entities of the resources of the enterprise such as

FABM 2 REVIEWER royalties income, rental income, interest income etc.

The Statement of Financial Position (SFP) which is also Cost of good sold or cost sales – refers to the cost of
known as balance sheet, shows the financial position of manufacturing or selling of merchandise. It includes cost
a business entity at a given period or a specified date. Its of purchase less purchase returns and allowances and
purpose is to help the financial health and soundness of purchase discounts which are both deduction from
a business entity in determining its liquidity, financial purchases.
credit and business risks. It has three elements
 Purchases Returns and Allowances – is deducted
ASSETS from purchase account representing the returns
An asset is a resource with economic value that an of merchandise due to damages or not
individual, a company, or a country owns or controls conforming with order.
with the expectation that it will provide a future benefit.  Purchase Discount – refers to incentives given to
suppliers for early payment of their accounts
LIABILITY within the discount period.
A liability represents an obligation and the obligation Freight In – refers to the transportation cost in bringing
requires an entity to transfer or otherwise provide merchandise within the premise of the business to
benefit to others. become ready for sale.
CAPITAL OR OWNER’S EQUITY Operating Expenses – this consists of expenses that is
A capital or owners equity is the driving force behind generally classified as to functions of expenses and the
every organization and is necessary for conducting nature of expenses
business.
Classification of expenses as to selling or general and
administrative such as:

The three elements of statement of Selling or Distribution Expenses (Related to sales)

comprehensive income; a. Freight out
1. Revenue or income b. Store Supplies
2. Cost c. Uncollected Accounts
3. Expense d. Taxes and Licenses
Revenue or income – refer to the proceeds from the e. Sales Salaries
sale of merchandise. It also includes sales return and
allowances, and sales discount which are both
deduction from sales accounts. General and administrative expenses
 Sales returns and allowances – is deducted from a. Utilities
sales because it’s represents return of
merchandise sold may due to some damages or b. Rental Expenses
not conforming with orders. c. Depreciation Expenses
 Sales Discount – are incentives given to
customer for early collection of their accounts d. Insurance Expenses
within the discount period.
e. Office Salaries
Income – refers to rendering a professional services to
clients or patients like legal fees income for lawyers,
accounting and auditing fees, medical fess for doctors,
dental fess for dentists, or income from use by other
There are two (2) forms of Statement of Comprehensive Elements of SCI The SCI has two primary elements
Income, namely: Income and Expenses

1. Single-step form – to be used in service concern or INCOME- are increase in economic benefits during the
merchandising business under “perpetual inventory accounting period in the form of inflows or
system). enhancements of assets or decreases of liabilities that
result in increase in equity, other than those relating to
2. Multiple-step form – to be used in merchandising
contributors from business owners.
business under “periodic inventory system”
Revenues -are income arising from the normal operating
Business can determine the results of its operation by
activities of the enterprise or in the ordinary course of
determining the profit and losses
business
Profit and Losses – the excess of revenues over
expenses is called profit. Conversely the excess of
expenses over revenues is called “loss” Revenue Accounts of a Service Business

To illustrate: Service Revenue is the generic revenue account of a

service business. Service Fee or Service Income may also
Revenue or Income Pxx
be used. However, it is better if a business customizes its
Less: Cost and expenses xx revenue account to better capture the essence of
revenue-generating transaction. Here are examples of
Profit or Loss Pxx service businesses and their corresponding revenue
accounts.

Revenue Accounts of a Merchandising Business

WEEK 5 LESSON 2
The Statement of Comprehensive Income (SCI) a. Sales is the generic revenue account of a
merchandising business. This can also be customized to
The SCI provides information about the peformance or
differentiate the sales revenue of one item to that of
profitability of the business entity. Internal users, such
another. A clothing store, for instance, may have two
as the owners, managers and employees, use the SCI to
reveriue accounts Sales-Pants and Sales-Jackets. What
make decisions and craft strategies relative to improving
could be the reason for having two accounts? It is
future performance and increasing profitability. External
basically, to determine which items are selling faster
users such as the Bureau of Internal Revenue requires
than the others.
submission of SCI to properly determine the tax due
them. b. Sales Returns and Allowances is an account that is
used to record the selling price of goods returned by a
customer. Why would a customer return? It could be
The SCI has two parts: that the goods were defective, damaged, or not within
the agreed specifications.
1. Net Income from the Income Statement.
c. Sales Discounts-reduction from the selling price of an
2. Other Comprehensive Income which consists of
item. It has two types: Cash Discount and Trade
revenues, expenses. gains, and losses that are reported
Discount
as not realized yet.
i. Cash Discount is given to customers on
Monetary Unit Assumption - it requires business
account who paid earlier than their due dates.
entities in the Philippines to record transactions in
Philippine Peso. All transactions involving foreign. ii. Trade Discount is the typical reduction in
currencies must be translated in the prevailing exchange price given to all customers. This is a common scenario
rates at the time of recording or reporting. in malls, supermarkets or groceries where items are
marked Sale", "20% Off "Buy 1-Take 1 and other similar
promotional schemes. Take note, however. that Trade Expenses include both expenses and lossess
discount is not recorded in the books of the business
a. Expenses are costs incurred in the ordinary course of
business. These are necessary in the process of
generating revenues.
The formula and calculation of revenue will vary across
companies, industries, and sectors. A service company b. Losses, on the other hand, satisfy the definition of
will have a different formula than. a retailer, while a expenses but may not arise in the ordinary course of
company that does not accept returns may have business. Example of losses are Loss due to Theft, Loss
different calculations than companies with return on Sale of Fixed Asset. Loss on Calamity
periods. Broadly speaking, the formula to calculate net
revenue is:
Expense Accounts of a Service Business
Net Revenue (Quantity Sold Unit Price) - Discounts -
Allowances – Returns Expenses incurred by an entity in the ordinary course of
business maybe numerous. Thus, it maybe necessary to
group or classify them into one common account title.
The amounts of Sales Retums and Allowances and Cash Here are some of the commonly used account titles.
Discounts are deducted from Sales to arrive at Net
a. Salaries and Wages Expense payment for salaries
Sales.
and wages of employees

b. Utilities Expense includes cost of electricity and water

Other Revenue Accounts
c. Rent Expense for the amount paid or incurred for use
Apart from selling goods or rendering services, a of property of another person or entity. This is usually
business may also directly or indirectly engage in some associated with office or store space or premises
activities that may result to generating revenues. Here occupied by the business entity
are some of the activities.
d. Advertising Expense-costs incurred in promoting the
a. Interest Income-this may be the main revenue business in various media (newspaper, radio, TV, social
account of entities engaged in lending money such as media)
banks, credit cooperatives, pawnshops and other
e. Repairs and Maintenance Expense incurred in the
lending companies.
repair and maintenance of machineries, equipment and
b. Royalty Income- this is the income derived from other fixed assets
allowing another person or entity to use one's tangible
f. Taxes and Licenses Expense - amounts paid to BIR for
or intangible property. For instance, a book author who
tax due and to other government regulatory agencies
holds copyright receives royalty income from the
for license to conduct a certain type of business or to
publisher for every book sold by the publisher.
operate within a barangay, city or municipality
c. Dividends these are revenues derived from stocks of
g. Supplies Expense cost of supplies used for the period.
other corporations held by the business
This may be specified as Office Supplies (paper, inks,
stationeries, clips) or Store Supplies (packaging
materials, receipts)
EXPENSES
h. Interest Expense cost of borrowing a sum of monev
IFRS also defines expenses as decreases in economic
or its equivalent
benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of i. Communications Expense this includes telephone and
liabilities that result in decreases in equity internet bills. phone cards, cellphone loads and postage
stamps
j. Insurance Expense this account represents the expired d. Freight-Out or Delivery Expense the cost of
portion of the insurance premiums paid. Business transporting goods to customers. While Freight-In is
entities will usually acquire fire and calamity insurance added to purchases, freight-out is not. It is reported
for their properties or medical insurance for their alongside all the other expenses enumerated earlier.
employees
e. Purchase Returns and Allowances is an account that
k. Transportation or Travel Expense this represents is used to record amounts of purchases returned to
those incurred byemployees or management to travel to supplier.
places on official business functions
Purchase Returns and Allowances and Purchase
l. Depreciation Expense this refers to that part of the Discounts are deducted from Purchases to arrive at Net
cost of fixed assetsallocated as expense for the period Purchases.

m. Bad Debts Expense the amounts of accounts Net purchases is found by subtracting the credit
receivable estimated to be doubtful of collection balances in the purchases returns and allowances and
purchases discounts accounts from the debit balance in
n. Miscellaneous Expense this is a catch-all account for
the purchases account The cost of goods purchased
all other expenses that are not recurring and minimal or
equals net purchases plus the freight- In account's debit
immaterial to warrant a separate account title.
balance

The given expense accounts maybe modified or

specified to capture the real essence of the expense.
Some related accounts may also be merged into one
account

Expense Accounts of a Merchandising Business

Expenses incurred by a merchandising business are

quite similar with that of a service business. The The cost of goods available for sale equals the beginning
following are account titles unique to such type of value of inventory plus the cost of goods purchased. The
business. cost of goods sold equals the cost of goods available for
a. Cost of Sales-this is the cost of goods or merchandise sale less the ending value of inventory.
inventory. A sari sari store, for instance, purchases
canned goods from a supplier for a unit price of P20.
One item was sold for P25. How much is the cost of
sales? It's 20 pesos because that is the buying price of
the goods to the business

b. Purchases this account is used to record acquisition

of merchandise. inventory. Merchandise inventory are
those that are intended for reselling. Other items
acquired not for reselling purposes must be classified
accordingly (e.g. supplies)

c. Freight-In this refers to costs incurred in bringing the

goods to the buyer's place of business. This s recognized
only if the buyer carried the burden of 18 paying for the
shipping cost. The seller may apt to pay for freight costs
depending on their agreement. Freight-in is added to
purchases
LESSON 7 of a sole proprietorship. As a general manager, he
oversees the day-to-day operations of the sole
Statement of changes in equity – all changes, whether
proprietorship. A sole proprietor is more involved than
increases or decreases to the owner’s interest in the
other business owners. Sole proprietorships are
company during the period are reported here. This
relatively easy to organize.
statement of Financial Position to be able to obtain the
ending balance of the equity to be used in SFP. Major disadvantages of a sole proprietorship include the
limited source of capital, proprietor's unlimited liability,
Single/Sole Proprietorship – All changes, whether
and the business entity's limited existence. The sole
increases or decreases to the owners interest in the
proprietor is the major source of financing available for
company during the period are reported here. This
business. Another major disadvantage of a sole
statement is prepared before the preparation of the
proprietorship is the unlimited liability of the sole
statement of Financial Position to be able to obtain the
proprietor Bankruptcy occurs when the sole
ending balance of the equity to be used in SFP.
proprietorship is unable to pay debts. In the Philippines,
Partnership – an entity whose assets, liabilities, income in case that the assets of a sole proprietorship are not
and expenses are centered or owned by two or more enough to cover its existing liabilities, creditors can run
persons. after the personal assets of the owner. Lastly, sole
proprietorships have limited life. A sole proprietorship
Corporation – an entity whose assets, liabilities,
generally co-exists with the sole proprietor.
income and expenses are centered or owned by itself
being a legally separate entity from its.

Initial Investments – The very first investment of the Common examples of sole proprietors are stores and
owner to the company. individuals rendering professional services like lawyers,
physicians, dentists, and accountants
Additional Investments – Increases to owners equity
by adding investments by the owner.

Withdrawal – Decreases to owners equity by 2. Partnership

withdrawing assets by the owner.
Tide IX, Chapter 1 of the Philippine Civil Code defines
partnership as a contract where two or more persons
bind themselves to contribute money, property, or
Types of Business Organizations
industry to a common fund, to divide the profits among
The business entity concept is a prevailing assumption in themselves. These persons are called partners. Their
accounting. It states that the transactions of the owners agreement is contained in a document called articles of
(as a separate entity) must be distinguished and partnership. The ultimate goal of the partner is to divide
differentiated from the transactions of the owners. the profits among themselves. A key advantage of a
Business transactions must be captured in the financial partnership is the ease of organization, as compared to
statements of the reporting entity. Personal a corporation. The contract of the partnership may be
transactions, on the other hand, must be kept in the oral or in writing, as a general rule. Another advantage
records of the owners. of a partnership is the entity's larger source of capital
and expertise, as compared to a sole proprietorship.
There are three major types of business organizations in
Major disadvantages of the partnership include
the Philippines. based on the classification of
unlimited liability, limited existence, and mutual agency
ownership. These business organizations are sole or
of the partners. Generally, a partner's liability in the the
single proprietorship, partnership, and corporation.
partnership can extend to his or her personal
1. Sole/Single Proprietorship properties, similar to a sole proprietorship. However,
the unlimited liability of a partner is subject to
This is a business organization owned by one person. exceptions (i.e., the concept of a limited partner).
The owner of the sole proprietorship is the proprietor. In Partnerships also have a limited existence. Generally,
most cases, the proprietor is also the general manager any change in the partnership may dissolve the entity.
The most common reason for a partnership's dissolution subjected to double taxation. The income of the
is the death of one partner. Finally, a mutual agency may corporation in itself will be subjected to a corporate
also be a disadvantage to a partnership. Mutual agency income tax of 30%, If the corporation decides to declare
means that each partner may bind the partnership and dividends to its stockholders, the dividends are again
the other partner in business-related matters. For subjected to a withholding tax
example, if one partner obtains a business loan on
behalf of the partnership, the partnership and the other
partner are bound by the said loan. Preparation of Statement of Changes in Equity for Sole
Proprietorship Preparing a statement of changes in
equity (SCE) for a sole proprietor is quite
3. Corporation straightforward. The elements of an SCE for a sole
proprietorship include the beginning capital, additional
The Corporation Code of the Philippines (1980) defines
income, net income, and withdrawals.
the word corporation as an "artificial being created by
operation of law, having the right word of succession
and the powers, attributes, and properties expressly
authorized by law or incident to its existence."

Corporation as Artificial Being

In the eyes of the law, a corporation is an artificial being

independent of its owners. A corporation has a name
and birthdate (incorporation date) just like anormal
person. As an artificial being, a corporation has rights,
powers, and attributes. Here is an example of a right of LESSON 8
a corporation. It can acquire its property. The names, CLASSIFICATION IN THE STATEMENT OF
powers, objectives, and registered address of a CASH FLOWS
corporation are included in a document called the
articles of incorporation. It means any remuneration for rendering personal
services arising from an employer- employee
The major advantage of a corporation is the relationship between the payor and the recipient.
centralization of management through the board of
directors. The board of director exercises functions over 1. Operating Activities are principal revenue-producing
the corporation. They protect the interest of the activities of an enterprise and include delivering or
stockholders. Another advantage of corporate producing goods for sale and providing services. In
organizations is its long existence. Generally, general, cash flows that relate to, or are the corollary of,
corporations in the Philippines are given a life of 50 items reported in the income statement are operating
years, subject to renewal. Ownership of a corporation cash flows. Examples are as follows:
may be inherited by the respective heirs of the original a. cash receipts from the sale of goods and the
owners. The liabilities of a corporation may not extend rendering of services; a
to the stockholders, unlike in sole proprietorship and
partnership. Stockholders are only liable to the extent of b. cash receipts from royalties, fees, commissions and
their original investment in the corporation. other revenue

The major disadvantage of a corporation is its stringent C. cash payments to suppliers for goods and services;
requirements for registration. Registering a corporate
d. cash payments to and on behalf of employees;
entity in the Philippines will take a significantly longer
period than organizing a sole proprietorship or e. cash receipts and cash payments of an insurance
partnership. Also, corporations are subjected to heavy entity for premiums and claims, annuities and other
government regulation through the Securities and policy benefits;
Exchange Commission (SEC). Corporations are also
f. cash payments or refunds of income taxes unless they 3. Financing Activities represent claims on future cash
can be specifically identified with financing and flows by providers of capital to the entity. Examples of
investing activities; and cash flows arising from financing activities are:

g. cash receipts and payments from contracts held for a. cash proceeds from issuing shares or other equity
dealing or trading purposes. instruments;

2. Investing Activities represent the extent to which c. cash proceeds from issuing debentures, loans, notes,
expenditures have been made for resources intended to bonds, mortgages and
generate future income and cash flows. Examples are as
b. cash payments to owners to acquire or redeem the
follows:
entity's shares; other short or long-term borrowings;
a. cash payments to acquire property, plant and
d. cash repayments of amounts borrowed; and
equipment, intangibles and other long-term assets
(these payments include those relating to capitalized e. cash payments by a lessee for the reduction of the
development costs and self-constructed property, plant outstanding liability relating to a finance lease.
and equipment);
REPORTING OF CASH FLOWS FROM OPERATING
b. cash receipts from sales of property, plant and ACTIVITIES
equipment, intangibles and other long-term assets;

c. cash payments to acquire equity or debit instruments

of other entities and interests in joint ventures (other An entity shall report cash flows from operating
than payments for those instruments considered to be activities using either;
cash equivalents or those held for dealing or trading
purposes);
1. Direct method, whereby major classes of gross cash
d. cash receipts from sales of equity or debt instruments receipts and gross cash payments are disclosed.
of other entities and interests in joint ventures (other
than receipts for those instruments considered to be
cash equivalents and those held for dealing or trading Presentation:
purposes);
Cash Flow from Operating Activities:
e, cash advances and loans made to other parties (other
than advances and loans made by a financial Cash receipts from customer pxx
institution);
Cash receipts from other revenue xx Pxx
f. cash receipts from the repayment of advances and
Cash paid to suppliers pxx
loans made to other parties (other than advances and
loans of a financial institution); Cash payments to employee xx (xx)

g. cash payments for futures contracts, forward Net cash flow from operating activities Pxx
contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading pur
poses, or the payments are classified as financing
activities; and

h. cash receipts from futures contracts, forward

contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing
activities
2. Indirect method, whereby profit or loss is adjusted
for the effects of transactions of a 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

REPORTING CASH FLOWS FROM INVESTING

AND FINANCING ACTIVITIES

An entity shall report separately major classes of gross

cash receipts and gross cash payments arising from
investing and financing activities, except to the extent
that cash flows are reported on a net basis

NON-CASH TRANSACTIONS

Investing and financing transactions that do not require

the use of cash or cash equivalents shall be excluded
from a cash flow statement. Such transactions shall be
disclosed elsewhere in the financial statements in a way
that provides all the relevant information about these
investing and financing activities. Examples of non-cash
transactions are:

1. the acquisition of assets either by assuming directly

related liabilities or by means of a finance lease;

2. the acquisition of an entity by means of an equity

sues and

3. the conversion of debt to equity.