COLLEGE

Tagudin
Campus

MODULE
2

THE MODULE

TITLE: BASIC CONSIDERATIONS ON FINANCIAL STATEMENTS

WHAT IS THE MODULE ALL ABOUT?

Module 2 will discusses the rule of debits and credits and the basic accounting
equation. It will presents also the objective and qualitative characteristics of financial
statements. It will show also the elements of financial statements, its recognition and
measurements. And last, it will presents the accounting events and transaction and the
effect in the accounting values.

LIST OF TOPICS TO BE STUDIED IN THE MODULE

A. Introduction
B. Definition of Financial Statements
C. Qualitative characteristics of Financial Statements
D. Elements of Financial Statements
E. Guidelines in the Presentation of Financial Statements
E.1 Financial Position
E.2 Financial performance
E.3 Equity
F. Accounting Events and transactions

INTENDED LEARNING OUTCOMES (ILO)

At the end of this module, the students would be able to:

1) Understand and explain the objective and qualitative characteristics of financial
statements
2) Distinguish the elements of financial statements, its recognition and
measurements.
3) Learn and apply the principle of Accounting equation, the rule of debits and
credits
4) Understand Accounting events and transactions, types and effects of
transactions.

LEARNING CONTENT

BASIC CONSIDERATION ON FINANCIAL STATEMENTS

A. Introduction
 COLLEGE
Tagudin
Campus

MODULE
2
Financial statements are the totality of all the transactions of the business. It will
show the liquidity, profitability and solvency of a certain business organization. It
will help users both external and internal in making a sound decisions and it will
guide not only the owners but future investors where to invest their excess
savings , that’s the reason why , it is vital to come out a reliable financial
statements by preparing the said financial statements in accordance with the
Generally Accepted Accounting Principles ( GAAP).

B. DEFINITION OF FINANCIAL STATEMENTS

Objectives
Provide information about the financial position, performance and changes in
financial position of an entity that is useful to a wide range of users in making economic
decisions.

Financial statements prepared for this purpose:

 Meet the common needs of most users
 Also show the results of the stewardship* of management, or accountability
of management for the resources entrusted to it.
 Do not, however, provide all the information that users may need to make
decisions since they largely portray the financial effects of past events and
do not necessarily provide non-financial information.

*e.g. in prev. times, it is the one employed by a large household or estate to manage
domestic concerns such as supervision of servants, collection of rents and keeping of
accounts.
C.QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
A. Fundamental qualitative characteristics

a. Relevance
b. Faithful Representation
 COLLEGE
Tagudin
Campus

MODULE
2
B. Enhancing Qualitative characteristics

a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

RELEVANCE
Relevant financial information is capable of making a difference in the decision
made by users, influences the economic decisions of users by helping them to
evaluate, past, present, or future events or confirming, or correcting, their past
evaluations.

a. Predictive value. Financial information has predictive value if it can be

used as input to processes employed by users to predict future outcomes. For e.g.
information about financial position and past performance is frequently used in
predicting wages payments, and the ability of the entity to meet maturing
obligations.

b. Confirmatory value (or feedback). Financial information has confirmatory

value if it provides feedback about (confirms or changes) previous evaluation.
Information with feedback value enables users to confirm or correct expectations.

FAITHFUL REPRESENTATION

To be useful, financial information must not only represent relevant phenomena,

but it must also faithfully represent the phenomena that it purports to represent.

a. Completeness. A complete depiction includes all information necessary for a user

to understand the event or information being presented, including all necessary
descriptions and explanations.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
b. Neutrality. A neutral presentation is one without bias.
c. Freedom from error. Means there are no errors or omissions in the
description of the phenomenon, and the process used to produce the reported
information has been selected and applied with no errors in the process.
ENHANCING QUALITATIVE CHARACTERISTICS
a. Comparability. It enables the users to identify and understand similarities in,
and differences among, items. Consistency, although related to comparability,
is not the same.

“Comparability is the goal; consistency helps to achieve that goal.”

b. Verifiability. Means that different knowledgeable and independent observers

could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.
c. Timeliness. Means having information available to decision-makers in time to
be capable of influencing their decisions.

d. Understandability. Means classifying, characterizing, and presenting

information clearly and concisely.
D.THE ELEMENTS OF FINANCIAL STATEMENTS

The financial statements portray the financial effects of transactions and other
events by grouping them into broad classes according to their economic
characteristics. These termed the elements of financial statements. Elements directly
related to measurement of financial position are:

Elements directly related to measurement of financial position are:

 Assets
 Liabilities
 Equity
Elements directly related to measurement of performance are:
 Income
 Expense
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or income

statement an item that meets the definition of an element and satisfies the criteria for
recognition. An item
that meets the definition of an element should be recognized if:

 It is probable that any future economic benefit associated with the item will
flow to or from the enterprise; and
 The item has a cost or value that can be measured with reliability.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which

the elements of financial statements are to be recognized and carried in the balance
sheet and income statement. This involves the selection of a particular basis of
measurement. A number of these are used to different degrees and in varying
combinations in financial statements. They include the following:

HISTORICAL COST. Assets are recorded at the amount of cash or cash equivalents
paid or the fair value of the consideration given to acquire them at the time their
acquisition.

CURRENT COST. Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or an equivalent asset was acquired currently.

“Liabilities are carried at the discounted amount of cash and cash equivalents that
would be required to settle the obligation currently.”
RELIAZABLE (SETTLEMENT) VALUE
Reliazable value. Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling an asset in an orderly
disposal.

Settlement value. Liabilities are carried at the undiscounted amounts of cash

or cash equivalents expected to be paid to satisfy the liabilities in the normal
course of business.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
Present Value. Assets/liabilities are carried at present discounted value of the future
net cash inflows/outflows that the item is expected to generate/settle in the normal
course of business.
E. GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS
Philippine Accounting Standard 1 (PAS) gives us the following guidelines in
the presentation of financial statements.
(1) Each component of the financial statements shall be clearly identified and
the following information shall be emphasized for a proper understanding
of the information presented:
i. The name of the reporting entity;

ii. Whether the financial statements cover the individual entity or a

group of entities.
(2) The period covered by the financial statement shall be specified.

Note: For Balance Sheet, use As of (date). For Income Statement,

Statement of Changes in Owner’s Equity and Statement of Cash
flows, use For the month/year ended (date).

E.1. FINANCIAL POSITION

The financial position of an enterprise is affected by the economic resources it
controls, its financial structure, it liquidity and solvency, and its capacity to adapt to
changes in the environment in which it operates. This is primarily provided in the
Statement of Financial Position or Balance Sheet.

It answers the following questions:

 What assets does entity own?
 What does it owe?
 What are the residual equity interests in the entity’s net assets?

Other important information provided by the statement of financial position is as

follows:
 Financial structure – is the source of financing for the assets of the
enterprise. It indicates what amount of assets has been financed by
creditors, which is borrowed capital, and what amount of assets has been
financed by owners, which is invested capital.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
Significance:

(1) Useful in predicting future borrowing needs and how

future profits and cash flows will be distributed among
those with an interest in the enterprise.

(2) Useful in predicting how successful the enterprise is likely

to be raising further finance.

 Liquidity – refers to the availability of cash in the near future after taking
account of financial commitments over this period.
Significance:

(1) Useful in predicting the ability of the enterprise to meet its

short-term financial commitments as they fall due.

 Solvency – refers to the availability of cash over the longer term to meet
financial commitments as they fall due.
Significance:

(1) Useful in predicting the ability of the enterprise to meet its

long-term financial commitments as they fall due.

 Capacity for adaption – the ability of the enterprise to use its available
cash for unexpected requirements and investment opportunities. This is
also known as financial flexibility.

(1) Information about the economic resources controlled by

the enterprise and its capacity for adaptation is useful in
predicting the ability of the enterprise to generate cash
and cash equivalents in the future.

COMPOSITION OF A STATEMENT IN FINANCIAL POSITION

Assets
AssetsASSETS
 These are resources controlled by the enterprise* as a result of past events**
and from which future economic benefits*** are expected to flow to the enterprise.

For example, an asset may be:

 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

 Used singly or in combination with other assets in the production of

goods or services to be sold by the enterprise;
 Exchanged for other assets;
 Used to settle a liability;
 Distributed to the owners of the enterprise.

Assets are should be classified only in two: current assets and non-current
assets. Operating Cycle is the time between the acquisition of assets for processing
and their realization in cash or cash equivalents. When the entity’s normal operating
cycle is not clearly identifiable, it is assumed to be twelve months.

*Controlled by the enterprise – control is the ability to obtain the

economic benefits and to restrict the access of others (e.g. an
entity being the sole user of its plants and equipment or by selling
idle assets)

**Past events – The event must be past before an asset can rise. (E.g.
equipment will only become an asset when there is the right to
demand delivery or access to the asset’s potential. Dependent on
the terms of the contract, this may be on acceptance of the order
or on delivery.

***Future economic benefits – These are evidenced by the prospective

receipt of cash. This could be cash itself, an account receivable or
any item which may be sold. Although, for example, a factory may
not be sold for it houses the manufacturing facility for the goods.
When these goods are sold, the economic benefit resulting from
the use of the factory is realized as cash.

Current Assets

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;

 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
c. It expects to realize the asset within twelve months after the reporting
period;

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 months after the
reporting period.
1. Cash any medium of exchange that a bank will accept for deposit at face
value. It includes coins, currency, checks, money orders, bank deposits and
drafts.

*Money orders is a document which can be bought as a way of

sending money through the post.
2. Cash Equivalents these are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.

3. Accounts Receivable These are claims against customers arising from sale
of services or goods on credits. This type of receivable offers less security
than a promissory note.

4. Notes Receivable A note receivable is a written pledge that the customer will
pay the business a fixed amount of money on a certain date.

5. Inventory or Merchandise Inventory these are assets which are (a) held for
sale by the company, (b) in the process of production for such sale, (c) in the
form of materials (raw materials) or supplies to be consumed in the
production.

6. Supplies this may be office supplies like bond papers, paper clips and the like
or can be also store supplies like boxes, bags, packaging tapes and other
related materials.

7. 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. This includes insurance and rent.

Non-current Assets
All other assets not classified or does not fall under the criteria of current assets
are called non-current assets.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

1. Property, Plant and Equipment (PPE) these are tangible assets that are
held by an enterprise for use in the production or supply of goods or in
rendering services, or for rental to other, or for administrative purposes and
which are expected to be used during more than one period.
These are:
a. Land e. Delivery Equipment
b. Building f. Store Equipment
c. Office Equipment g. Service Vehicle
d. Furniture and Fixtures
2. Accumulated Depreciation applies to property, plant and equipment except
land as a contra account that contains the sum of periodic depreciation
charges. The reflected amount is deducted from the cost of the related asset
to obtain book value.
To illustrate:

The Company has an office equipment worth P500,000 with a useful life of

10 years acquired last June 1, 2020.

P
Office Equipment 500,000

(100,000
Accumulated Depreciation – O/E )

P
Net book value 400,000

Formula:
Annual Depreciation = Cost of the PPE – salvage value* (if any)
Life (n)

Accumulated Depreciation = Annual depreciation x age of the PPE

*Salvage value is the value of an asset if sold for scrap and also called as
Residual or scrap value.
To compute:

= 500,000 = 50,000 annual depreciation

10

= 50,000 x 2 years = 100,000

Accu. Dep. (from june 1 2018 to
june 1 2020)
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

3. INTANGIBLE

These are identifiable , non monetary assets without physical substance held for use
in the production or supply of goods or services, for rentals to others or for
administrative purposes. These are:
a. Goodwill e. Franchises
b. Patents f. Trademarks
c. Copyrights g. Brandnames
d. Licenses

LIABILITIES

A present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources
embodying can be measured benefits.
*Obligation – These maybe legal or not. A duty to do something or a debt.

* Transfer economic benefits - This could be a transfer of cash, or another

property, the provision of a service or the refraining from
activities which would otherwise be profitable.

The settlement of a present obligation involving outflow of resources may take the
form of:

a. Payment of cash

b. Transfer of other assets

c. Provision for services

d. Replacement of the present obligation with another obligation e.

Conversion of the obligation to equity

Current Liabilities
An entity shall classify a 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
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
c. The liability is due to be settled within twelve months after the reporting
period; or

d. The entity does not have an unconditional right to defer settlement of

the liability for at least twelve months after the reporting period.
1. Accounts payable This account represents the reverse relationship of the
accounts receivable. Due to suppliers of goods and other assets purchased
on credit.

2. Notes Payable A note payable is like a note receivable but in a reverse

sense. The business entity is the maker of the note; that is, the entity is the
party who promises to pay in a specified amount of money on specified future
date.

3. Accrued Liabilities Amounts owed to others for unpaid expenses. This

account includes:

a. Salaries payable c. Interest payable

b. Utilities payable d. Taxes payable

4. 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 (liability method). When the goods
or services are provided to the customer, the unearned revenue is reduced
and income is recognized.

5. Current portion of Long-term debt These are portions of long-term liabilities

which are to be paid within one year from the balance sheet date.

Non-current liabilities

All other liabilities not classified or does not fall under the criteria of current
liabilities are called non-current liabilities.

1. Mortgage payable This account records long-term debt of the business entity
for which the entity has pledged certain assets as security to the creditor.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

2. Bonds payable is an obligation in connection with the bond, a contract

between the issuer and the lender specifying the terms of repayment and the
interest to be charged.

OWNER’S EQUITY
Equity is defined as the residual interest in the asset of an entity that remains after
deducting all its liabilities.

1. Capital this account is used to record original and additional investment of the
owner of the business entity. In partnership,

Partners’ Capital is use as its capital account while in corporation is

Shareholders’ Equity.

2. 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.

3. Income Summary It is a temporary account used at the end of the

accounting period to close the income and expenses. This account shows the
profit or loss for the period before closing to the capital account.

FINANCIAL PERFORMANCE reflected by accrual accounting*

Performance of an enterprise – comprise its revenue, expenses, net income or

loss for a period of time. It is the level of income earned by the enterprise through
efficient and effective use of its resources. Information about performance is
primarily provided in an Income Statement or Statement of

Financial Performance or Statement of Comprehensive Income or Statement

of Income and Expenses.

*Accrual Accounting recognizes transactions and other events of a reporting entity in

the periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

E.2 COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE

REVENUE OR INCOME
These are increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decrease of liabilities from delivery or
production of goods, rendering of services, or other activities that constitute the
enterprise’s major operations.

1. Service Income Revenues earned by performing services for a customer or

client, for e.g. accounting services by a CPA firm, laundry services by a
laundry shop.

2. Sales Revenues earned as a result of sale of merchandise; for e.g. sale of

merchandise by General Merchandise Store.

EXPENSES
These are decrease in economic benefits during the period in the form of
outflows or using up of assets or incurrence of liabilities that result in decreases in
equity, other than relating to distributions to equity participants.

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

2. Salaries and Wages Expense includes all payments as a result of an

employer-employee relationship such as salaries and wages, 13th month pay,
cost if living allowances, other related benefits.

3. Utilities Expense expenses related to use of telecommunications facilities,

consumptions of electricity, fuel and water.

4. Rent Expense expense for space, equipment or other asset rentals.

5. Supplies Expense expense of using supplies in the conduct of daily

business.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
6. Insurance Expense portion of premiums paid on insurance coverage which
has expired.
7. Depreciation Expense portion of the cost of a tangible asset allocated or
charged as expense during an accounting period.

8. Uncollectible Accounts Expense the amount of receivables estimated to be

doubtful of collection and charged as expense during an accounting period.
9. Interest Expense An expense related to use of borrowed funds.

E.3 CHANGES IN FINANCIAL POSITION

It refers to the changes in the economic resources and obligation of an
enterprise. In constructing a statement of changes in Owner’s Equity,
funds can be defined in various ways, such as all financial revenues, working
capital, liquid assets or cash.

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

The simplest form of the account is known as the “T” account because of its
similarity to the letter T. the account has three parts as shown below.

Account Title

Left side or Debit Right side or

side credit side

 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

THE ACCOUNTING EQUATION and DEBITS AND CREDITS-THE DOUBLE ENTRY SYSTEM

Assets
ASSETS = Liabilities
LIABILITIES + Equity
EQUITY

BALANCE

The basic tool of accounting is the accounting equation. The left side of
the equation shows how much the business owns, and the right side of the equation
shows how much resources do the outside creditor and owner supplied to the
business.
The logic of debiting and crediting is related to the accounting equation. Transactions
may require addition to both sides (left or sides), subtractions from both sides (left
and right sides), or an addition and subtraction on the same side (left or right sides).
But in all cases the equality must be maintained as shown above.
Accounting is based on a double-entry system which means that the dual
effects of business are recorded. A debit side entry must have a corresponding
credit side entry. For every transaction, there must be one or more accounts
debited and one or more accounts credited and must be equal both sides. Each
transaction affects at least two accounts.
The rules of debit and credit in accounts.
ACCOUNT DEBIT CREDIT

Assets + -

Liabilities - +

Capital or Equity - +

Revenue or Income - +
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
Expenses + -

(+) increase; (-) decrease

G.ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an
enterprise’s assets, liabilities, and/or equity. A transaction is a particular kind of
event that involves the transfer of something of value between two entities.
Accountants observe many events that they identify and measure in financial
terms. A business transaction is the occurrence of an event or a condition that
affects financial position and can be reliably recorded.

Financial transaction worksheet

Every financial transaction can be analyzed or expressed in terms of its effects on
the accounting equation. The financial transactions will be analyzed by means of a
financial transaction worksheet which is a form used to analyze increases and
decreases in the assets, liabilities or owner’s equity of a business entity.
When a specific asset, liability or owner’s equity item is created by a financial
transaction, it is listed in the financial transaction worksheet using the appropriate
accounts.
To illustrate:

Mr. Magna Nakaw wants to open an accounting firm this

year. The following transactions are made during the month.

May 1. Mr. M. Nakaw invested P100,000 to start an accounting office.

M. Nakaw Accounting Firm

Financial Transaction Worksheet

Month of May 2020

ASSET = LIABILITIES + OWNER’S EQUITY

May

Cash Accounts Office Office = Accounts Notes + M. Nakaw

2020
Receivable Supplies Equipment Payable Payable Capital

1 100,000 100,000
The financial transaction is analyzed as follows:
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
 An entity separate and distinct from Nakaw’s personal
financial affairs is created.

 An economic resource – cash of P 100,000 is invested in the business

entity. The source of this asset is the contribution made by the owner,
which represents owner’s equity. The owner’s equity account is M.Nakaw
Capital

 The dual nature of the transaction is that cash is invested and owner’s
equity created. The effects of this transaction on the accounting
equation are as follows: increase in asset – cash from zero to P250,000
and increase in owner’s equity from zero to P 250,000

May 3. Purchased office supplies worth P20,000 on account.

ASSET = LIABILITIES + OWNER’S EQUITY

May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital

Bal. 100,000 100,000

3 20,000 20,000

Bal. 100,000 0 20,000 0 = 20,000 0 + 100,000

120,000 = 120,000

The effect of transaction is increase in asset and increase in liabilities.

Take note that the equality of the two sides of the equation is maintained.
May 5. Purchased additional office supplies for cash, P10,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 0 20,000 0 = 20,000 0 + 100,000

5 (10,000) 10,000

Bal. 90,000 0 30,000 0 = 20,000 0 + 100,000

120,000 = 120,000

The effect of transaction is increase in asset and decrease in

another asset form of asset. After posting the transaction,
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
total asset amounts to P120,000 and total liabilities and
capital amount to P120,000.

May 6. Paid the accounts payable in full.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 90,000 0 30,000 0 = 20,000 0 + 100,000
6 (20,000) (20,000)
Bal. 70,000 0 30,000 0 = 0 0 + 100,000
100,000 = 100,000

Transaction reduces both sides of the equation by P20,000 resulting to the

equality of the equation after posting.

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 100,000
8 50,000 50,000
Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
150,000 = 150,000

May 10. Rendered accounting services for cash, P25,000.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
10 25,000 25,000 Prof.fee
Bal. 95,000 0 30,000 50,000 = 50,000 0 + 125,000
175,000 = 175,000

May 15 Rendered accounting services on account, P 30,000.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 95,000 0 30,000 50,000 = 50,000 0 + 125,000

15 30,000 30,000 Prof.fee

 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000

205,000 = 205,000

ASSET = LIABILITIES + OWNER’S EQUITY

May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000

May 15 Paid Meralco bills, P 3,500.

15 (3,500) (3,500)Utility
Exp.
Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
201,500 = 201,500

ASSET = LIABILITIES + OWNER’S EQUITY

May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
May 15 Paid salaries for the period, P15,000.
15 (15,00) (15,000)Salaries
Exp.
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500

May 20 Collected P10,000 from customer.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
20 10,000 (10,000)
Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500

May 22 A Short term loan from a local bank was granted in the
amount of P50,000, less P5,000 financing charges. Mr.
M. Nakaw issued 1 year promissory note.
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500
22 45,000 50,000 (5,000)
Interest
Expense
Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
231,500 = 231,500
May 25 Paid telephone bill amounting to P 6,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
25 ( 6,000) (6,000) Comm.
Expense
Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
225,500 = 225,500

May 27 Mr. Nakaw withdrew P20,000 for personal use.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
27 (20,000) (20,000)Nakaw,
Withdrawals
Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500
205,500 = 205,500

May 30 At
the end of the month, physical count of the office supplies
revealed that P 5,000 had been consumed.
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2020
Receivable Supplies Equipment Payable Payable Capital
Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500
30 ( 5,000) (5,000)Supplies
Expense
Bal. 105,500 20,000 25,000 50,000 = 50,000 50,000 + 100,500
200,500 = 200,500

Summary of M. Nakaw in tabular Form

M. Nakaw Accounting Firm

Financial Transaction Worksheet
Month of May 2020
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + M. Nakaw
2015
Receivable Supplies Equipment Payable Payable Capital
1 100,000 100,000
3 20,000 20,000
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
5 (10,000) 10,000
6 (20,000) (20,000)
8 50,000 50,000
10 25,000 25,000 Prof.fee
15 30,000 30,000 Prof.fee
15 (3,500) (3,500)Utility
Exp.
15 (15,00) (15,000)Salaries
Exp.
20 10,000 (10,000)
22 45,000 50,000 (5,000) Interest
Expense
25 ( 6,000) (6,000) Comm.
Expense
27 (20,000) (20,000)Kayayan,
Withdrawals
30 ( 5,000) (5,000)Supplies
Expense
Bal. 105,500 20,000 25,000 50,000 = 50,000 50,000 + 100,500
200,500 = 200,500

USE OF T-ACCOUNTS
Analyzing and recording transactions using the accounting
equation is useful in conveying a basic understanding of how
transactions affect the business. However, it is not an efficient
approach once the number of accounts involved increases. Double-
entry system provides a formal system of classification and recording
business transactions.
May 1. Mr. M. Nakaw invested P100,000 to start an accounting office.

Cash M. Nakaw, Capital

5/1 100,000 100,000 5/1

May 3. Purchased office supplies worth P20,000 on account.

Office Supplies Accounts Payable

5/3 20,000 20,000 5/3

May 5. Purchased additional office supplies for cash, P 10,000.

Office Supplies Cash
5/3 20,000 5/1 100,000 10,000 5/5
5/5 10,000

May 6. Paid the accounts payable in full, P20,000

 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
Accounts Payable Cash
5/6 20,000 20,000 5/3 5/1 100,000 10,000 5/5
20,000 5/6

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.

Accounts Payable Office Equipment
5/6 20,000 20,000 5/3 5/8 50,000
50,000 5/8

May 10. Rendered accounting services for cash, P25,000.

Cash Professional Fees
5/6 20,000 20,000 5/3 25,000 5/10
5/10 25,000 50,000 5/8

May 15. Rendered accounting services on account, P30,000.

Accounts Receivable Professional Fees
5/15 30,000 25,000 5/10
30,000 5/15

May 15. Paid Meralco bills, P3,500.

Cash Utilities Expense
5/6 20,000 20,000 5/3 5/15 3,500
5/10 25,000 50,000 5/8
3,500 5/15

May 15. Paid salary of office staffs,P15,000

Cash Salaries Expense
5/6 20,000 20,000 5/3 5/15 15,000
5/10 25,000 50,000 5/8
3,500 5/15
15,000 5/15

May 20. Collected P 10,000 from customer.

Cash Accounts Receivable
5/6 20,000 20,000 5/3 5/15 30,000 10,000 5/20
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
15,000 5/15

May 22. A short term loan from a local bank was granted in the amount of P50,000,
less P5,000 finance charges. M. Nakaw issued 1 year promissory note.

Cash Notes Payable

5/6 20,000 20,000 5/3 50,000 5/22
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
Interest Expense
5,000 5/22

May 25. Paid telephone bill amounting to P6,000.

Cash Telephone Expense
5/6 20,000 20,000 5/3 5/25 6,000
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15
6,000 5/25

May 27. M. Nakaw withdrew cash P20,000 for her personal use.
Cash M. Nakaw drawing
5/6 20,000 20,000 5/3 5/27 20,000
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15
6,000 5/25
20,000 5/27

May 30. At the end of the month, physical count of the office supplies
revealed that P5,000 had been consumed.
Office Supplies Supplies Expense
5/3 20,000 5,000 5/30 5/30 5,000
5/5 10,000

Summary of the Module :

Module 1 discussed the qualitative cahracteristics of the financial statements . It
discussed the elements of the financial statements and defined what is assets,
liabilities and equity. It present the difference of account presented in the
financial( the real account ) and financial performance ( the nominal account) . It
presents the normal balances of assets, expenses and withdrawals are on the debit
side and the equity, revenue and liabilities on the credit side. It presents also teh
normal journal entry and compound journal entry . It presents also the transfer of the
record from the book of original entry to the book of final entry.

References:
 De Guzman, Angeles A.(2018). Fundamentas of Accounting , Lorimar
Publishing Inc.,Real Excellence Publishing, Quezon City
 Palma, Roberto Z.( 2018) Basic Accounting ,Rex Bookstore, Manila
 Ballada, Win and Susan Ballada(2018), Basic Accounting Made It Easy , 14 th
Edition; Domdane Publishers and Made Easy Book, Manila
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2

INTENDED LEARNING ACTIVITY

ACTIVITY 1

Name: _____________________ Class Schedule: ________________

Course/Year/Section: ____________ Date: _________________________

PROBLEM #1

Assets Liabilities Onwner’s Equity

1 760,000 360,000
2 860,000 592,000
3 108,000 760,000
4 626,600 376,240
5 800,000 (100,000)
6 600,000 450,000
7 530,000 410,000
8 473,000 153,700
9 147,000 236,500
10 624,000 237,000

 Fill the amount of the missing element of the financial position.

PROBEM #2

Income Expense Profit (Loss)

1 840,000 360,000
2 2,400,000 540,000
3 1,300,000 860,000
4 2,000,000 720,000
5 1,800,000 (400,00)
6 750,000 500,000
7 500,000 600,000
8 700,000 150,000
9 600,000 (150,000)
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
10 900,000 900,000

 Fill the amount of the missing element of the financial performance.

PROBEM #3

1. At the beginning of the year, the assets of Matt Services were

P360,000 and its owner’s equity was P200,000. During the year, assets
increased by P120,00 and liabilities increased by P20,000. What was the
owner’s equity at the end of the year?
2. The liabilities of Sarah Company equal one-third of the total
assets, and the owner’s equity is P240,000. What is the amount of the
liabilities?
3. At the beginning of the year, Trisha Mae Station had liabilities of
P100,000 and owner’s equity of P96,000. If assets increased by P40,000 and
liabilities decreased by P30,000. What was the owner’s equity at the end
of the year?

Use the accounting equation to answer each of the questions above.

ACTIVITY 1.1

PROBLEM #1

Instruction: Indicate on the space provided,(1)(X)on the element where

the account belong (2) BS if the account is Balance Sheet account and IS
if the account is income statement account; Dr (debit) or Cr (credit) to
identify the normal balance of the account.
Accounts ASSET LIABILITES OWNER’S BS or IS Dr or Cr
EQUITY
1. Repairs and Maintenance
Expense
2. Salaries and Wages
Expense
3. Notes Payable
4. Notes Receivable
5. Service Vehicle
6. Mortgage Payable
7. Utilities Expense
8. Furniture and Fixtures
9. Communication Expense
10. Employees’ benefits
payable
11. Office Equipment
12. Prepaid Insurance
13. Owner’s Withdrawal
14. Professional fees
 ILOCOS SUR POLYTECHNIC STATE
COLLEGE
Tagudin
Campus

MODULE
2
earned
15. Accounts Receivable
16. Representation Expense
17. Salaries Payable
18. Office Supplies Expense
19. Office Supplies
20. Accounts payable
21. Cash
22. Inventory
23. Land
24. Accumulated
Depreciation
25. Miscellaneous Expense
26. Prepaid Rent
27. Rent Expense
28. Juan, Capital
29. Insurance Expense
30. Depreciation Expense

ACTIVITY 2

Answer the assessment made by your instructor, link will be send in the GC
created by your instructor. Note . Link will be per major .

You may now proceed to the next module of this course. I hope you
have learned some information if not a lot in the
lessons discussed earlier.