FINANCIAL

STATEMENTS
AND ITS
ELEMENTS
The basic accounting statements are:
(1) the Income Statement or the Statement of
Financial Performance, which contains the income
and expense accounts and shows the results of
the business operation or the performance of the
business and
(2) the Balance Sheet or Statement of Financial
Position which contains the assets, liabilities, and
equity of the business and shows the financial
condition of the business.
Elements of Financial Statements
The elements of financial statements are the general groupings of line items
contained within the statements. These groupings will vary, depending on the
structure of the business. Thus, the elements of the financial statements of a
for-profit business vary somewhat from those incorporated into a nonprofit
business (which has no equity accounts).

The main elements are as follows:

Assets
Liabilities
Equity
Revenue, and
Expenses

Of these elements, assets, liabilities, and equity are included in the balance
sheet. Revenues and expenses are included in the income statement.
Changes in these elements are noted in the statement of cash flows.
ASSETS
Assets are economic resources owned by the business. They include properties and
other things of value whose ownership title is in the name of the business. Assets can
be grouped into current assets and noncurrent assets.

1. Current assets are those assets which are utilized, usually within one accounting
period (i.e. one year) or within the regular operation of the business or the normal
operating cycle of the business. The regular operation of the business or normal
operating cycle of the business is the period between the rendering of the service
(in case of service concerns) to the receipt of cash; or the period between the
acquisition of materials into their conversion into cash (in case of merchandising
and manufacturing concerns).
2. Noncurrent assets are those assets, which include among others, property, plant
and equipment. Property, plant and equipment are tangible assets used in the
operation of the business, have a useful life that exceeds one year, and are not
intended for sale. Examples are land, building, equipment, furniture and fixtures.
Other noncurrent assets are long-term investments, intangible assets, and other
noncurrent assets.
CURRENT ASSETS
Checking account balance, currency, coins, checks received from customers but not yet deposited
CASH

Amounts owed to the company for services performed or products sold but not yet paid
ACCOUNTS RECEIVABLE

ALLOWANCE FOR BAD A contra current asset account associated with Accounts Receivable
DEBTS

Cost of merchandise purchased but has not yet been sold

MERCHANDISE INVENTORY

Cost of supplies that have not yet been used; supplies that have been used are recorded in Supplies
SUPPLIES INVENTORY
Expense

PREPAID EXPENSES Expenses that are not yet incurred but paid in advance

PETTY CASH FUND A small fund of cash kept on hand for purchases or reimbursements of small / petty expenses
NON-CURRENT ASSETS
LAND Cost to acquire and prepare land for use by the company

BUILDINGS Cost to purchase or construct buildings for use by the company

OFFICE EQUIPMENT Cost to acquire and prepare equipment for use by the company

ACCUMULATED Amount of fixed assets’ cost that has been allocated to Depreciation Expense since the time the asset was
DEPRECIATION acquired

Assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital
INVESTMENTS appreciation, or for other benefits to the investing enterprise
LIABILITIES
Liabilities are obligations of an entity arising from past transactions or events.

1. Current liabilities - are obligations a company expects to pay within one

year. Current liabilities are short-term debts like accounts payable and
accrued expenses.
2. Noncurrent Liabilities - are obligations due more than one year from the
balance sheet date. Noncurrent liabilities are long-term debts like bonds
payable and long-term loans.

EQUITY
Equity refers to what the owners of an entity have invested in an enterprise;
what the business owes to its owners.
CURRENT LIABILITIES
ACCOUNTS PAYABLE Trade payables due to suppliers

ACCRUED EXPENSES Expenses not yet paid, but already incurred

WITHHOLDING TAX
Taxes withheld from employees payable to BIR
PAYABLE

SHORT-TERM LOANS
Loans that are due on demand within the next 12 months
PAYABLE

NONCURRENT LIABILITIES
NOTES PAYABLE The amount of principal due on a formal written promise to pay

LONG-TERM LOANS
Loans that are due for more than 1 year
PAYABLE
EQUITY
CAPITAL Simplest equity account and used for sole proprietorships and partnerships

DRAWING Represents the money drawn by the owner of a small business for their personal use

SHARE CAPITAL Contributions from stockholders / members of the entity (used for corporations or cooperatives)

RETAINED EARNINGS Net earnings of an entity (after distribution of dividends) retained for future operations
REVENUES AND EXPENSES
Revenue is the term used to describe income earned through the provision of
a business's primary goods or services. Expense is the term for a cost
incurred in the process of producing or offering a primary business operation.

Revenue is the total income a company generates from its operations, such as
sales of goods or services. While expenses are the costs a company incurs to
generate revenue and run its business, including the cost of goods sold,
operating expenses, interest, and taxes.
REVENUE
SALES Amounts earned from sale of merchandise

SERVICE INCOME Amounts earned from performing services

RENTAL INCOME Amounts earned from having properties rented

INTEREST INCOME Amounts earned for lending money

EXPENSES
COST OF GOODS SOLD Cost of merchandise sold to customers

The cost of buying merchandise during a period for the purpose of sale; may include buying of raw materials
PURCHASES
in the case of a manufacturing concern or finished goods in the case of a retail business.

SALARIES EXPENSE /
Amount paid to employees of an entity for services rendered
WAGE EXPENSE

SUPPLIES EXPENSE Amount used to purchase supplies for office use (paper, ballpen, ink, pentel pens, etc)

REPRESENTATION EXPENSE Amount paid to a person for voluntary services (for volunteers or guest speakers)

UTILITIES EXPENSE Amount paid for the electricity and water consumption of the entity

FUEL EXPENSE Cost of fuel/lubricant for the vehicle being used in the business

REPAIRS AND
Cost in the repair and maintenance of the fixed assets of the business
MAINTENANCE EXPENSE
EXPENSES
DEPRECIATION EXPENSE Gradual charging to expense of an asset’s cost over its expected useful life

BAD DEBTS Refers to notes/accounts receivable that will not be collected

RENT EXPENSE Cost of rental of office space or equipment for business operation

AUDIT FEE Amount paid to external auditors

LEGAL FEE Retainer’s fee for legal services rendered

TAXES AND LICENSE FEES Cost of taxes and licenses paid to legalize business operation (business permit, license to operate, etc)

TRAVELLING EXPENSE Cost of travelling expenses of officers on official business travel

INTEREST EXPENSE Cost of debt that has occurred during a specified period of time.
EXPENSES
MARKETING EXPENSE Amount paid for the promotion and advertising of the business
ACCOUNTING
EQUATION
Importance of the Accounting Equation
Business transactions affect the assets, liabilities, and proprietorship of the business.
These effects can be expressed in the accounting equation:
ASSETS = EQUITIES

Equity is the right, claim, or interest of a person over the assets of the business.
Liability represents such claim in the assets of the business and proprietorship is the
owner’s or owners’ interest in the business.
LIABILITIES
EQUITIES
OWNER’S EQUITY

And since there are two sources of equities, one from the creditors (liabilities) and
one from the owner, then we can express the accounting equation as:
ASSETS = LIABILITIES + OWNER’S EQUITY
Illustrations
Transaction 1
October 1 - Mr. Gil opened a motor repair shop and invested P100,000 cash.

Analysis:
1. The asset, cash, is increased by P100,000.
2. The capital is also increased by P100,000.

ASSETS = LIABILITIES + EQUITY

Cash +100,000 = Capital +100,000
+100,000 = 0 + 100,000
Illustrations
Transaction 2
October 3 - He purchased repair supplies worth P25,000 on credit from De Mesa
Trading.

Analysis:
1. The asset, repair supplies, is increased by P25,000.
2. Liability, accounts payable, is also increased by P25,000.

ASSETS = LIABILITIES + EQUITY

Supplies +25,000 = Accounts Payable +25,000
+25,000 = +25,000 + 0
Illustrations
Transaction 3
October 7 - He bought a table and chairs for his office worth P6,000 cash.

Analysis:
1. The asset, furniture and fixtures, is increased by P6,000.
2. Another asset, cash, is decreased by P6,000.

ASSETS = LIABILITIES + EQUITY

Furniture +6,000 =
Cash -6,000

+6,000 = 0 + 0
-6,000
Illustrations
Transaction 4
October 9 - Mr. Gil withdrew P15,000 from the business for his personal use.

Analysis:
1. The asset, cash, is increased by P15,000.
2. Capital is also decreased by P15,000.

ASSETS = LIABILITIES + EQUITY

Cash -15,000 = Capital -P15,000

+15,000 = 0 + -P15,000
Accounting Equation Extension
The accounting equation, ASSETS = LIABILITIES + EQUITY can be further extended to
include the effects of INCOME and EXPENSES. For sole proprietorship business,
income is ADDED to owner’s equity while expenses are DEDUCTED from owner’s
equity. To illustrate:

LIABILITIES
EQUITIES
OWNER’S EQUITY (+ INCOME or
- EXPENSES)

Hence, the accounting equation when extended would be as follows:

ASSETS = LIABILITIES + OWNER’S EQUITY (+INCOME / -EXPENSES)

Illustrations
Transaction 5
October 11 - Billed M. Manzano for repair work done on his motorcycle, P12,000.

Analysis:
1. The asset, accounts receivable, is increased by P12,000.
2. Income, service income, is also increased by P12,000.

ASSETS = LIABILITIES + EQUITY

Accounts Receivable +12,000 = Income +P12,000

+12,000 = 0 + +P12,000
Illustrations
Transaction 6
October 14 - Paid the salary of the cashier worth P10,000.

Analysis:
1. The asset, cash, is decreased by P10,000.
2. Expense, salaries and wages expense, is increased by P10,000.

ASSETS = LIABILITIES + EQUITY

Cash -10,000 = Expense -P10,000

-10,000 = 0 + -P10,000
Illustrations
Transaction 7
October 15 - Received from Mr. X P20,000 cash in payment for the repairs done by
the business.

Analysis:
1. The asset, cash, is increased by P20,000.
2. Income, service income, is also increased by P20,000.

ASSETS = LIABILITIES + EQUITY

Cash +20,000 = Income +P20,000

+20,000 = 0 + +P20,000
Illustrations
Transaction 8
October 25 - Received bill from ABC Water District amounting to P2,500 for water
consumption this month.

Analysis:
1. Expense, utilities expense, is increased by P2,500.
2. Liability, accrued expense, is also increased by P2,500.

ASSETS = LIABILITIES + EQUITY

= Accrued expense +P2,500 Utilities expense +P2,500
= +P2,500 + -P2,500
QUESTIONS?