest Receivable, Advances to Officers

and Employees, and Dividends Receivable.

 Allowance for Doubtful Accounts, sometimes termed as Allowance for

Bad Debts, is a contra-asset account or valuation account used to
record accumulated balance of customers' accounts that are doubtful
of collectibility. It is a contra-asset account because it is an offset
against an asset (Accounts Receivable) to produce a more useful and
reliable measure of the company's liquidity. It reduces Accounts
Receivable if it remains uncollected at the end of the accounting
period. Because the Allowance for Doubtful Accounts is merely an
estimate and not a precise calculation, professional judgment plays a
considerable role in determining the size of this valuation account. It
should be emphasized that this is NOT an asset but rather a contra-asset
account.

4. Inventories - are assets that are held for sale in the ordinary course of business, in the
process of production for such sale or in the form of materials or supplies to be consumed
in the production process or in rendering of services. In a merchandising firm, the title
Merchandise Inventory is used. For a manufacturing firm, inventory accounts include Raw
Materials Inventory, Work-in-Process Inventory, Finished Goods Inventory and Factory
Supplies.

5. Prepaid Expenses - are expenses paid and recorded as assets before they are used or
consumed. Examples of these expenses paid in advance include Prepaid Rent, Prepaid
Insurance, and Prepaid Advertising.

 Part of this sub-classification is office supplies and store supplies such as

stationery, ball pens, erasers, envelopes and other supplies not yet used.
It can be in the form of Office Supplies or Store Supplies depending on its
purpose.

B. NON-CURRENT ASSETS - under PAS 1, all other assets that cannot be classified as
current are classified as non-current. This includes tangible, intangible, operating
and financial assets of a long-term nature. Included here are:

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 1. Fixed Assets - also known as Property, Plant and Equipment (term normally used for
a manufacturing firm). These are tangible assets which are held by an enterprise for
used in production or supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used for more than one
accounting period. It may also be defined as "tangible assets with an estimated
useful life beyond one year, used in the conduct of business, and are not intended
for sale in the ordinary course of business". It includes among others:

a. Land - a lot or real estate owned and used by a firm as building site, parking
area and other business operations. It should be noted that land for current
sale as in case of subdivided lots is a current asset. Also, land held for
speculation or for future sale should be classified as long-term investment.

b. Building - structure used to house the office, store or factory

c. Equipment - includes among others:

 Machinery - may be composed of stamping machines, ovens,
conveyors, lathes, etc.
 Furniture and fixture- tables, chairs, lighting fixtures, wall decors, etc.
 Office equipment- typewriters, calculator, computers, etc.
 Store equipment - cash registers, weighing scales, etc.
 Delivery equipment - trucks, pick-ups, vans, forklifts, etc.

 Accumulated Depreciation is a contra-asset account representing

usage of asset or expired cost of the asset up to the present. It is a
contra- asset account because it is deducted from the appropriate
fixed asset account (except land because its value Increases as time
passes by, most often than not) to produce the book value for the asset.
Accountants often use the term book value or carrying value to
describe the net valuation of an asset in a company's accounting
records. Book value is of significance primarily for accounting purposes.
It represents costs that will be offset against the revenue of future
periods. It also gives users of financial statements an indication of the
age of the company's depreciable assets (older assets tend to have
larger amounts of accumulated depreciation associated with them
than newer assets). It is important to realize that the computation of
book value is based upon an asset's historical cost. Thus, book value is
not intended to represent an asset's current market value. Like
Allowance for Doubtful Accounts, this is NOT an asset but rather a
contra-asset account.

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 2. Long-term Investments - are assets held by an enterprise for the accretion of wealth
through distribution such as interest, royalties, dividends, and rentals, for capital
appreciation or for other benefits to the investing enterprise such as those obtained
through trading relationships. It may also be defined as assets not directly identified with
the operating activities of the business. They are expected to contribute to the success of
the business by making an independent contribution to earnings or exercising a certain
favorable effect upon the sales and operation of the company. The company holds them
for a period longer than one year. Included under this sub-classification are the following:

a. Investment In Stocks - investments in the capital stock of a corporation

b. Investment In Bond - Investments in government or corporation bonds

c. Investment Property - investment in real properties (land and/or building) being

held by the company for capital appreciation purposes or to earn additional
income (i.e. rentals)

d. Fund tor non-current purposes like Plant Expansion Fund, which is cash set aside
for future purchase of additional property

3. Intangible Assets - identifiable non-monetary assets without physical substance held for
use in the production or supply of goods or services, for rental to others, or for
administrative purposes. They are long-lived assets without physical characteristics and
whose value lies in the rights, privileges and competitive advantages that they give the
owner. Items falling under this category are:

a. Patent - an exclusive right granted by the government to an inventor enabling

him to control the manufacture, sale or other use of his invention for a specified
period of time

b. Copyright - an exclusive right granted by the government to an author,

composer or artist enabling him to publish, sell or otherwise benefit from his
literary, musical or artistic work.

c. Trademark - a symbol, sign or name used to mark a product to distinguish it from

other products.

d. Franchise- a right or privilege granted by the franchisor to a franchisee. In a

public franchise the State allows a private entity the use of public property in
performing services like use of public land for telephone or electric lines, use of
streets or highways for a bus line. In a private franchise, the franchisee acquires
the right to use the trademark, patent and process of the franchisor as in the
case of putting up a Jollibee outlet.

e. Goodwill- value of all favorable attributes that relate to a business enterprise like
good name, capable staff and personnel, high credit standing, reputation for
fair dealings, reputation for superior products, favorable geographic location
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 and list of regular customers. It arises when expected earnings exceed normaI
earnings.

4. Other Non-current Assets - include other long-term items which cannot be appropriately
classified under the usual asset categories. Examples include:

a. Advances to Officers and Employees not collectible within one year

b. Restricted Cash Accounts such as Cash in Closed Banks
c. Long-term Installment Receivables
d. Non-productive Property or property no longer used in operations like plant
facilities which have been idle for an extended period or those abandoned
but not physically retired. These are simply known as 'IDLE ASSETS"
e. Damaged Inventory not yet declared as loss of the enterprise

LIABILITIES

Liabilities are present obligations of an enterprise arising from past transactions or

events, the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits. Like assets, liabilities have two major
classifications: Current Liabilities and Non-current Liabilities.

A. CURRENT LIABILITIES - under PAS 1, an entity shall classify liability as current when:

a. It expects to settle the liability in its normal operating cycle;

b. It holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve month after the reporting period;
or
d. It does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period.

Current liabilities include obligations which are expected to be settled in the normal course
of the enterprise's operating cycle, and obligations which are due to be settled within one
year from the balance sheet date.

Liabilities, such as trade payables and accruals for employees and other operating costs,
are classified as current liabilities since they are to be paid within one year or the normal
operating cycle whichever is longer. Trade payable may be defined as indebtedness
representing amounts due to trade creditors as a result of the purchase of merchandise
and/or services in the ordinary course of business. Other liabilities, non-trade payables in
particular, that are due for settlement within twelve months after the last day of the current
accounting period, are also classified as current.

All other obligations are to be classified as non-current. Examples include:

1. Accounts Payable - if not qualified, this is trade accounts payable. This refers to
indebtedness that arise from purchase of goods, materials, supplies or services in an
open charge account, that is, It Is not evidenced by any written promise to pay.

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 2. Notes Payable - when a promissory note is issued as evidence of the indebtedness
that arise from purchase of goods, materials, supplies or services or in place of an
open charge account for such purchases.

3. Communications Payable - may include obligations to companies for postage,

telephone and telegraph and similar services received by the business.

4. Utilities Payable - obligations to utility companies like electric companies (Benguet

Electric Cooperative), water companies (Baguio Water District).

5. Taxes and Licenses Payable - payables to the government in the form of business
and transfer taxes, income taxes, business permits, etc.

6. Withholding Tax Payable, SSS Payable, Philhealth Payable, PAGIBIG Payable -

payables to government agencies like Bureau of Internal Revenue, Social Security
System, Philhealth Insurance Corporation and Home Development Mutual Fund
(HDMF), respectively, representing payroll-related mandatory contributions of
employer and employees.

7. Unearned Revenues - represent obligations for goods or services that a company

must provide or deliver in a future accounting period in return for an advance
payment from a customer like in the case of Unearned Interest Income, Unearned
Rent Income, and Unearned Subscriptions Revenue

8. Accrued Expenses - also known as Accrued Liabilities, these are expenses that have
been incurred but not yet paid like in the case of Accrued Salaries Payable and
Accrued Interest Payable.

B. NON-CURRENT UABILITIES - under PAS 1all other liabilities not classifiable as current
should be classified as non-current liabilities. Examples include:

1. Long-term Notes Payable - an obligation evidenced by a promissory note that is to

be paid beyond one year.

2. Bonds Payable - a liability supported by a formal unconditional promise made under

seal to pay a specified sum of money at a determinable future date, and to make
periodic interest payments at a stated rate until the principal is paid

3. Mortgage Payable - a long-term obligation to a bank or other financial institutions

secured by real properties of the business.

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 CAPITAL

Capital is the residual interest in the assets of the enterprise after deducting all its
liabilities. It is the owner's contribution to the business. The term used in reporting a firm's
equity depends on the kind of business organization it is. If it is a sole proprietorship, the
term "'OWNER'S EQUITY" would be more appropriate. On the other hand, a partnership's
capital can be referred to as "PARTNERS' EQUITY'' and for a corporation,
"STOCKHOLDERS’ EQUITY'' or SHAREHOWERS' EQUITY''. The owners' equity comes from two
sources:

a. Net Investment = Investments – Drawings

b. Net Income=Income - Expenses
(b.1) Income
(b.2) Expense
In a sole proprietorship (which is the focus of succeeding discussions), the following items
are considered:

A. (NAME OF OWNER), CAPITAL - the total of the initial and additional contributions
made by the owner, which is increased by profits and decreased by losses and
owner's withdrawals.

B. (NAME OF OWNER), DRAWING or (NAME OF OWNER), WITHDRAWAL or (NAME OF

OWNER), PERSONAL - represents cash or other assets taken by the owner for
personal use. This has an effect of reducing the owner's capital.

C. INCOME - are increases in economic benefits during the accounting period in the
form of inflows or enhancements or assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants. In other words, it refers to increases in owner's equity resulting from
selling goods, rendering services or performing other business activities. Common
examples include:
1. Service Revenue / ProfessionaI Fees /Income from Fees - revenue earned
from selling services.
2. Rent Income - revenue earned from renting out commercial spaces (like
apartments, condominiums, market stalls, office spaces ) to third parties
3. Interest Income - revenue earned for lending money
4. Commission Income - revenue earned by real estate brokers, insurance
agencies, travel agencies, etc.
5. Sales - principal revenue of both merchandising and manufacturing
concerns from selling goods to customers.
 Sales Returns and Allowances is a contra-revenue account which
represents merchandise returns from customers and/or deductions from
the original sales price. The returns may be due to the delivery of
defective goods or the wrong merchandise was sent.
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 Sales Returns refers to the merchandise returned at selling price by
o
the customers due to defects, inferior quality or not in accord with
the customer's specifications.
o Sales Allowances refers to cases when the customer would be willing
to keep the merchandise, if the seller is willing to grant a deduction
from the selling price.
 Sales Discount is a contra-revenue account that refers to the reduction
in the amount to be paid by a customer as a result of early payment of
an invoice.

Both Sales Returns and Allowances and Sales Discounts are

deducted from Gross Sales to arrive at the Net Sales. This would be
elaborated in the discussion of accounting for merchandising business.

D. EXPENSES - are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incidences of liabilities that result in
decreases in equity other than those relating to distributions to equity participants.
These are decreases in owner's equity resulting from the costs of goods and services
used up in the course of earning revenues. Common examples include:

1. Advertising Expense - refers to cost of publications on newspapers, radio,

television, calling cards, billboards and other costs of promoting the business.

2. Communications Expense - refers to cost of all means of communications used

during the period like telephone, telegraph services and postage.

3. Delivery Expense - also known as Freight Out or Transportation Out. It represents

the cost of gasoline, oil and other related expenses in transporting goods to
customers.

4. Depreciation Expense - refers to the portion of the total cost of fixed assets
allocated to current operations.

5. Insurance Expense - refers to insurance premiums paid or payable to an

insurance company. In an Insurance contract, one party, the insurance
company, undertakes to guarantee the business against loss by a specified
event or peril.

6. Interest Expense - refers to the cost of borrowing funds used by the business. Also
known as Finance Cost.

7. Rent Expense - refers to charges on the right to occupy shop or office space or
enjoy the use of other properties or assets belonging to another party.

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 8. Repairs and Maintenance Expense - refers to the cost of repairing and servicing
certain assets like buildings and office equipment.
9. Representation Expense - refers to the cost of entertaining customers and
prospective clients and others.

10. Salary Expense - refers to the compensation or remuneration in whatever form

given to employees for the services they render to the firm.

11. Supplies Expense - refers to the cost of ballpens, erasers, stationery and other
supplies used or consumed by the enterprise.

12. Taxes and Licenses - refer to business taxes, licenses, and other fees due to the
government.

13. Utilities Expense - refers to the cost of electricity and water consumed during the
current accounting period.

14. Purchases - refers to the merchandise acquired or bought during the period,
which is intended to be sold in the ordinary course of business

 Purchase Returns and Allowances is a contra-expense account, which

refers to the reduction from the amount the company should pay for
merchandise bought as a result of defect, Inferior quality or wrong
specifications. Its nature is similar to that of Sales Returns and
Allowances. The difference lies only in the perspective.

 Purchase Discount is a contra-expense account that refers to the

discount taken by the company for early payment.

Both Purchase Returns and Allowances and Purchase Discounts have an

effect of reducing Purchases. This would also be explained further in the
discussion of accounting for merchandising business.

15. Freight In or Transportation in - refers to the cost of transporting items bought for
resale from its point of origin to the point of destination. Actually, this is a delivery
expense but shouldered by the buyer.

16. Cost of Merchandise Sold - represents the value of items sold to customers,
which is computed by adding the beginning inventory, purchases and freight in
to come up with Merchandise Available for Sale and deducting ending
inventory.

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 THE ACCOUNTING EQUATION
Accounting is governed by a fundamental accounting equation that shows the
relationship of the three accounting elements found in the statement of financial position.
It is the most basic tool in accounting. This equation presents the resources of the business
(ASSETS) and the sources or of claims to these resources (EQUITIES).

ASSETS=EQUITIES

Equities may be subdivided into two principal types: the rights of creditors and the
rights of owners. The equities of creditors represent debts of the business and are called
liabilities. The equity of the owner is called capital or owner's equity. Expansion of the
equation to give recognition to the two basic types of equities yields the following, which Is
known as the accounting equation:

ASSETS=LIABILITIES+CAPITAL

It is customary to place "Liabilities" before "Capital" in the accounting equation

because creditors have preferential rights to the assets. The residual claim of the owner or
owners is sometimes given greater emphasis by transposing liabilities to the other side of
the equation, yielding:

ASSETS-LIABILITIES=CAPITAL

The accounting equation is further expanded to show the two sources of changes in
capital:

CAPITAL

ASSETS=LIABILITIES + Increased by (+) Decreased by (-)

Investments Withdrawals
Income Expenses

From the expanded accounting equation, another important equation in

accounting is used to compute for the results of the operations of the business during a
given period of time. This equation makes use of the temporary accounting elements -o
the revenues, gains, expenses and losses.

NET INCOME (LOSS) = INCOME–EXPENSES

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 The equity of the proprietor may be computed independently from the asset and
liability elements, if information about profit and withdrawals for personal use is available.
The value assigned to the equity of the proprietor is computed with the use of another
accounting equation which is as follows:

+ Additional Investments

C A P I T A L , e n d = C A P I T A L , b e g i n n i n g + - Withdrawals
+/- Net Income (Loss)

EFFECTS OF TRANSACTIONS ON ACCOUNTING EQUATION

Under the Double-entry Bookkeeping System, it is assumed that every business

transaction has at least two-fold effects - an element with value is received and an
element with value is given up. It is necessary that an accountant have the skill to
determine which elements are affected by a business transaction, and the effect or effects
of the transaction on said elements. A business transaction may have any or a
combination of the following two-fold effects on the statement of financial position
elements.

There are nine (9) possible two-fold effects on the accounting elements.

1 Increase in Assets = Increase in Capital

2 Increase in Assets = Increase in Liabilities
3 Increase in Assets = Decrease in Other Forms of Assets
4 Decrease in Assets = Decrease in Liabilities
5 Decrease in Assets = Decrease in Capital
6 Decrease in Liabilities = Increase in Capital
7 Decrease in Liabilities = Increase in Other Forms of Liabilities
8 Decrease in Capital = Decrease in Liabilities
9 Decrease in Capital = Increase in Other Forms of Capital

The analysis of the selected business transactions of Guro Accounting Tutorial

Services for the month of November is as follows:

Transactions Analysis
Assets = Liabilities + Capital
1. Mr. Chris Guro established + Cash + Guro, Capital
an accounting tutorial
service business and had
invested P50,000 cash of his
personal money into the
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 business
2. Borrowed P100, 000 from + Cash + Notes Payable
BPI payable after 2 years.
The company issued a 12%
interest bearing note to the
bank.
3. Purchased tables and + Furniture
chairs for cash, P75, 000 - Cash

4. Paid rent for office, P5, 000 - Cash - (Rent Expense)

5. Purchased additional + Furniture + Accounts
tables and chairs on Payable
account from Balingit
Furniture on account,
P100, 000.
6. Paid business license and - Cash - (Taxes and
taxes, P1, 500. Licenses)
7. Received cash for tutorial + Cash + (Service Income)
services, P75, 000
8. Paid employees' salaries, - Cash - (Salaries Expense)
P10, 000.
9.Sent a check to Balingit - Cash - Accounts
Furniture to pay for Payable
additional tables and chairs
previously purchased on
account P100, 000.
10. Paid water and electricitv - Cash - (Utilities Expense)
bill, P2, 500.
11. Purchased office and + Supplies + Accounts
school supplies from Trader - Cash Payable
Inc. at P20, 000, 50 % down,
balance on account
12. Rendered tutorial services + Accounts + (Service Income)
to students on account, Receivable
P35, 000.
13. Mr. Guro withdrew cash - Cash - (Guro, Drawing)
for personal use, P5, 000.
14. Collected from customer + Cash
for tutorial services previously -Accounts
rendered on account. Receivable
15. Paid P5, 000 of account - Cash - Accounts
with Trader Inc. Payable
16. 70% of supplies - Supplies - (Supplies
purchased has been used. Expense)

The two-fold effects of the 16 transactions completed by Guro Accounting during the month
of November are as follows:

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 ASSETS = LIABILITIES + CAPITAL
CASH ACCOUNTS SUPPLIES FURNITURE ACCOUNTS NOTES GURO, TYPES OF
RECEIVABLE PAYABLE PAYABLE CAPITAL CAPITAL
TRANSACTION
1 +50,000 +50,000 Initial
Investment
2 +100,000 +100,000

3 - 75,000 + 75,000

4 - 5,000 - 5,000 Rent

Expense
5 +100,000 +100,000

6 - 1,500 - 1,500 Taxes &

Licenses
7 + 75,000 +75,000 Service
Income
8 - 10,000 - 10,000 Salaries
Expense
9 -100,000 -100,000

10 - 2,500 - 2,500 Utilities

Expense
11 - 10,000 + 20,000 + 10,000

12 + 35,000 +35,000 Service

Income
13 - 5,000 - 5,000 Guro,
Drawing
14 + 25,000 - 25,000

15 - 5,000 - 5,000

16 -14, 000 -14, 000 Supplies

Expense
Bal 36, 000 10, 000 6, 000 175, 000 5, 000 100, 000 122, 000

Tot 227, 000 = 227, 000

FINANCIAL STATEMENTS
After the preceding transactions have been analyzed and recorded in the books of
the business, reports are prepared for users. The reports that are considered the primary
means of communicating important accounting information to interested users are called
FINANCIAL STATEMENTS. These are normally prepared at the end of an accounting period
or upon request of the owner.

According to PAS No.1, a complete set of financial statements includes the

following:

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 a. Statement of Comprehensive Income
b. Statement of Financial Position
c. A statement showing either:
i. All changes In equity; or
ii. Changes in equity other than those arising from capital
transactions with owners and distributions to owners:
d. Cash Flow Statement; and
e. Accounting policies and Explanatory notes.

STATEMENT OF COMPREHENSIVE INCOME

A Statement of Comprehensive Income (also known as Income Statement) is a

financial statement that shows the results of operations of a business entity for a specific
period of time. Many consider this as the most important financial report because it shows
whether or not a business achieved its profitability goal of earning an acceptable Income.

It is in the Statement of Comprehensive Income where revenues and expenses are

reported. If revenues exceed expenses, a net Income or net profit results; otherwise, there
would be net loss. For this reason, this financial statement is sometimes known as Profit and
Loss Statement and Statements of Operations.

 PARTS:
1. Heading - contains three items:
a. Name of the business for which the statement is prepared
b. Title of the statement which is STATEMENT OF COMPREHENSIVE
INCOME
c. Period covered by the statement (ex. For the Year Ended,
December 31, 2010 )
2. Body - contains the last two accounting elements:
a. Revenues
b. Expenses
 FORMS (based on the analysis of expenses):
1. Natural Presentation - referred to as the Nature of Expense
Method. It calls for the aggregation of expenses according to
their nature and are not reallocated among the various functions
within the enterprise.

2. Functional Presentation - referred to as the Function of Expense

Method or Cost of Sales Method. It entails classification of expenses
according to their function as part of cost of sales, distribution,
selling and administrative activities. This would be elaborated later
in the discussion of accounting for merchandising business.

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 Guro Accounting Tutorial Services
Statement of Comprehensive Income
For the Month Ended November 30, 2010

Service Income P 110,000

Less: Expenses
Supplies Expense P 14,000
Salaries Expense 10,000
To Statement of
Rent Expense 5,000
Changes in
Utilities Expense 2,500
Taxes and License 1,500 33,000 Owner’s Equity
Net Income P 77,000

 The Information is taken directly from the Capital column of the Analysis of Transactions

Table for 16 transactions. The titles used for the revenue and expense accounts are taken
from the "Type of O.E. transaction" column.

• Expenses are arranged according to the size of the amount (from largest to smallest),
with Miscellaneous Expense as the last Item. Shown above is an illustration of a Statement
of Comprehensive Income.

STATEMENT OF CHANGES IN OWNER'S EQUITY

The Statement of Changes in Owner's Equity can be considered a bridge between

the Statement of Financial Position and the Statement of Comprehensive Income. It is
because the net income or loss computed in the Statement of Comprehensive Income is
reported in the Statement of Changes in Owner's Equity. The amount of capital at the end
of the period as shown in the statement is presented in the Owner's Equity section of the
Statement of Financial Position.

 PARTS
1. Heading - contains three items:
a. Name of the business for which the statement is prepared
b. Title of the statement which is STATEMENT OF CHANGES IN
OWNER'S EQUTIY
c. Period covered by the statement {ex. For the Year Ended
December 31, 2010)
2. Body - contains the following:
a. Beginning Capital
b. Net income (loss)
c. Additional Investments
d. Withdrawals
e. Ending Capital
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 Guro Accounting Tutorial Services
Statement of Changes in Owner’s Equity
For the Month Ended November 30, 2010
Initial Investment P 50,000 From Statement of
Comprehensive
Add: Net Income 77,000 Income
Total P 127,000
Less: Guro, Drawing 5,000
Guro, Capital-end P 122,000 To Statement of
Financial Position

 The information is taken directly from the Guro, Capital column of the Analysis of
Transactions Table. Take note that the ending capital on this statement is that same
balance found in the analysis table.
 The amount of net income added to the capital is taken from the Statement of
Comprehensive Income.

STATEMENT OF FINANCIAL POSITION

The Statement of Financial Position (also known as Balance Sheet) is a financial

statement that shows the financial position or condition of a business on a certain date.
Financial position refers to the economic resources that belong to a company and the
claims (equities) against those resources at a point in time. For this reason, it is often called
the Statement of Financial Position. Actually, the Statement of Financial Position reports the
assets, liabilities and capital of a business entity as of a specific date.

 PARTS:
1. Heading - contains three items:
a. Name of the business for which the statement is prepared
b. Title of the statement which is STATEMENT OF FINANCIAL
POSITION
c. Date (As of a specific date. Example, December 31, 2010)
2. Body - contains the first three accounting elements:
a. Assets
b. Liabilities
c. Capital
 FORMS:
1. Account Form - assets are listed on the left side while the liabilities and
capital are listed on the right side. The Total Assets should be in line
with Total Liabilities and Owner's Equity

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 2. Report form - in a vertical form, assets a.-e listed first then followed by
the liabilities and capital. ( the sample below makes use of this form)

STATEMENT OF CASH FLOWS

The Statement of Cash Flows Is a financial statement that summarizes the inflows and
outflows of cash that are directly associated with the:

a. Operating activities of the business enterprise, as In: cash from sale of goods and
services to customers, collections from customers, payments of operating expenses,
payments of trade obligations, etc.
b. Investing activities of the enterprise, such as: proceeds from the sale of fixed assets,
payments for the purchase of fixed assets, etc.
c. Financing activities of the business enterprise, such as cash investments and
withdrawals of the owner or owners, proceeds from borrowings, repayments of
loans, etc.
 PARTS:
1. Heading - contains three items:
a. Name of the business for which the statement is prepared
b. Title of the statement which is STATEMENT OF CASH FLOWS
c. Period covered by the statement (Example, For the Year Ended
December 31, 2010)
2. Body - contains the net cash flows from
a. Operating activities
b. Investing activities

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 c. Financing activities
 Methods of computing net cash flow from operating activities:
1. DIRECT METHOD - whereby major classes of gross cash receipts and
gross cash payments are disclosed; or
2. INDIRECT METHOD - whereby net income or loss is adjusted for the
effects of transaction of non-cash nature, any deferrals or accruals of
past or future operating cash receipts or payments, and Items of
income or expense associated with Investing or financing cash flows.

As a simple guide, a summary of the treatments of commonly used accounts to

convert the accrual basis net income to cash basis net income, which is the essence of the
indirect method, is presented below.

Add to Deduct from

Net Income Net Income
Depreciation Expense /
Amortization Expense /
Losses /
Gains /
Trade and Other Receivables Decrease Increase
Inventory Decrease Increase
Prepaid Expenses Decrease Increase
Trade Payables Increase Decrease
Other current payables Increase Decrease
A simple statement of cash flow, using the direct method, is shown below:

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 Shown on the next page is the Statement of cash Flows for Guro Accounting Tutorial
Services making use of the indirect method of presenting cash from operating activities.

GUIDELINES FOR PREPARING FINANCIAL STATEMENTS

1. The financial statements are prepared in the following order:

a. Statement of Comprehensive Income
b. Statement of Changes in Owner's Equity
c. Statement of Financial Position
d. Statement of cash Flows

2. When financial statements are handwritten, blank lines are not usually left between
the major sections. These would prevent any unscrupulous insertions.

3. The headings must be properly centered.

4. A peso sign (P) is placed before the first amount of a column and an amount after a
single-rule (single underline indicating that the amounts above have been
subjected to a mathematical operation). A peso sign is also placed before the
amount after a double-rule (double underline indicating that the amount is final or
no other amounts are indicated below it).

5. Each mathematical operation is completed under separate columns. A maximum

of three to four columns may be used. Do not forget to single-rule to show that the
operation has been completed.

6. Double-rule (to place a double underline under an amount) totals to show that all
work have been completed, checked and verified.
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 7. In the Statement of Comprehensive Income, arrange expenses from the highest to
the lowest amount except for miscellaneous expense that should be listed at the last
regardless of the balance.

8. The major classifications of accounts are written at the extreme left edge of the
report while the amounts are written at the last money column. Any details or break
down of each major classifications are indented at least 112 inch to the right, while
the amounts are also indented one column to the left.(See presentation of Current
Assets on Statement of Financial Position)

9. Totals of breakdown can be written on the right side of the last item in the column
added (see total expenses on Statement of Comprehensive Income), or it can be
written on the next line with a proper description (see total current assets on
Statement of Financial Position)

RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS

As discussion of the transactions of Guro Accounting Tutorial Services indicates, the

statement of financial position, the statement of comprehensive income, the statement of
changes in owner's equity and the statement of cash flows are all based on the same
transactions, but they present different "views" of the company. They should not be
thought of as alternatives to each other; rather, all are important in terms of presenting key
financial information about the company.

The diagram in Figure 1 explains how the four financial statements relate to the
period of time they cover. The horizontal line represents time (for example, a month or a
year). At the beginning and ending points in time, the company prepares a statement of
financial position that gives a static look in financial terms of where the company stands.
The other three financial statements - the Statement of Comprehensive Income, Statement
of Changes in Owner's Equity and the Statement of Cash Flows - cover the Intervening
period of time between the two statements of financial position and help explain
important changes that occurred during the period.

Figure 1 Financial Reporting Time Line

Date of the Beginning Date of the End

of the period of the period

TIME

Statement of Financial Position Statement of Financial Position

Statement of Comprehensive Income
Statement of Changes in Owner’s Equity
Statement of Cash Flows

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 If we understand where a company stands financially at two points in time, and if
we understand the changes that occurred during the intervening period in terms of the
company's profit-seeking activities (Statement of Comprehensive Income), transactions
affecting capital (Statement of Changes in Owner's Equity), and its cash activities
(Statement of cash Flows), we know a great deal about the company that is valuable in
assessing Its future cash flows - information that is useful to investors, creditors,
management, and others.

Because the statement of financial position, statement of comprehensive income,

statement of changes in owner's equity, and statement of cash flows are derived from the
same underlying financial information, they are said to "articulate", meaning that they
relate closely to each other.

The Statement of Financial Position represents an expansion of the accounting

equation and explains the various categories of assets, liabilities and owner's equity. The
Statement of Comprehensive Income explains the changes in financial position that result
from profit-generating transactions in terms of revenue and expense transactions. The
resulting number, net income, represents an addition to the owner's equity in the
enterprise. The Statement of Changes in Owner's Equity explains the increases and
decreases in the capital account. The Statement of cash Flows explains the ways cash
increased and decreased during the period in terms of the enterprise's operating, investing
and financing activities. n this illustration, the cash paid for investing activities (P175,000)
represents the fixed assets balance. These relationships among the financial statements are
called articulation.

ROLE OF MANAGEMENT IN THE PREPARATION OF FINANCIAL STATEMENTS

The proprietor or manager has the primary responsibility for preparing and
presenting the financial statements of the business enterprise. He reviews these statements
and gives the final approval before they are released to any government agency, creditor
or other financial statement user. He decides what other financial information should be
gathered and presented in order to meet the financial information needs of the decision-
makers.

The proprietor or manager the one who is principally interested in the information
contained in the financial statements. He has the advantage of having immediate access
to additional management and financial information that is helpful in carrying out his
various planning, decision- making, and controlling responsibilities.

LIMITATIONS OF THE FINANCIAL STATEMENTS

External users should understand that there are some constraints in the manner of
preparing and presenting the traditional general-purpose financial statements. These
constraints would somehow limit the usefulness of statements. Among them are:

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  The assets and liabilities are usually recognized in the financial statements at their
acquisition costs, known as historical costs. During periods of inflation, information
about historical costs is not as useful as information about current values. Decision
makers want to know the current values of the assets and liabilities of the business
enterprise. The traditional financial statements give very limited information about
current values.

 Under accrual basis of accounting, as usually used by profit-oriented business

enterprises, the use of estimates cannot be avoided. Estimates are used in
determining values that would be assigned to certain assets, liabilities, income and
expenses. The decision makers may doubt the fairness of the financial statements
since estimates are used in some areas related to the valuation of the Statement of
Financial Position items and in the computation of profit of the period.

 The traditionally prepared Statement of Financial Position does not include some
assets that have financial value to the business enterprise. Examples of assets that
are not reported in a traditionally prepared Statement of Financial Position are: the
good name or reputation of the business enterprise, the continuous patronage of
contented customers, the invaluable skills of highly trained workers, the secret
manufacturing processes that were perfected over the years, and the loyalty of the
employees. These asset items are not recognized since their monetary worth cannot
be objectively determined. The generally accepted accounting practice is to
record and report only those assets that were acquired in a market transaction.

 Another constraint that limits the usefulness of the Statement of Financial Position is
that the time value of money is not taken into consideration specifically for the
valuation of current assets and liabilities. Many of the current receivables and
payables that are included In the Statement of Financial Position are reported at
their future monetary value instead of their present value as of the reporting date.

Decision makers should be aware of both the usefulness and limitations of the prepared
financial statements. They should remember that the prepared general-purpose financial
statements are not instant tools for decision making. They must also have a clear
understanding of the accounting elements reported in the Statement of Financial Position
and Statement of Comprehensive Income. Knowledge of accounting would give them a
far deeper appreciation for the information contained in the financial reports.

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 PRACTICE EXERCISE 1-1. ANALYSIS OF TRANSACTIONS

Engr. Dolores opened a car repair shop at the beginning of the year and
completed the following transactions for the month of January:
1. Invested cash P40,000 and various car repair tools worth P100,000.
2. Paid the rent of the shop, P3,200.
3. Purchased supplies, P1,050 for cash.
4. Paid the corresponding business license and mayor's permit, P460.
5. Paid the printing of calling cards, posters and tarpaulins, P500.
6. Purchased a hydraulic jack worth P20,000 from Mekaniko Company on
account.
7. Paid the salary of employees for the month P6,000.
8. Received cash of P18,950 for repair services rendered.
9. Sent a bill to a customer for services rendered P8,500.
10. Sent a check to Mekaniko Company P12,000 to apply to account.
11. Engr. Dolores withdrew P4,000 cash for personal use.
12. Paid light and water bill for the month, P620.
13. Purchased an office table and chair P1,500 for cash.
14. A minor repair work was done on the some equipment and paid P350.
15. Received P4,000 check from a customer for partial payment of receivables
from them (from number 9).
16. All supplies purchased in January were used.

REQUIRED: (a) Complete the analysis table below. Use the following account titles
for revenue and expenses: Service Revenue, Salary expense, Rent expense, Supplies
expense, Taxes and licenses, Utilities expense, Repairs & maintenance, Advertising
expense. (b) Prepare in good form: a Statement of Comprehensive Income,
Statement of Changes in Owner's Equity, Statement of Financial Position

ASSETS = LIABILITIES + CAPITAL

Cash Accounts Supplies Repair Furniture Accounts Dolores, Type of
Receivable Tools& & Payable Capital Owner’s
Equipment Fixtures Equity
Transactions

1 +40000 +40000 Initial

Investment
2
3
4
5
6
7
8
9

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 10
11
12
13
14
15
16

Statement of Comprehensive Income

Statement of Changes in Owner’s Equity

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 Statement of Financial Position

PRACTICE EXERCISE 1-2. ANALYSIS OF TRANSACTIONS

Babylyn, after receiving her degree in computer science, began her own business
called Bits and Bytes Computer Rentals and Programming. She completed the following
transactions soon after starting the business:

a. Babylyn began her business with a P90,000 cash investment, which she
deposited in the bank, and a computer unit, which was valued cost P15,000.
b. Paid one month's rent for the business space. Rent is P3,600 per month.
c. Purchased additional 4 computer units for P70,000 for cash.
d. Purchased computer supplies on credit, P6,000.
e. Total collections form customer from computer rentals, P8,000.
f. Billed a client P12,100 upon completion of a computer programming project
g. Paid electricity and water bills amounting to P4,000
h. Received P8,000 from the client billed previously
i. Withdrew P3,500 in cash for personal expenses
j. Paid P2,000 of amount owed on computer supplies purchased in (d)

REQUIRED: On the table below, show by addition and subtraction the effects of the
transactions on the accounting equation. Show new balances after each transaction, and
identify each owner's equity transaction by type.

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 ASSETS = LIABIITIES + CAPITAL

End of Module 1
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