The Major Financial Statement and Other Information

Sources
Financial Statement is a particular form of financial reports that provide
information about the reporting entity’s assets, liabilities, equity, income and
expenses.

IFRS IAS No. 1 stipulates that a complete set of Financial Statement is

composed of:

 Statement of Financial Position (Balance Sheet)-as at the end of

the period
 Statement of Comprehensive Income- for the period
 Statement of Cash Flow- for the period
 Statement of Changes in Owner’s Equity- for the period
 Financial Notes and Supplementary Schedules- comprising a
summary of significant accounting policies and other explanatory
information.
Statement of Comprehensive Income/ Income Statement

The statement of income and expenses or the profit and loss statement
shows the results of the operations of a business entity for the month or year or
period.

It gives the users an indication of the company’s success or failure to

increase it’s assets through the earning of a net income. Simply put, this
statement shows the operating results of the company’s financial activities by
comparing the income (revenue) earned against the expenses incurred.
The format of the Statement of Income and Expenses is based on the
formula it represents:
Income = Revenue(income) – Expenses
The Statement of Income and Expenses and the Balance Sheet re linked
together because the Net Income (or loss) computed on the statement of
income and expenses is added to (or deducted from) the Owner’s Equity in the
Statement of Financial Position/ Balance Sheet.

A typical Statement of Income and Expenses is as follows:

ABC ENTERPRISES
STATEMENT OF COMPREHENSIVE INCOME
For the year ended December 31, 2019
Revenues Php 30,000.00

Less: Expenses

Rent Expense Php 3,000.00

Salaries Expense 4,000.00

Utilities Expense 2,000.00 9,000.00

Net Income Php 21,000.00

 Statement of Financial Position/ Balance Sheet

It shows the financial condition/position of a business as of a given

period. It consists of Assets, Liabilities, and Owner’s Equity/Capital. It is also
called “ Balance Sheet”

A typical Statement of Financial Position is as follows:

ABC ENTERPRISES
STATEMENT OF FINANCIAL POSITION
As of December 31, 2019

Assets Liabilities and Owner’s Equity

Current Assets Current Liability

Cash Php 5,000.00 Accounts Payable Php 22,400.00

Accounts Receivable 2,600.00 Noncurrent Liability

Supplies 2,300.00 Loans Payable 77,500.00

Sub-total Current Assets Php 9,900.00 Total Liabilities Php 99,900.00

Noncurrent Assets Owner’s Equity 40,000.00

Building Php 113,000.00

Equipment 17,000.00

Sub-total Noncurrent Assets Php 130,000.00

Total Assets Php 139,900.00 Total Liabilities & Owner’s Equity Php 139,900.00

Statement of Cash Flow

It shows the use of cash for a certain period.

It simply summarizes the cash receipts and cash disbursements for the
accounting period.

It summarizes the cash activities by the business by classifying cash

inflows (receipts) and cash outflows (payments) into operating, investing, and
financing activities.

It shows the net increase or decrease of cash in a given period and the
cash balance at the end of the period.

This allows management to assess the business’ ability to generate cash

and projected future cash flows.
 ABC ENTERPRISES
STATEMENT OF CASH FLOW
For the month ended March 31, 2019

Cash Flows from Operating Activities:

Collection of Account Receivable Php 80,000.00
Payment of Accounts Payable (50,000.00)
Payment of Salaries Expense (5,000.00)
Net Increase from Operating Activities Php 25,000.00

Cash Flows from Investing Activities:

Proceeds from sale of equipment Php 16,000.00
Payments for purchase of furniture (10,000.00)
Net Increase from Investing Activities Php 6,000.00

Cash Flows from Financing Activities:

Cash received from ABC as initial investment Php 300,000.00
ABC, Withdrawals (10,000.00)
Net increase from financing activities Php 290,000.00
Net Increase in Cash Balance Php 321,000.00
Add: Cash Balance, Beginning -
Cash Balance Ending, March 31, 2019 Php 321,000.00
========
Statement of Changes in Owner’s Equity

It shows the changes in the Capital or Owner’s Equity as a result of

additional investment or withdrawals by the owner plus or minus the net income or net
loss for the year.

A typical Statement of Financial Position is as follows:

ABC ENTERPRISES
STATEMENT OF CHANGES IN OWNER’S EQUITY
For the month ended March 31, 2019

ABC, Capital, Beginning Php 300,000.00

Add: Net Income 105,000.00
Sub-Total Php 405,000.00
Less: ABC, Drawing 10,000.00

ABC, Capital, Ending Php 395,000.00

 Financial Notes and Supplementary Schedules

Notes to financial statements provide narrative description or

disaggregation of the items presented in the financial statements and information
about items that do not qualify for recognition.

Example of Notes to Financial Statements

Note 1- Other Income

Rent Income Php 35,000.00
Dividends Income 10,000.00
Gain on sale of equipment 6,000.00
Interest Income 4,000.00
Total Php 55,000.00
Note 2- Depreciation Expense
Depreciation Expense-Building Php 12,000.00
Depreciation Expense-Equipment 1,000.00
Total Php13,000.00
The first note to the financial statements is usually a summary of the company's significant
accounting policies for the use of estimates, revenue recognition, inventories, property and
equipment, goodwill and other intangible assets, fair value measurement, discontinued
operations, foreign currency translation, recently issued accounting pronouncements, and
others.
The Accounting Equation
The fundamental Accounting Equation
Assets = Liabilities + Owner’s Equity
Each part of this equation can be defined simply:
Assets Liabilities Owner’s Equity/Capital

Things of value Financial obligation Represents ownership

Property owned by the business Net worth

Give future economic benefit

Activity
Find the missing amounts.
Assets = Liabilities + Owner’s Equity

1. _______ = 10, 000.00 + 50, 000.00

2. 20,000.00 = 2, 000.00 + ________
3. 150,000.00 = __________ + 100,000.00

Let’s Remember
1. Simply add liabilities and owner’s equity to get assets of Php 60,000.00.
2. Simply deduct liabilities of Php 2,000.00 from the assets of Php 20,000.00
to get owner’s equity of Php 18,000.00.
3. Simply deduct owner’s equity of Php 100,000.00 from the assets of
Php 150,000.00 to get liabilities Php 50,000.00
To illustrate:
The following will include the amount and the account affected in illustrating
the effects on the asset equation. Notice that the accounting equation is always
balanced in every transaction such that assets are always equal to liabilities and
capital/owner’s equity.

TRANSACTION ASSETS LIABILITIES OWNER’S ANALYSIS

EQUITY
An entity separate
1.Owner invests INC-CASH NO CHANGE INC-MR. and distinct from
cash P 1,000,000 SY,CAPITAL the owner is
P 1,000,000.00 P 1,000,000 created. The cash
investment of the
owner increases
the cash as the
business and the
capital of the
owner.
2. Purchases P Supplies increase
9,000 supplies on INC INC-ACCOUNT NO the asset of the
credit. SUPPLIES PAYABLE CHANGE owner and the
P 9,000 P 9,000 liability
correspondingly
increases as
supplies have
been bought on
account or credit.
3. Owner invests P The equipment
90,000 equipment INC NO CHANGE INC increases the
EQUIPMENT P MR. SY, assets of the
90,000 CAPITAL business. Since
P 90,000 this is an
investment by the
owner, capital of
the owner
correspondingly
increases.
4. Buying land P Land increases the
500,000 paying cash INC/DEC NO CHANGE NO CHANGE assets of the
INC-LAND P business but cash
500,000 correspondingly
DEC-CASH decreases with the
P500,000 cash paid for
purchase of the
land.
5. Borrow cash Cash increases
P 50,000 with INC- CASH INC-NOTES NO CHANGE the assets of the
notes payable P 50,000 PAYABLE P business because
50,000 the business
borrowed money.
Note Payable
increases the
 liabilities of the
business as it
represents an
obligation on the
part of the
business to pay at
a future date.
6. Rendered p The business
20,000 services for INC-CASH P NO CHANGE INC- earned an income
cash 20,000 SERVICE by rendering
INCOME services and
P 20,000 collecting
revenues in cash.
The effect in the
accounting
equation is an
increase in cash
for the cash
collected and an
increase in capital
as revenue
increases capital.
7. Paid P 700 utilities Payment
expense for the DEC-CASH NO CHANGE DEC-UTILITIES represents cash
month P 700 EXPENSE P 700 outflow decreasing
the capital of the
business as they
have an opposite
effect on income.
8. Rendered P Assets increased
10,000 services on INC-ACCOUNT NO CHANGE INC-SERVICE by the amount of
credit RECEIVABLE INCOME account receivable
P 10,000 P 10,000 expected to be
collected from the
customer to whom
the service was
rendered and
capital increased
since rendering of
services
represents
revenue.
9. Paid the supplies DEC-CASH DEC-ACCOUNTS NO CHANGE This transaction is
bought on credit in P 6,000 PAYABLE a payment of
transaction # 2 P 6,000 account. Since
there is cash
outflow
representing the
payment of an
existing liability,
assets decreased
in the amount of
the cash paid and
liabilities
decreased in the
 amount of the
liability on supplies
paid.

10.Collected the
account in INC/DEC NO CHANGE NO CHANGE Asset increased as
transaction # 8. there was cash
INC-CASH P inflow in the
10,000 amount of the
collection.
DEC- However, asset
ACCOUNT correspondingly
RECEIVABLE decreased with the
P 10,000 amount of the
collection as the
account receivable
which is an asset
account will
decrease. This is
because the
amount the
customer owes
has already been
collected.

Activity
Transaction Effects on the Basic Accounting Model

Transaction A L OE
a. Bought equipment, paying cash
b. Paid the monthly rent expense
c. Purchased supplies on credit
d. Made an additional investment in the company
e. Charged customers for services provided on account
f. Paid creditor on account.
g. Received payment from customers on account.
h. Received cash for services rendered today.
i. Permanently reduced investment in the business by taking out a
cash
j. Paid salaries for the week
k. Acquired equipment, paying 50% down, the balance due in 30
days.
Required: For each transaction, indicate whether the Assets (A),Liabilities (L), or
Owner’s Equity (OE) increased (+), decreased (-) or did not change (0) by placing the
appropriate sign in the column.
 Exercise
Basic Accounting Equation
The formation of an Accounting Equation is presented below. Fill in the amounts in
each of the Accounting Value by the given transactions. For your guide, the“Balances”
of each value is already given and transaction No. 1 is answered. Use a parenthesis
sign for the decrease.

Transactions ASSETS= LIABILITIES + CAPITAL

1. Mr. Michael Wong invested cash in the 1,850,000.00 0 1,850,000.00
business, P1,850,000.00
2. Rendered service to a client on cash, P50,000
3. Bought service vehicle on account,P 100,000
4. Michael Wong withdrew cash of P 25,000
5. Rendered service to client on account, P
90,000
6. Paid office rental for the month, P10,000
7. Partial payment of account,P30,000
8. Michael Wong invested office table,P80,000
9. Partial collection of a client’s account,P20,000
10. Borrowed money from a bank and issued a
note, P 150,000
2,255,000.00 220,000.00 2,035,000.00
BALANCES
THE ACCOUNTING PROCESS
The Accounting Process
The life of a business is divided into accounting periods of equal length. A
standard sequence of accounting procedures is repeated for each period. These
uniform procedures done to accomplish the accounting process are referred to as the
accounting cycle. (Lao Ong, Flocer)
The following are the steps in the accounting processing cycle:
1. Identifying and analyzing the events to be recorded
This is the process of identifying and analyzing the transactions to be recorded
through the business documents. Business documents are forms containing evidence
to support a business transaction. These documents provide the data concerning the
parties involved in the transaction, exchange made, the date, and the money value of
the exchange. In determining the exchange made, the value received by the business
and the value parted with are translated into their debit and credit components.
2. Recording transactions in the journal
This is known as journalizing. It is the process of recording the transaction in
the first book of account known as journal.
3. Posting journal entries to the ledger
This is known as posting. It is the process of transferring the information found
in the journal into the book of final entry known as the ledger. The ledger summarizes
the increases or decreases of individual accounts.
4. Preparing the Trial Balance
The Trial Balance is a list of accounts found in the ledger together with the
account’s balance or total. This is a proof that every debit, there is corresponding
credit. Hence, it is also a proof that the ledger’s is in balance.
5. Preparing the worksheet and adjusting entries
The worksheet is a common tool used by accountants to assemble on a sheet
of paper all the information needed to prepare the financial statements, adjusting
entries, closing entries, and the post-closing trial balance.
6. Preparing the Financial Statements
A Statement of Financial Position (balance sheet), Statement of
Comprehensive Income (income statement), Statement of Changes in Owner’s Equity,
and a Cash Flow Statement are prepared to provide useful information to parties
interested in the financial information of the business.
7. Journalizing and posting of Adjusting journal entries
Adjusting entries are prepared at the end of the accounting period to update
the accounts for internal transactions because they affect more than one accounting
period.
 This will record the accruals, expiration of deferrals, estimation, and other
events from the worksheet.
8. Journalizing and posting of closing journal entries
Closing entries are prepared at the end of the accounting period to update the
owner’s capital account. This will also eliminate the balances of the nominal accounts
so that they may be ready for the next period.
9. Preparing the Post Closing Trial Balance
After the closing entries have been posted, the post closing trial balance is
prepared from the general ledger accounts. This is necessary to assure that these
entries have been correctly posted. This will also check the equality of the debits and
credits afer the closing entries.
10. Journalizing and posting of reversing journal entries
Reversing entries are prepared to simplify the accounting process. The
adjusting entries are simply reversed on the first day of the accounting period. Not all
adjusting entries are reversed, only accruals and deferrals that use the nominal
accounts.
 Accounting System
Accounting System- comprises the methods used by the business to keep
records of its financial activities and to summarize these accounts in periodic
accounting reports.

Flow of Information in an Accounting System

It is especially important for accountants to understand each step involved in
an accounting system given that they are the ones who will be preparing the financial
records which are subsequently presented in financial statements. Analysts, on the
other hand, do not require the same level of details. It is, however, prudent for them to
become familiar with the information flow through the accounting system.

Accounting System: Flow of Information

The following illustrates how information flows through an accounting system:

 Journal entries and adjusting entries: Preparation of journal entries is the starting
point in the flow of information. Journals are used for recording business transactions
in chronological order. A general journal is found in all accounting systems and
contains a collection of all business transactions in the accounting system, sorted by
date. Special journals are only found in some accounting systems and are used to
record specific transactions only. Journal entries reflect the date, the accounts and the
amounts affected by a business transaction. Adjusting journal entries are a subset of
journal entries which are typically made at the end of an accounting period to record
items such as accruals.
 General ledger and T-accounts: A ledger shows all business transactions by
account. The general ledger is considered the core of an accounting system and
contains all of the same entries which are posted to the general journal. The general
ledger is useful for reviewing all of the activities that are related to a single account,
whereas T-accounts are usually used to describe or analyze accounting transactions.
 Trial balance and adjusted trial balance: A trial balance lists all the account
balances at a specific point in time. It is usually prepared at the end of an accounting
period as a first step in producing the financial statements. The initial trial balance
helps to identify if any adjusting entries are required. If adjusting entries are made, an
adjusted trial balance is then prepared.
 Financial statements: Preparation of the financial statements is the final step in the
accounting system and is done using the account totals which result from the adjusted
trial balance.

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ow-information-accounting-system/
 Debits and Credits
To determine whether an account is to be debited or credited, the following
rules of debits and credits are the guides.

NORMAL BALANCES OF ACCOUNTS

___________________________________________________________________
ASSETS - DEBIT LIABILITIES - CREDIT
EXPENSES - DEBIT OWNER’S EQUITY- CREDIT
INCOME - CREDIT

The Principles of Debit & Credit

 DEBIT IS INCREASE IN ASSETS

DECREASE IN LIABILITIES

VALUE RECEIVED DECREASE IN CAPITAL

DECREASE IN REVENUE

INCREASE IN EXPENSES

CREDIT IS DECREASE IN ASSETS

INCREASE IN LIABILITIES

VALUE PARTED WITH INCREASE IN CAPITAL

INCREASE IN REVENUE

DECREASE IN EXPENSE
 Rules for Debit and Credit can be summarized as follows:
You debit to show: You credit to show:
1. Increase in assets 1. decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in Owner’s Equity 3. Increase in Owner’s Equity
- Owner’s withdrawal -Initial investment
- Expenses -Additional investment
- Revenue/ Income

Activity
Rules of Debit and Credit

Indicate in each independent case whether the account is to be debited

(DR) or to be credited (CR).

___1. Increase in Accounts Payable

___2. Decrease in Capital account

___3. Increase in Service Revenue

___4. Increase in Cash

___5. Decrease in Accounts Receivable

___6. Increase in Salaries Expense

___7. Increase in Office Equipment

___8. Increase in unpaid Salaries

___9. Increase in Owner’s drawing account

___10. Increase in Interest Income

ANALYZING TRANSACTIONS
Following are the steps involved to analyze transactions:
1. From the business document, determine the kind of transactions or
exchange made.
2. Analyze the transaction to determine the accounts affected. They can
either effect the assets, liabilities, owner’s equity, revenue or expenses
accounts.
3. Determine the effect of the transaction on the accounts affected. The
transaction can either increase or decrease the accounts.
4. Apply the rules of debits and credits to identify whether the accounts
affected should be debited or credited to show the corresponding increase or
decrease.

To illustrate:
Presume that Angelina Miller established Art Gallery with an initial investment
of Php 300,000.00 on September 1, 2020. The journal entry is shown below.

USING THE GENERAL JOURNAL

Date Account Title and P.R Debit Credit

Explanation .
2020

Sept. 1 Cash 300,000.00

Miller, Capital 300,000.00

Initial investment.

USING THE T ACCOUNT

June 1 – M. Rogers opened a catering service he called “McRogers”. He invested Php
32,000 cash and equipment, Php 85,000.
June 3- He purchased kitchen utensils & tools, Php 10,000.00 and additional
equipment, Php 10,00.00 from K Trading on credit

June 7- Paid advertisement announcing the opening of his business, Php

1,500.00
June 11 – Rendered a catering service to Jay & Mel San Juan wedding and received
cash of Php 52,000.00.
Let’s Remember
The left side in all of the accounts is the Debit side, while the right side is the
Credit side.
Increases and Decreases do not appear uniformly in either the Debit or Credit
side.
This means that the terms Debit and Credit may refer to either increase or
decrease depending on the nature of the account. Therefore, “to Debit” and “to
Credit”should not be confused with “to increase” and “to decrease”.
The position of amounts indicates whether they should be added together or
one amount should be deducted from the other.
Amounts found on the same side are added together, while amounts found on the
opposite sides involve subtraction
 Activity

Effects of Accounts Balances

Instruction: On the space provided, indicate a on what has been done in each of the account
which resulted to have increased or decreased in its balance.

Debited Credited

Sample: Cash in Bank was increased by P 20,500 __√__ _______

1. Adrian Molo,Capital account increased by P 8,500 ______ _______

2. Prepaid insurance account decreased by P4,000 ______ _______
3. Account Receivable account increased by P800 ______ _______
4. Accounts Payable account decreased by P750 ______ _______
5. Cash in Bank account decreased by P 16,450 ______ _______
6. Accounts Payable account increased by P18,050 ______ _______
7. Account Receivable account decreased by P500 ______ _______
8. Rent expense account increased by P2,500 ______ _______
9. Service Income account increased by P7,000 ______ _______
10. Salaries expense account increased by P 2,000 ______ _______
11. Notes Payable account increased by P20,750 ______ _______
12. Notes Receivable account decreased by P4,500 ______ _______
13. Building account increased by P 500,000 ______ _______
14. Unused supplies account decreased by P5,450 ______ _______
15. Adrian Molo,Drawing account increased by P800 ______ _______

Exercise
Mr. Coco Lim decided to invest in a travel agency. Below are the transactions
for the month of September . You are requested to journalize the transaction.
September 1 Mr. Coco Lim invested a service vehicle worth Php 850,000 and
cash of Php 2,000,000.00.

4 Borrowed P 250,000 from Malaya Bank.

5 Bought sala set from Kakato P 50,000 on account.

6 withdrew cash P 50,000 for personal use.

15 Rendered services to Vimz Tours P 500,000 on account.

21 Paid employees’ salaries for P 75,000.

30 Collected account from Vimz Tours.

Date Explanation Debit Credit
2020
Sept. 1 ___________________ _____
________________ _____
Initial investment.

4 ___________________ _____
________________ _____
Borrowed money from the
Bank.

5 ___________________ _____
________________ _____
Bought furniture on account.

6 __________________ _____
________________ _____
Withdrew cash for personal use.

15 __________________ _____
________________ _____
Rendered services on account.

21 __________________ _____
________________ _____
Paid employees’ salaries.

30 __________________ _____
________________ _____
Collected accounts in full.