FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

ACCOUNTING ELEMENTS

Accounting elements are the quantitative information reported in the statement of

financial position and income statement. These elements are considered as the building blocks of
the financial statements.

Types of accounts
1. Real accounts - elements directly related to the measurement of financial position are assets,
liabilities and equity, and their usefulness continues throughout the life of the business and
their year-end balances are forwarded to the next accounting period.

2. Nominal accounts - elements directly related to the measurement of financial performance are
income And expenses. These accounts provide information on the changes in equity as the
result of business operation. Their usefulness is limited to the year when they are incurred
and their year end balances are not forwarded to the next accounting period.

Accounting Elements are:

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

Assets
Assets are properties or rights on properties owned by the business. These items of value
are used by the enterprise in their day to day activities. Assets are resources controlled by the
enterprise as a result of past business transactions or events which future economic benefits are
expected to flow to the entity.

The essential characteristics of an asset are:

1. The asset is controlled by the entity
2. The asset is the result of a past transaction or event
3. The asset provides future economic benefits
4. The cost of the asset can be measured reliably.

Classification of Assets
1. Current Asset
2. Non-current asset

I. Current Asset
An asset shall be classified as current when it satisfies any of the following criteria:
a. The asset is cash or cash equivalent unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading
c. The entity expects to realize the asset within twelve months after the reporting period
d. The entity expects to realize the asset or intends to sell or consume it within the entity’s
normal operating cycle.

Examples of current assets and contra-accounts:

1. Cash - includes currency or cash items on hand, cash in bank, cash fund (petty cash fund,
payroll fund)
2. Cash equivalents - are short term highly liquid investment that are readily convertible to
known amounts of cash and so near their maturity that they present insignificant risk of
changes in value. Only highly liquid investments that are acquired three months before
maturity date can qualify as cash equivalents.
3. Trading securities - investments which are readily marketable and represent temporary
investment of funds available for current operations.
4. Accounts receivable – are open accounts or those that are not supported by promissory notes.
5. Allowance for doubtful accounts - a contra-asset account which is provided for possible loss
from uncollected accounts.
6. Note receivable - amount collectible evidenced by a promissory note.
7. Merchandise inventory - goods held for sale by trading concern
8. Finished goods, goods in process, raw materials and factory supplies - inventories held by
manufacturing firm
9. Prepaid expenses - expenses paid in advance (prepaid rent, prepaid insurance)
10.Unused supplies - supplies purchased for use and are still unused
11.Accrued income - income earned but not yet received (accrued interest income, accrued rent
income)

II. Non-Current Asset

A. Property, Plant, and Equipment or Fixed Assets
1. Office equipment
2. Store equipment
3. Delivery equipment
4. Machineries
5. Furniture and Fixtures
6. Land
7. Building
8. Accumulated depreciation - contra-account used to accumulate expired cost of fixed
assets. It is a deduction from property, plant and equipment.

B. Long Term Investments

Investments are assets held by the enterprise for the accretion of wealth through capital
distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other
benefits to the investing enterprise. An investment may either be current or non-current. A
current investment is readily realizable and is intended to be held for not more than one year. A
long term investment is intended to be held for more than one year.
Examples: investments in bonds, investment in subsidiaries

C. Intangibles
Intangible assets are identifiable non-monetary assets without physical substance. It
must be controlled by the enterprise as a result of past event and from which future economic
benefits are expected to flow to the enterprise.
Example:
1. Copyright – right granted to authors, composers, playwrights, artists, publishers or
distributors to publish, and dispose of their works for a limited time.
2. Franchise – right granted to operate a utility or to manufacture or to market a product of
another company within a specified area.
3. Patent – right granted to an inventor to manufacture or produce his inventions or
products.
4. Goodwill – an intangible advantage that increases earnings over what is normal, It is the
excess of agreed value over contributed value.
5. Trademark or brand name – a symbol, sign, slogan or name used to mark a product or
distinguish it from other products
6. computer software, leasehold rights

D. Other non-current assets

Include assets that do not fit into the definition of the above-mentioned non-current
assets. These include long-term advances to officers or employees, abandoned property, and
long-term refundable deposits.

Liabilities
Liabilities are debts or obligations of the business. It refers to the present obligations of an
enterprise from past transactions or events, the settlement of which is expected to result in an
outflow from the enterprise resources embodying economic benefits.
I. Current Liabilities
A liability shall be classified as current when it satisfies any of the following criteria:
a. The entity expects to settle the liability within the entity’s normal operating cycle
b. The entity holds liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the reporting period
d. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.

Examples:
1. Accounts payable - amounts due to suppliers for the purchase of goods or services on
credit
2. Notes payable - amounts due to other parties evidenced by a promissory note
3. Accrued expenses - expenses incurred but not yet paid
4. Interest payable - unpaid interest on borrowings
5. Salaries payable
6. Bank loans payable
7. Accrued revenue / accrued income- income received but not yet earned
8. SSS premium payable
9. Philhealth premium payable
10. Withholding tax payable

II. Non-Current Liabilities

Examples:
1. Mortgage payable - economic obligations secured by collateral
2. Notes payable - debts supported by notes and payable beyond one year
3. Deferred revenue - income received in advance but not yet earned and which will be
realized as income over a period of more than one year or the normal operating cycle if it
exceeds one year.

Equity
Equity is the difference between assets and liabilities. If the business owns assets worth
P2,000,000 and has debts worth P 1,500,000, the capital or owner’s equity is P 500,000.

Equity represents residual interest in the assets of the enterprise after deducting all
liabilities, otherwise known as net assets or net worth. Terms used in reporting the equity of an
enterprise are owner’s equity or capital in sole proprietorship, partner’s equity or capital in a
partnership, and stockholder’s equity or shareholder’s equity in a corporation.

For a sole proprietorship and partnership, the equity and withdrawal accounts are:
a. Owner’s capital - this includes the capital contribution of the owner
b. Owner’s drawing - this is used in recording the withdrawal capital made by the owner.

Income / Revenue
Income refers to the earnings of the enterprise. These includes sale of merchandise,
income due to performance or other type of income realized in the operation s of the business.

Technically, income is defined as the increase in economic benefits during the accounting
period in the form of inflow or increase in asset or decrease in liability that results in increase in
equity other than the contribution from equity participants.

The income accounts in a service concern maybe named as follows:

1. Service income - charges to clients or customers for services rendered
2. Professional fees
3. rent income
4. repair income
5. laundry income
6. ticket sales

For a merchandising firm, account titles are as follows:

1. Sales
2. Sales returns - represent deduction from sales due to merchandise returned by customers
 3. Sales allowance - represent deductions from selling price of goods with defects or goods
sent to customers but not as ordered
4. Sales discounts - deductions from the selling price due to payment of customers within the
discount period.

Expenses
Expenses are defined as the decrease in economic benefit during the accounting period in
the form of an outflow or decrease in asset or increase in liability that results in decrease in equity
, other than distribution to equity participants.

Specifically, expenses include the following: cost of sales, distribution or selling expenses,
administrative expenses, other operating expenses and income tax expense.

Cost accounts - these accounts represent the value of the goods sold. These include:
1. Purchases - represent the original acquisition price of the goods for resale
2. Purchase return - represent coat of goods purchased but returned to suppliers because of
damage, defect or unacceptable
3. Purchase allowance - represent the reduction in the cost of defective or damaged goods
bought but not returned to the supplier
4. Purchase discounts - represent the reduction in the amount paid to the supplier due to
payment of account within the discount period
5. Freight in - represent the cost of transporting goods purchased from the suppliers to the
store or warehouse

Otherexpense accounts:
1. salaries and wages
2. advertising expense
3. rent expense
4. repairs and maintenance
5. transportation expense
6. taxes and licenses – amount of taxes and licenses paid to the government
7. Doubtful accounts expense / bad debts expense – possible loss or portion of the
uncollectible receivables allocated as expense for the period.
8. depreciation expense - is the portion of the cost of the fixed asset that is charged or
allocated as expense for the period.
9. insurance expense
10. supplies expense
11. utilities expense
12. representation and entertainment - represent value placed on activities that will promote
goodwill and increase customers’ patronage.
13. SSS, Pag-ibig premiums – contributions of the employer to SSS and |Pag-big
14. Miscellaneous expense – relatively small amount paid for items or services which do not
fall under the above accounts.
Exercises:

A. Classification of Accounts. Write the letter answers on the space provided before the numbers.
CA – Current asset EQ - Equity
NCA-Noncurrent asset REV- Revenue
CL – Current liability EX - Expense
NCL – Noncurrent liability

_______1. Notes payable, due after 5 years ______11. Accrued salaries

_______2. Machinery ______12. SSS premium payable
_______3. Copyright ______13. Prepaid insurance
_______4. Accounts payable ______14. Allowance for doubtful accounts
_______5. Bad debts expense ______15. Unearned rent income
_______6. Ali Rose Capital ______16. Salaries expense
_______7. Building ______17. Office supplies expense
_______8. Ticket Sales ______18. Note Payable Trade
_______9. Cash ______19. Office supplies
______10. Merchandise inventory ______20. Sales

B. Identification.
______________1. These are the resources owned and controlled by the business.
______________2. It is the residual amount after deducting all the liabilities from the assets.
______________3. These are income received in advance but not yet earned.
______________4. These are assets without physical substance.
______________5. These are expenses paid in advance but not yet incurred.
CHART OF ACCOUNTS

In recording business transactions and events, the bookkeeper is usually guided by a

chart of accounts. A chart of accounts is a list of account titles classified or arranged according to
the financial statements wherein they appear.

The number of accounts maintained for a particular business depends upon the nature of
its operations, the volume of transactions, and the extent to which details are desired.

Clarity Fashion
Chart of Accounts

Assets
Account Number Account
1011 Cash
1012 Accounts Receivable
1013 Allowance for doubtful accounts
1014 Sewing Supplies
1015 Prepaid Rent
1016 Sewing Machine
1017 Accumulated Depreciation – Sewing Machine

Liabilities
2021 Accounts Payable
2022 Wages Payable
2023 Unearned Revenue

Owner’s Equity
3031 Louie, Capital
3032 Louie, Drawing
3033 Income Summary

Revenue
4041 Service Fee
4043 Rental Income

Expenses
5051 Salaries Expense
5052 Sewing Supplies Expense
5053 Rent Expense
5055 Utilities Expense

Activity:
Prepare a chart of account for ABC Trading. Use the accounts given below.
Provide the account number.

ABC Capital Office equipment

ABC, Drawing Office supplies
Accounts payable Office supplies expense
Accounts Receivable Prepaid insurance
Allowance for doubtful accounts Rent expense
Accrued rent expense Salaries expense
Accrued salaries Cash
Insurance Expense Utilities expense
Furniture & Fixture Utilities payable
Merchandise inventory Sales
Notes payable Accumulated depreciation- Office equipment
Notes receivable
THE ACCOUNTING EQUATION

An accounting equation shows the relationship between assets and equities . Assets are
properties owned or controlled by the business. Rights or claims against the asset are called
equities. Equities are divided into two types: 1) liabilities – the equity of creditors, and 2) capital
or owner’s equity – the equity of the owner.
ASSETS = LIABILITIES + OWNER’S EQUITY

Owner’s equity or capital is the excess of total assets over total liabilities. Creditor’s claim
has priority over claims of the owner, thus, owner’s equity is considered residual.
ASSETS – LIABILITIES = OWNER’S EQUITY

A business is interested in items which resulted to the increase or decrease in owner’s

equity. The increase in owner’s equity may be due to the income derived from the profit-directed
activities of the company or to additional investment by the owner. The decrease in the owner’s
equity may be due to the expenses or costs incurred in the operation.

Illustration 1.

Fill in the missing information on the table.

ASSETS = LIABILITIES + OWNER’S EQUITY

1. ₱ 205,000 ₱ 105,000 ₱100,000
2. ₱ ? ₱ 25,000 ₱30,000
3. ₱ 540,000 ₱ 345,000 ₱?
4. ₱ 237,500 ₱ 196,000 ₱?
5. ₱ ? ₱ 145,000 ₱ 45,000

Illustration 2

Determine the effects of the transactions on the accounting equation. Write INC if the effect is
increase and DEC if the effect is decrease. If the effect is on the owner’s equity, specify whether it
is an investment, withdrawal, revenue or expense.

OWNER’S Transaction
Transaction ASSETS LIABILITIES EQUITY affecting the
equity
Example (cash)
Initial cash investment INC INC Investment
Purchase of supplies in (supplies)
cash INC
(cash)
DEC
Payment of accounts (Cash) (accounts
payable DEC payable)
DEC
Collection of accounts
receivable
Payment of employee
salaries
Purchase of equipment on
account
Payment of rental expense
for use of office space
Sale of merchandise on
cash to customers
Capital withdrawal of
owner
Problem 1

The following problem will illustrate the effects of business transactions on the basic
accounting equation. This is presented in a tabular form..

1. Will established “Will TV Repairs” with an investment of ₱100,000.

2. Purchased equipment on cash basis, ₱29,000.
3. Purchased supplies on account ₱2,000.
4. Received P25,000 for repairing television sets.
5. Paid electricity bill, P ₱1,500.
6. Paid the ₱2,000 account on transaction #3.
7. Paid ₱ 2,500 wages expense
8. Withdrew capital, ₱5,000.
9. Rendered repair services on account, ₱15,000.
10.Purchased additional supplies on account, ₱1,800

ASSETS = LIABILITIES + EQUITY

1. 100,000 = + 100,000
2. 29,000 = +
(29,000)
3. = +
2,000 2,000
4. 25,000 = + 25,000
5. (1,500) = + (1,500)
6. (2,000) = (2,000) +
7. (2,500) = + (2,500)
8. (5,000) = + (5,000)
9. 15,000 = + 15,000
10. 1,800 = 1,800 +
Total 132,800 = 1,800 + 131,000
132,800 = 132,800

Problem 2

Jerry opened an ice cream store. Given below are the transactions. That transpired on the
first month of operations.

1. Jerry invested ₱350,000 cash

2. Acquired equipment on cash ₱200,000.
3. Purchased supplies on credit ₱50,000
4. Sold ₱25,000 worth of product to a customer on cash.
5. Purchased additional supplies on cash, ₱ 8,500.
6. Sold ₱14,500 worth of product to Client Z on account.
7. Paid partially the liability on transaction #3, ₱40,000
8. Collected partial cash payment from Client Z, ₱10,500
9. Paid electricity expense, ₱4,500
10.Paid employee salaries, ₱8,000.

Required: Determine the effect of the transaction to the accounting equation. Use the table below
as a guide.

ASSETS = LIABILITIES + EQUITY

Date Cash Accounts Supplies Equipment Accounts J Capital
Receivable Payable
Problem 3

Listed below are the business transactions for Pure Company during its first month of
operations:
1. Owner invested cash, ₱250,000.
2. Purchased equipment in cash, ₱50,000.
3. Purchased merchandise on credit amounting to ₱55,000.
4. Purchased furniture on account ₱30,000.
5. Paid cash for the business permit, ₱9,000.
6. Made sales in cash, ₱27,000
7. Partial payment of accounts payable in transaction #3, ₱45,000
8. Sold merchandise on credit, ₱15,500
9. Paid employee salaries of ₱12,000.
10. Paid the remaining liability in transaction #3, ₱10,000

Required: Indicate the effects of the given transactions on each of the financial. Prepare an
expanded form of accounting equation using the following accounts: CASH, ACCOUNTS
RECEIVABLE, MERCHANDISE INVENTORY, FURNITURE & EQUIPMENT, ACCOUNTS PAYABLE
and PURE CAPITAL.