Fundamental of Accountancy,

Business and Management 2

Ms. Jessalyn Sarmiento - Tancio

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
 Quarter 1

Lesson 1. Statement of Financial Position

Most Essential Learning Competencies
The learner…
1. identify the elements of the SFP and describe each of them.
(ABM_FABM12- Ia-b-1)

2. prepare an SFP using the report form and the

account form with proper classification of items
as current and noncurrent.
(ABM_FABM12- Ia- b-4)

What is Accounting?
Accounting is the process of recording financial transactions pertaining to a business. Businesses use accounting to
keep their financial information organized which help in the effective management of business.
The accounting process includes summarizing, analyzing and reporting these transactions to oversight agencies,
regulators and tax collection entities.
What are Accounts?
Accounts are names and numbers that you create to track those five primary things in an accounting system those five
things have different names
Assets – things you owned
Liability – the money you owe
Income- Money you receive
Expense – money you spend
Equity- your overall worth

Why use accounts/ accounting?

 Budgeting
 Identify Trends
 Accurate reports
 Maintaining Transparency
 Confidence in making decision for your organization

What is the Accounting Equation?

Assets = Liabilities + Equity

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Statement of Financial Position
Statement of Financial Position
 Also known as the Balance sheet.
 This statement includes the amounts of the company’s total assets, liabilities, and owner’s equity which in totality
provides the condition of the company on a specific date.

Assets
Anything of monetary value owned by a person or business. Assets are classed as capital/fixed, current, tangible or
intangible and expressed in terms of their cash value on financial statements
 Tangible assets are those tangible physical assets acquired to carry on the business of a company with a life
exceeding one year. It includes money, land, buildings, investments, inventory, cars, trucks, boats, or other
valuables.
 Intangibles such as goodwill are also considered to be assets. client lists
Examples of Intangible assets franchise agreements, favorable finance or lease agreements, brand names,
distribution networks, proprietary processes or technology (or anything protected by copyright), supplier
contracts, skilled employees

PERMANENT ACCOUNTS
 these accounts are permanent in a sense that their balances remain intact from one accounting period to another.
Examples: Cash, Accounts Receivable, Accounts Payable, Loans Payable and Capital

Accrued income
 income which has been earned but not yet received.

 Income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be
recognized in the accounting period in which it arises rather than in the subsequent period in which it will be
received.

Prepaid asset
 an expense that has already been paid for, but which has not yet been consumed. The concept most
commonly applies to administrative activities, such as prepaid rent or prepaid advertising.
 A prepaid asset appears as a current asset on an organization's balance sheet, assuming that it is expected to be
consumed within one year. Once the asset has been consumed, it is charged to expense.

CONTRA ASSETS
• Contra assets are those accounts that are presented under the assets portion of the SFP but are reductions to the company’s
assets.

These include Allowance for Doubtful Accounts and Accumulated Depreciation.

Allowance for Doubtful Accounts is a contra asset to Accounts Receivable. This represents the estimated amount that the company
may not be able to collect from delinquent customers.

Accumulated Depreciation is a contra asset to the company’s Property, Plant and Equipment. This account represents the total
amount of depreciation booked against the fixed assets of the company.

Liability
 A liability is typically an amount owed by a company to a supplier, bank, lender, or other provider of goods,
services, or loans. Liabilities can be listed under accounts payable, and are credited in the double entry
bookkeeping method of managing accounts.

Contra liability account

 account is a liability account where the balance is expected to be a debit balance. Since a debit balance in a
liability account is contrary to the normal credit balance, the account is referred to as a contra liability account.
Ms. Jessalyn Sarmiento - Tancio
Fundamentals of Accountancy Business and Management 2
August 2020
Accrued expense
 an accounting expense recognized in the books before it is paid for. Accrued expenses are typically periodic, and
are documented on a company's balance sheet as current liabilities.

Unearned income
 income from investments and other sources which is unrelated to employment. Examples of unearned income
include interest from savings accounts, bond interest, alimony, and dividends from stock. Unearned income,
known as a "passive source of income," is income not acquired through work
Current assets and current liabilities are also called short term assets and shot term liabilities

Current Asset
 Assets that can be realized (collected, sold, used up) within one year after year-end date.
Examples include Cash, Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.

Current Liabilities
 Liabilities that fall due (paid, recognized as revenue) within one year after year-end date.
Examples include Notes Payable, Accounts Payable, Accrued Expenses (example: Utilities Payable), Unearned
Income, etc.
Non-Current assets and Non-Current liabilities are also called long term assets and long term liabilities
Noncurrent Assets – Assets that cannot be realized (collected, sold, used up) one year after yearend date.
Examples include Property, Plant and Equipment (equipment, furniture, building, land), Long Term investments,
Intangible Assets etc.
Noncurrent Liabilities – Liabilities that do not fall due (paid, recognized as revenue) within one year after year-
end date. Examples include Loans Payable, Mortgage Payable, etc.

Equity
 is typically referred to as shareholder equity which represents the amount of money that would be returned to a
company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off.

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
 Example of
SFP or
BALANCE
SHEET

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
In Preparing Statement of Financial Position we have different part
a. Heading

i. Name of the Company

ii. Name of the Statement

iii. Date of preparation (emphasis on the wording – “as of”)

Report form
A balance sheet is
a balance sheet that
presents asset, liability,
and equity accounts in a
vertical format.

Account form 
A financial statement
format where the assets
are reported on the left
side and the liabilities
and equity are reported
on the right side
a. Emphasize that the two
are only formats and will
yield the same amount of
total assets, liabilities and
equity

b. Emphasize that assets

should always be equal to
liabilities and equity

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
When the company has a lot of assets (example: cash, accounts receivable, prepaid expenses), owners may sometimes think that the
company is doing well. There are instances that owners forget that they might also have a lot of liabilities which may result to their
equities having a very small balance. With the preparation of the SFP, the owner can easily see the assets, liabilities and equity
balances of his/her company which will show exactly the financial position of the company as of a given point in time.

Important matters:
a. Without the SFP, the company cannot know if it truly owns anything because in case of bankruptcy, liabilities are paid first.
- Small businesses don’t usually account for their assets and liabilities as long as the owners see that cash is coming in. They
sometimes forget that when liabilities become due, if they don’t have enough current assets to be able to pay those liabilities, then they
can get in trouble with their debts.

b. Importance of the format:

i. Report form vs Account form – these are just formats. Usually depends on the reader for preference.
ii. Report form is the normal format for those not familiar with accounting. Account form easily shows that the SFP is balanced
and separates assets from liabilities and equities.
iii. Separation of the current and noncurrent – current liabilities are upcoming liabilities and the company should be prepared
to pay them. Companies should prepare as early as today for payment of noncurrent liabilities as these usually have large balances.
Current assets show the company’s ability to sustain its current operations while noncurrent assets shows the company’s
ability to sustain long-term operations.

Quiz # 1
Define the following question. Choose the answer below.
1. The process of recording financial transactions pertaining to a business.
2. What is the Accounting Equation?
3. This statement includes the amounts of the company’s total assets, liabilities, and
owner’s equity which in totality provides the condition of the company on a specific
date.
4. Anything of monetary value owned by a person or business.
5. Physical assets acquired to carry on the business of a company with a life exceeding one year.
6. Income which has been earned but not yet received.

7. An expense that has already been paid for, but which has not yet been consumed.
8. those accounts that are presented under the assets portion of the SFP but are reductions to the company’s assets.
9. An amount owed by a company to a supplier, bank, lender, or other provider of goods, services, or loans.
10. An accounting expense recognized in the books before it is paid for
11. Assets that can be realized (collected, sold, used up) within one year after year-end date.
12. Represents the amount of money that would be returned to a company’s shareholders if all of the assets were
liquidated and all of the company's debt was paid off.

13. A balance sheet is a balance sheet that presents asset, liability, and equity accounts in a vertical format.
14. A financial statement format where the assets are reported on the left side and the liabilities and equity are
reported on the right side
15. Liabilities that do not fall due (paid, recognized as revenue) within one year after year-end date.

Accounting, Assets, Prepaid asset, Assets = Liabilities + Equity, Tangible assets, Liability, Report Ms. form
JessalynStatement
Sarmiento - Tancio
Fundamentals of Accountancy Business and Management 2
of Financial Position, Accrued income, CONTRA ASSETS, Accrued expense, Equity, Noncurrent Liabilities,August 2020
Account form, Current Asset, Current Liabilities, Non-Current Asset
Quiz # 2
Answer the following problem.
1. Learning is Fun Company had current assets amounting to Php 100,000. Noncurrent assets
for the year totaled Php 76,000. How much is the company’s total assets?
2. Happy Selling Company’s total liabilities amounted Php 10,000. Total equity had an ending
balance of Php 20,000. How much is total assets?
3. Happy Selling’s had the following accounts at year end: Cash-250,000, Accounts Payable-70,000, Prepaid Expense-
15,000. Compute for the company’s current assets.
4. Happy Selling’s Accounts Receivable amounted to Php 500,000. Prepaid Expense and Unearned Income totaled Php
30,000 and Php 10,000 respectively. Cash balance amounted to Php 100,000 while Accounts Payable and Inventory
totaled to Php 20,000 and Php 10,000 respectively. How much is the company’s current assets? Current liabilities?
5. Company’s Total Liabilities and Equity amounted to Php 285,000. Total noncurrent assets ended at Php 85,000. Cash
totaled Php50,000. Inventory amounted to Php100,000. Assuming the company had no other assets, how much is
Accounts Receivable?
6. Total assets amounted to Php575,000. Total equity amounted to Php 250,000. Accounts Payable amounted to Php
50,000 while Unearned Income totaled Php 85,000. Assuming there are no other current liabilities, compute for the
company’s noncurrent liabilities.

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Activity #1
Arrange the following accounts in Current Asset, Non- Current Asset, Current
Liabilities, Non- Current Liabilities

1. Good will 14. Accrued Expenses

2. Intangible Assets 15. Long Term – Debt
3. Accounts Receivable 16. Land
4. Loans Payable 17. Company Vehicle
5. Cash 18. Property, Plant and Equipment
6. Utilities Payable 19. Materials and Supplies
7. Inventories 20. Accumulated Depreciation
8. Prepaid Expense 21. Software
9. Long Term Investments 22. Rent Expense
10. Term Debt 23. Building
11. Accounts Payable 24. Furnitures and Fixtures
12. Income Taxes Payable 25. Allowance for Doubtful Accounts
13. Mortgage Payable

Non- Current Asset Non- Current Liabilities

Non- Current Asset Non- Current Liabilities

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Activity # 2
Using the Accounts Form prepare a Statement of Financial Position (Balance Sheet)
Good will -5,000 Long Term – Debt-
420,000
Accounts Receivable-15,000
Land- 500,000
Loans Payable- 23,000
Company Vehicle- 150,000
Cash- 10,000
Property, Plant and Equipment- 320,000
Utilities Payable- 120,000
Materials and Supplies 45,300
Inventories- 50,000
Software-100,000
Prepaid Expense- 7,000
Rent Expense- 26,000
Term Debt- 75,000
Building- 1,200,000
Accounts Payable- 30,000
Furnitures and Fixtures- 33,000
Income Taxes Payable- 60,000
Owner’s Capital-1,230,000
Mortgage Payable- 200,000
Additional Investment- 214,000
Accrued Expenses- 15,000
Accumulated Depreciation- 22,300

Activity # 3

Prepare a Statement of Financial Position for the company (account form) Write you
answer on the given space below.

You were hired by Mr. Juan Dela Cruz to prepare his sari-sari store’s Statement of
Financial Position. In order to prepare the statement, you identified the following assets and
liabilities of Mr. Dela Cruz:
a. His sari-sari store has cash deposited in a bank account amounting to P50,000
b. His sari-sari store had a lot of uncollected sales from customers amounting to P75,000
c. The total amount of merchandise left inside the store is P30,000
d. He already paid one year’s rent in advance amounting to P12,000
e. The value of all the company’s furniture amounted to P100,000
f. He bought merchandise from his supplier amounting to P25,000 and the supplier agreed that payment can be
made 2 months after year-end
g. SSS, Phil health and Pag-ibig Payables for his one employee totaled P5,000
h. The sari-sari store had outstanding liabilities to utility companies amounting to P3,000
i. He had a loan from the bank amounting to P50,000 to be paid in 3 years Prepare a Statement of Financial Position
for the company (one in report form and one in account form)

Lesson 2. Statement of Comprehensive Income (SCI)

Most Essential Learning Competencies

The learner…

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
 1. identify the elements of the SCI and describe each of these items for a service business and a merchandising
business (ABM_FABM12- Ic-d-5)
2. prepare an SCI for a service business using the single-step approach (ABM_FABM12- Ic-d-6)
3. prepare an SCI for a merchandising business using the multistep
approach (ABM_FABM12- Ic-d-7)

What are accruals?

• refers to adjustments that must be made before a company's financial
statements are issued.
Accruals involve the following types of business transactions:
• expenses, losses, and liabilities that have been incurred but are not yet recorded in the accounts, and
• revenues and assets that have been earned but are not yet recorded in the accounts
Expense Accruals
Expenses that have been incurred for which we have not yet received an invoice(receipt) from the supplier.
Example
 Travel expenses paid by an employee, but not yet claimed back from the company
 Outside services (legal, advertising, cleaning) received or rendered but not yet billed
Revenue Accruals
good or services that have delivered for which we have not yet billed the customer
Example
 Service work to client performed under existing contract, not yet billed.
 Electricity company supply the electricity to the consumer but not yet billed until the end of the month.

Revenues
Fees earned from providing services and the amounts of merchandise sold. Often the term income is used instead of
revenues.
• Examples of revenue accounts include: Sales, Service Revenues, Fees Earned, Interest Revenue, Interest Income. 

Expense
Expenses associated with the main activity of the business are referred to as operating expenses. Expenses associated with
a peripheral activity are non-operating or other expenses.
• Example a retailer's interest expense is a non-operating expense. A bank's interest expense is an operating
expense.
Types of Business
1. Service Business
A company that provides certain professional support to its clients.
Examples:
consulting, accounting, transportation, cleaning, hospitality, traveling or maintenance, 

2. Merchandise Business
A business that purchases finished products and resells them to consumers.

Accrued income
is income which has been earned but not yet received.
Ms. Jessalyn Sarmiento - Tancio
Fundamentals of Accountancy Business and Management 2
August 2020
Accrued expense
is expense which has been incurred but not yet paid.

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME

• Also known as the income statement.
• Contains the results of the company’s operations for a specific period of time which is called net income if it
is a net positive result while a net loss if it is a net negative result. This can be prepared for a month, a quarter or a
year.
Consists of two major sections:
• Net income (or net earnings) from the company's income statement
• Comprehensive income, which consists of positive and/or negative amounts for foreign currency translation and
hedges, and a few other items
TEMPORARY ACCOUNTS
• Also known as nominal accounts are the accounts found under the SCI.
• They are called such because at the end of the accounting period, balances under these accounts are transferred to
the capital account, thus having only temporary amounts and resulting to zero beginning balances at the beginning
of the following year
• Examples of temporary accounts include revenues, sales, utilities expense, supplies expense, salaries expense,
depreciation expense, interest expense among others.

Single-step
A single-step income
statement is one of two commonly used formats for the income statement or profit and loss statement. The single-step

Different parts of the Statement of Comprehensive Income

A. Heading

i.Name of the Company

ii.Name of the Statement

iii.Date of preparation (emphasis on the wording – “for the”)

B. STATEMENT OF COMPREHENSIVE INCOME

i.First part is revenues -This is the total amount of revenue that the company was able to generate from providing services
to customers

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
 ii.Second part is expenses (can be broken down into General and Administrative and Selling Expenses).

iii.Revenues less Expenses. Net income for a positive result and net loss for a negative result

Multiple-step
• An income statement that has more than one subtraction in arriving at net income. An income statement showing
gross profit is an indication it is a multiple-step income statement.

i. First part is Sales This is the total amount of revenue that the company was able to generate from selling products

ii. Second part compose of contra revenue – called contra because it is on the opposite side of the sales account. The sales account is
on the credit side while the reductions to sales accounts are on the debit side. This is “contrary” to the normal balance of the sales or
revenue accounts.

ii.i. Sales returns – This account is debited in order to record returns of customers or allowances for such returns.
Returns occur when customers return their products for reasons such as but not limited to defects or change of preference.

ii.ii.Sales discount – This is where discounts given to customers who pay early are recorded. Also known as cash
discount. This is different from trade discounts which are given when customers buy in bulk. Sales discount is awarded to customers
who pay earlier or before the deadline.

iii. Sales less Sales returns and Sales discount is Net Sales

iv. Third part is Cost of Goods Sold – This account represents the actual cost of merchandise that the company was able to sell during
the year.

iv.i. Beginning inventory – This is the amount of inventory at the beginning of the accounting period. This is also
the amount of ending inventory from the previous period.

iv.ii.Net Cost of Purchases = Purchases + Freight In

iv.ii.i.Net Purchases = Purchases – (Purchase discount and purchase returns)

iv.ii.i.i.Purchases – amount of goods bought during the current accounting period.

iv.ii.i.ii.Contra Purchases –An account that is credited being “contrary” to the normal balance of
Purchases account.

iv.ii.i.ii.i.Purchase discount – Account used to record early payments by the company to the
suppliers of merchandise. This is how buyers see a sales discount given to them by a supplier.

iv.ii.i.ii.ii.Purchase returns – Account used to record merchandise returned by the company to

their suppliers. This is how buyers see a sales return recorded by their supplier

iv.ii.ii.Freight In – This account is used to record transportation costs of merchandise purchased by the
company. Called freight in because this is recorded when goods are transported into the company.

iv.iii.Add Beginning inventory and Net cost of Purchases to get Cost of Goods Available for Sale

iv.iv.Ending inventory – amount if inventory presented in the Statement of Financial Position. Total cost
of inventory unsold at the end of the accounting cycle.

v. Sales less Cost of Goods Sold is Gross Profit

Ms. Jessalyn Sarmiento - Tancio
Fundamentals of Accountancy Business and Management 2
August 2020
vi. Fourth Part is General and Administrative Expenses –These expenses are not directly related to the merchandising function of
the company but are necessary for the business to operate effectively.

vii. Fifth Part is Selling Expenses – These expenses are those that are directly related to the main purpose of a merchandising
business: the sale and delivery of merchandise. This does not include cost of goods sold and contra revenue accounts.

viii. Gross Profit less General and Administrative Expenses less Selling Expenses is Net Income for a positive result while Net Loss
for a negative result

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Simple Example of SCI

1. How a company can earn without having cash and lose even with lots of cash.
a. Company can still have net income without cash transactions due to accrued income
- A sari-sari store who sells a lot of merchandise but majority of the sales are on credit. High net income, low cash
balance.
b. Company can still have net loss with a lot of cash revenues due to depreciation and accrued expense - We always see a
lot of people buying from Jollibee/Mcdo using cash but a new branch can still have net loss due to the depreciation
expense of its building/equipment.
2. Other important matters:
a. Without the SCI, the company cannot truly know if it is earning.
Example:
- Small businesses don’t usually account for their revenues and expenses as long as the owners see that cash is coming in.
They sometimes forget that equipment is depreciated and some expenses are accrued.
b. Importance of the format:
i. Single-Step vs Multi-Step and why is single-step more often used in service companies while multi-step is more
often used in merchandising companies (service companies don’t have inventories)
ii. Use of reduction to sales and contra purchases (contra accounts are used to easily determine those accounts that
are directly connected to sales and purchases. These can also be used as a determinant of quality –sales returns and
purchase returns)
iii. Separation of the General and Administrative Expenses with the Selling Expenses (companies can know how to
reduce expenses and increase net income by pin pointing which expense is very high)

Quiz # 3

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Identify the following. Choose the answer below.

1. Refers to adjustments that must be made before a company's financial statements are issued.
2. A business that purchases finished products and resells them to consumers.
3. This is the amount of inventory at the beginning of the accounting period. This is also the amount of ending inventory from
the previous period.
4. Expenses that have been incurred for which we have not yet received an invoice(receipt) from the supplier.
5. A company that provides certain professional support to its clients.
6. Contains the results of the company’s operations for a specific period of time which is called net income if it is a
net positive result while a net loss if it is a net negative result.
7. This is the total amount of revenue that the company was able to generate from selling products
8. These expenses are not directly related to the merchandising function of the company but are necessary for the business to
operate effectively.
9. These expenses are those that are directly related to the main purpose of a merchandising business: the sale and delivery of
merchandise. This does not include cost of goods sold and contra revenue accounts.
10. This account is used to record transportation costs of merchandise purchased by the company. Called freight in because this
is recorded when goods are transported into the company.
11. This is where discounts given to customers who pay early are recorded. Also known as cash discount. This is different from
trade discounts which are given when customers buy in bulk. Sales discount is awarded to customers who pay earlier or
before the deadline.
12. Amount of goods bought during the current accounting period.
13. This account is debited in order to record returns of customers or allowances for such returns.
14. The opposite side of the sales account. The sales account is on the credit side while the reductions to sales accounts are on the
debit side.
15. Good or services that have delivered for which we have not yet billed the customer.

Freight In, Revenue Accrual, Sales discount, Contra revenue, Sales returns, Purchases, STATEMENT OF
COMPREHENSIVE INCOME, Selling Expenses, General and Administrative Expenses, Sales, Service
Business, Beginning Inventory, Expense Accruals, Merchandise Business, Accrual, Income

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Quiz # 4
Answer the following problem
1. Learning is Fun Company generated revenues amounting to Php 100,000.
Expenses for the year totaled Php 76,000. How much is the company’s net income
for the year?
2. Happy Selling Company’s salaries to sales agents amounted to Php 10,000. Salaries
of accountants amounted to Php 20,000. No other expenses were incurred. How much is the company’s general
and administrative expense?
3. Happy Selling’s beginning inventory amounted to 250,000. Net purchases amounted to 70,000. Freight In totaled
15,000. Compute for the company’s cost of goods available for sale.
4. Happy Selling’s Sales amounted to Php 500,000. Sales returns and sales discounts amounted to Php 30,000 and
Php 10,000 respectively. Purchases of the company totaled Php 100,000 while purchase returns and purchase
discounts amounted to Php 20,000 and Php 10,000 respectively. How much is the company’s Net Sales? Net
Purchases?
5. Company’s Cost of Goods Sold amounted to Php 285,000. Net cost of purchases totaled Php 85,000. Beginning
inventory amounted to Php 250,000. Sales amounted to Php 500,000. Compute for the company’s Ending
Inventory.
6. Gross profit of Happy Selling amounted to Php 175,000. Beginning Inventory totaled Php 250,000. Ending
Inventory amounted to Php 50,000 while Net Cost of Purchases totaled Php 85,000. Compute for Happy’ s Net
Sales.
7. At the end of the first month of operations for Juan’s Service Company, the business had the following accounts:
Cash, Php19,000; Prepaid Rent, Php500; Equipment, Php5,000 and Accounts Payable Php2,000. By the end of
the month, Jackson's had earned Php20,000 of Revenues, Php1,000 of Utilities Expenses and Php1,500 of Salaries
Expenses. Calculate the net income to be reported by the company for this first month.
8. During October, a sari-sari store had the following transactions involving revenue and expenses. Did the firm earn
a net income or incur a net loss for the period? What was the amount?
Paid Php1,200 for rent
Provided services for Php2,750 in cash
Paid Php250 for telephone service
Provided services for Php1,900 on credit
Paid salaries of Php1,675 to employees
Paid Php350 for office cleaning service
9. Compute for the Cost of Goods Sold using the following:
Sales – 15,000
Purchases – 2,000
Purchase returns – 200
Purchase discounts – 200
Freight in – 100
Beginning inventory – 1,000
Ending inventory – 500

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Activity #4
1. Prepare a single-step Statement of Comprehensive Income using the
following:
Revenues – 20,000
Rent expense – 3,000
Salaries expense – 4,000
Utilities expense – 2,000
Learners can use any business name and the end of the current year for the heading.

2. Prepare a multi-step Statement of Comprehensive Income using the following:

Net Sales -100,000
Cost of Goods sold- 75,000
Salaries Expense for Admin Staff – 23,000
Salaries Expense for Sales Agent -36,000
Rent Expense for Office Building – 15,000
Miscellaneous Expense -13,000
Utilities Expense for Shop -5,000
Advertisement – 11,000
Depreciation of delivery van- 2,000
Learners can use any business name and the end of the current year for the heading.
3. Identify if the account is part of the general and administrative expenses or selling expenses
Nena had the following expense accounts for the year ended December 31, 2016:
A. Salaries of admin personnel
B. Salaries of janitors
C. Salaries of sales agents
D. Utilities of home office
E. Rent of office building
F. Depreciation of office equipment
G. Depreciation of delivery van
H. Advertising
I. Miscellaneous Expense
J. Rent of the Retail Store

Ms. Jessalyn Sarmiento - Tancio

Fundamentals of Accountancy Business and Management 2
August 2020
Lesson # 3 Statement of Changes in Equity (SCE)

Most Essential Learning competencies

The learner prepares an SCE for a single proprietorship

STATEMENT OF CHANGES IN EQUITY

a. Revenues – service income, sales

b. Expenses – salaries expense, depreciation expense

c. Income – revenues less expenses (amount found at the bottom of the SCI)

d. Assets – inventories, prepaid expenses, property, plant and equipment

e. Liabilities – accounts payable, unearned income, long-term debt,

STATEMENT OF CHANGES IN EQUITY – All changes, whether increases or decreases to the owner’s interest on
the company during the period are reported here. This statement is prepared prior to preparation of the Statement of
Financial Position to be able to obtain the ending balance of the equity to be used in the SFP

SINGLE/SOLE PROPRIETORSHIP –An entity whose assets, liabilities, income and expenses are centered or owned
by only one person
PARTNERSHIP – An entity whose assets, liabilities, income and expenses are centered or owned by two or more
persons
CORPORATION – An entity whose assets, liabilities, income and expenses are centered or owned by itself being a
legally separate entity from its owners. Owners are called shareholders or stockholders of the company

Initial Investment – The very first investment of the owner to the company.
Additional Investment – Increases to owner’s equity by adding investments by the owner

Withdrawals –Decreases to owner’s equity by withdrawing assets by the owner

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Fundamentals of Accountancy Business and Management 2
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 Different parts of the Statement of Changes in Equity
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “for the”)
b. Increases to Equity
i. Net income for the year
ii. Additional investment
c. Decreases to Equity
i. Net loss for the year
ii. Withdrawals by the owner
Company can earn a lot, have numerous assets and yet have very small equities. This is a common mistake of most
people. They focus on increasing their income (salary) and assets (house, car, appliances) but at the same time they also
increase their liabilities (buying using loans, debts). This results to low levels or even negative amounts of equity over
their properties.
The importance of taking note of how much equity do owners have over the company assets or even over their own
personal belongings.

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Fundamentals of Accountancy Business and Management 2
August 2020
Quiz # 5
1. Which form of business organization puts the least risk on its owners?
2. Which form of business organization is owned by only one person?
3. Increases in owner’s equity without additional investment
4. Decreases to owner’s equity apart from net effect of revenues and expenses.
5. The very first investment of the owner to the company.
6. Beginning owner’s equity amounted to P 300,000. Net loss for the year totaled P 45,000. No additional
investments and withdrawals for the period. Compute for total increase in equity for the year.
7. Ending owner’s equity amounted to P70,000. Additional investments during the year amounted to P30,000.
Withdrawals totaled P50,000. Compute for the company’s net income for the year assuming beginning equity is
P10,000.
8. Owner, Juan invested an initial capital amounting P50,000 in order to put up his janitorial services company.
During the first year of operations (2016), the company had a loss of P25,000. Because of this, Juan invested
additional capital amounting to P50,000 in 2017. In the second year (2017), the company had a net income of
P100,000 and Juan withdrew P10,000 for personal use. Compute for the ending capital balance of Juan for the
year 2017.
9. Owner Juana invested P100,000 to start her laundry business. During the first year of operations (2016), the
company had a net income of P15,000. Juana invested additional P100,000 to grow the business. In 2017, the
business earned P50,000. As of December 31, 2017, Juana’s capital balance is P200,000. How much is Juana’s
withdrawal?
10. The following balances were retrieved from the records of Juan’s Janitorial Services for the year ended
December 31, 2016: (Prepare the Statement of Changes in Equity)
Capital, January 1, 2016 P 500,000
Withdrawals 100,000
Additional Investments 50,000
Net Loss 45,000

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Fundamentals of Accountancy Business and Management 2
August 2020
 Lesson # 4 Cash Flow Statement (CFS)
Most Essential Learning competencies

The learner…

1. discuss the components and structures of a CFS

2. prepare a CFS

Accrual - the accumulation or increase of something over time, especially payments or benefits.
Depreciation - is an accounting method of allocating the cost of a tangible or physical asset over its useful life
or life expectancy. 

a. Accrual – accrued income, accrued expense

b. Depreciation – equipment, furniture, building

CASH FLOW STATEMENT – Provides an analysis of inflows and/or outflows of cash from/to operating,
investing and financing activities (This statement shows cash transactions only compared to the SCI which
follows the accrual principle.

Importance: The CFS provides the net change in the cash balance of a company for a period. This helps owners
see if their revenues are actually translated to cash collections or if they have enough cash inflows in order to pay
any maturing liabilities.

a. Receipts from customers - derived from the following formula:

Ending Accounts Receivable = Beginning Accounts Receivable + Net Sales – Collections

Therefore: Collections (receipts from customers) = Beginning Accounts Receivable + Net Sales or Net Revenue –Ending Accounts
Receivable

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Fundamentals of Accountancy Business and Management 2
August 2020
b. Payments to Suppliers and Employees – derived from the following formula:

Ending Accounts Payable and Ending Accrued Salaries Expense = Beginning Accounts Payable + Beginning Accrued Salaries
Expense + Net Purchases + Salaries Expense - Payments

Therefore: Payments = Beginning Accounts Payable + Beginning Accrued Salaries Expense + Net Purchases + Salaries Expense –
Payments

Direct – The operating cash flow section of the CFS under the direct method would show each major class of
gross cash receipts and gross cash payments

Indirect – The operating cash flow section of the CFS under the indirect method will reconcile the net
income/loss of the company with the total cash flows generated/used in operating activities by adjusting the net
income/loss for effects of non-cash transactions

Emphasize that the two are only approaches and will yield the same amount of cash flow from operating activities. Note that the
Investing and Financing sections of the CFS are the same under the two approaches.

Different parts of the Cash Flow Statement

Operating Activities – Activities that are directly related to the main revenue-producing activities of the
company such as cash from customers and cash paid to suppliers/employees

Investing Activities – Cash transactions related to purchase or sale of non-current assets

Financing Activities – Cash transactions related to changes in equity and borrowings.

Net change in cash or net cash flow (increase/decrease) – The net amount of change in cash whether it is an
increase or decrease for the current period. The total change brought by operating, investing and financing
activities.

Beginning Cash Balance – The balance of the cash account at the beginning of the accounting period.

Ending Cash Balance – The balance of the cash account at the end of the accounting period computed using the
beginning balance plus the net change in cash for the current period.

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Fundamentals of Accountancy Business and Management 2
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a. Heading

i. Name of the Company

ii. Name of the Statement

iii. Date of preparation (emphasis on the wording – “for the”)

b. Sample of the Direct Method

i. First part is operating activities

ii. Second part is investing activities

iii. Third part is financing activities

How a company can earn a lot, have numerous assets and yet have very small equities.

Company can still have a high level of cash balance with net loss due to non-cash expenses such as depreciation and accrual of
expenses

Other important matters:

a. Discuss that without the CFS, the company cannot know if it can pay its upcoming liabilities or continue operations due to some
expenses having no credit terms, thus cash is needed before a transaction can occur.

b. Discuss the importance of the approach:

b. i. Direct approach provides information regarding the actual cash transactions generated/used in operations

b. ii. Indirect approach provides information regarding non-cash transactions during the year and shows the difference between the net
income/loss of the company and the cash generated/ used in operations

c. Discuss that knowing the cash flow of the company or the cash flow of their personal lives can help the learners reduce unnecessary
outflows and increase inflows to make sure that at the end of each period, the company or the learner can have a net increase in cash.

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Fundamentals of Accountancy Business and Management 2
August 2020
Quiz # 6
1. Gain on sale of property and equipment is part of what activity in the CFS?
2. Changes in long term liabilities is part of what activity in the CFS?
3. Net income is part of which Approach in preparing the CFS?
4. Based on the given above, compute for the net change in cash for the year.
5. The accumulation or increase of something over time, especially payments or benefits.
6. It is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life
expectancy. 
7. Provides an analysis of inflows and/or outflows of cash from/to operating, investing and financing activities.
8. Cash transactions related to changes in equity and borrowings.
9. Cash transactions related to purchase or sale of non-current assets
10. Activities that are directly related to the main revenue-producing activities of the company such as cash from
customers and cash paid to suppliers/employees.

Quiz on the preparation of the CFS (either Direct or Indirect)

1. Identify which of the following transactions fall under operating, investing and financing activities:

a. Cash received from customers

b. Cash paid to suppliers

c. Cash paid to employees

d. Cash paid to purchase equipment (company does not sell equipment)

e. Cash received from sale of furniture (company’s main line of business is not related to furniture)

f. Depreciation expense

g. Sale of goods on credit

h. Purchase of goods on credit

i. Cash received from getting a loan from a bank

j. Cash paid to owners

2. Juana’s sari-sari store had the following transactions during the year:

a. Purchase of goods. Paid cash. 100,000

b. Sale of goods. Received cash. 150,000

c. Paid utilities 30,000

d. Paid rent 10,000

e. Sold equipment for cash 100,000

f. Owner withdraws investment 10,000

Compute for the net cash flow generated by/used in operating activities

Activity # 5
1. Prepare a Cash Flow Statement.
Juana’s sari-sari store had the following transactions during the year:

a. Purchase of goods. Paid cash. 100,000

b. Sale of goods. Received cash. 150,000

c. Paid utilities 30,000

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Fundamentals of Accountancy Business and Management 2
August 2020
d. Paid rent 10,000

e. Sold equipment for cash 100,000

f. Owner withdraws investment 10,000

2. Prepare the Cash Flow Statement of Teresa’s Delivery Services using the following:

Net Income 500,000

Depreciation expense 70,000

Gain on sale of property and equipment 10,000

Increase in trade and other receivables – net 250,000

Increase in trade and other payables 150,000

Amount of proceeds from sale of property and equipment 50,000

Paid loan from a bank 100,000

Cash, January 1, 2016 70,000

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Fundamentals of Accountancy Business and Management 2
August 2020
Financial statement (FS) analysis
is the process of evaluating risks, performance, financial health, and future prospects of a business by subjecting financial
statement data to computational and analytical techniques with the objective of making economic decisions

There are three kinds of FS analysis techniques:

- Horizontal analysis

- Vertical analysis

- Financial ratios

Horizontal analysis
also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time with the purpose
of determining the increase or decrease that has taken .

This will reveal the behavior of the account over time. Is it increasing, decreasing or not moving? What is the magnitude of the
change? Also, what is the relative change in the balances of the account over time?

- Horizontal analysis uses financial statements of two or more periods.

- All line items on the FS may be subjected to horizontal analysis. - Only the simple year-on-year (Y-o-Y)grow this covered in
this lesson.

- Changes can be expressed in monetary value (peso) and percentages computed by using the following formulas:

• Peso change=Balance of Current Year-Balance of Prior Year

• Percentage change= (Balance of Current Year-Balance of Prior Year)/(Balance of Prior Year)

• Example:

✓Peso change = P250,000 - P175,000 = P75,000

✓Percentage change = (P250,000 - P175,000) / P175,000 = 42.86%

✓This is evaluated as follows: Sales increased by P75,000. This represents growth of 42.86% from 2013 levels.

Vertical analysis,

also called common-size analysis, is a technique that expresses each financial statement item as a percentage of a base amount

- For the SFP, the base amount is Total Assets.

• Balance of Account / Total Assets.

• From the common-size SFP, the analyst can infer the composition of assets and the company’s financing mix.

• Example:

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Fundamentals of Accountancy Business and Management 2
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 ✓The above may be evaluated as follows: The largest component of asset is Equipment at 39.3%. Cash is the smallest
component at 14%. On the other hand, 50% of assets are financed by debt and the other half is financed by equity.

Activity # 6
Prepare Vertical Analysis

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Fundamentals of Accountancy Business and Management 2
August 2020
 Ms. Jessalyn Sarmiento - Tancio
Fundamentals of Accountancy Business and Management 2
August 2020
Ratio analysis
Expresses the relationship among selected items of financial statement data. The relationship is expressed in terms of a
percentage, a rate, or a simple proportion. A financial ratio is composed of a numerator and a denominator.
For example, a ratio that divides sales by assets will find the peso amount of sales generated by every peso of asset
invested. This is an important ratio because it tells us the efficiency of invested asset to create revenue. This ratio is called
asset turnover. There are many ratios used in business.
These ratios are generally grouped into three categories:
(a) profitability,
(b) efficiency, and
(c) financial health.

Profitability ratios
measure the ability of the company to generate income from the use of its assets and invested capital as well as control its
cost. The following are the commonly used profitability ratios:
- Gross profit ratio reports the peso value of the gross profit earned for every peso of sales. We can infer the average
pricing policy from the gross profit margin.
- Operating income ratio expresses operating income as a percentage of sales. It measures the percentage of profit
earned from each peso of sales in the company’s core business operations (Horngren et.al. 2013). A company with a high
operating income ratio may imply a lean operation and have low operating expenses. Maximizing operating income
depends on keeping operating costs as low as possible (Horngren et.al. 2013).
- Net profit ratio relates the peso value of the net income earned to every peso of sales. This shows how much profit will
go to the owner for every peso of sales made.
- Return on asset(ROA) measures the peso value of income generated by employing the company’s assets. It is viewed
as an interest rate or a form of yield on asset investment. The numerator of ROA is net income. However, net income is
profit for the shareholders. On the other hand, asset is allocated to both creditors and shareholders. Some analyst prefers to
use earnings before interest and taxes instead of net income. There are also two acceptable denominators for ROA –
ending balance of total assets or average of total assets. Average assets is computed as beginning balance + ending
balance divided by 2.
- Return on equity(ROE) measures the return (net income) generated by the owner’s capital invested in the business.
Similar to ROA, the denominator of ROE may also be total equity or average equity.

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Fundamentals of Accountancy Business and Management 2
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Operational efficiency ratio
measures the ability of the company to utilize its assets. Operational efficiency is measured based on the company’s
ability to generate sales from the utilization of its assets, as a whole or individually. The turnover ratios are primarily used
to measure operational efficiency.
- Asset turnover measures the peso value of sales generated for every peso of the company’s assets. The higher the
turnover rate, the more efficient the company is in using its assets. - Fixed asset turnover is indicator of the efficiency of
fixed assets in generating sales.
- Inventory turnover is measured based on cost of goods sold and not sales. As such both the numerator and denominator
of this ratio are measured at cost. It is an indicator of how fast the company can sell inventory.An alternative to inventory
turnover is “days in inventory”. This measures the number of days from acquisition to sale.
- Accounts receivables turnover the measures the number of times the company was able to collect on its average
accounts receivable during the year. An alternative to accounts receivable turnover is “days in accounts receivable”. This
measures the company’s collection period which is the number of days from sale to collection.

Financial Health Ratios

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Fundamentals of Accountancy Business and Management 2
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look into the company’s solvency and liquidity ratios. Solvency refers to the company’s capacity to pay their long term
liabilities. On the other hand, liquidity ratio intends to measure the company’s ability to pay debts that are coming due
(short term debt).
- Debt ratio indicates the percentage of the company’s assets that are financed by debt. A high debt to asset ratio implies
a high level of debt.
- Equity ratio indicates the percentage of the company’s assets that are financed by capital. A high equity to asset ratio
implies a high level of capital.
- Debt to equity ratio indicates the company’s reliance to debt or liability as a source of financing relative to equity. A
high ratio suggests a high level of debt that may result in high interest expense.
- Interest coverage ratio measures the company’s ability to cover the interest expense on its liability with its operating
income. Creditors prefer a high coverage ratio to give them protection that interest due to them can be paid.
- Current ratio is used to evaluate the company’s liquidity. It seeks to measure whether there are sufficient current assets
to pay for current liabilities. Creditors normally prefer a current ratio of 2.
- Quick ratio is a stricter measure of liquidity. It does not consider all the current assets, only those that are easier to
liquidate such as cash and accounts receivable that are referred to as quick assets.

Acitvity # 7
a. Compute for the company’s profitability and operating efficiency ratios for 2014.

b. Compute for the financial health ratios of the company in 2014 and 2013.

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Fundamentals of Accountancy Business and Management 2
August 2020
 Ms. Jessalyn Sarmiento - Tancio
Fundamentals of Accountancy Business and Management 2
August 2020
Lessson # 6 Basic Documents and Transactions Related to Bank Deposits
Most Essential Learning competencies
The learner…

1. identify the types of bank accounts normally maintained by a business

2. prepare bank deposit and withdrawal slips
3. identify and prepare checks
4. identify and understand the contents of a bank statement

Types of bank accounts normally maintained by a business

A. Savings Accounts
• These are intended to provide an incentive for the depositor to save money.
• The depositor can make deposits and withdrawals using the form provided by the bank.
• Banks usually pay an interest rate that is higher than a checking account or a current account.
• Some savings accounts have a passbook, in which transactions are logged in a small booklet that the
depositor keep
• Some savings accounts charge a fee if the balance falls below a specified minimum

B. Checking or Current Accounts

• Money held under a checking account can be withdrawn through issuance of a check
• Banks usually allows numerous withdrawals and unlimited deposit under this type of account.
• The interest rate for checking account is usually lower as compared to a savings account.
• The account holder or depositor of a checking account is normally provided at the end of the month a bank
statement showing all the deposits made, checks paid by the bank, and the balance of the account.
• The depositor is given easy access to the funds as compared to a savings account.

Preparation of bank deposit and withdrawal slips

A withdrawal slip and deposit slip are written orders to the bank. These slips are used to take out money or to put in money to the
depositor’s account.

Withdrawal Slip
*Without a withdrawal slip, the bank will not allow you to get money from your account. The required information in the withdrawal
slip are:

• Account Name - the name of the depositor

• Account Number – the unique identifier given by the bank for every account maintained

• Date of the withdrawal

• Type of account - savings or current

• Currency

• Amount to be withdrawn - the amount that the depositor wishes to withdraw from his account. The amounts in words and in figures
are indicated.

• Signature of the Depositor – this is the most important part in the withdrawal slip. The signature is a proof that the depositor is
authorizing the bank to get money from his account. Usually, the bank compares the signature in the withdrawal slip against the
signature in the bank records submitted during the opening of the account.

There are instances that the depositor cannot attend personally to withdraw the funds, he may authorize a representative by indicating
the name of the representative in the space provided and the representative must sign. There is a need for the representative to bring a
valid identification card upon withdrawal otherwise the bank will not approval the withdrawal.

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Fundamentals of Accountancy Business and Management 2
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Deposit Slip
The bank provides deposit slip that the depositor will fill up every time the depositor will put in money to his account. The usually
required information in a deposit slip are:

• Account Name – this is the complete name of the depositor that is reflected in the records of the bank. If it has a pass book, the
account name is indicated on first page inside the passbook.

• Account Number – this is a unique identifier of the account maintained by the depositor.

• Date of Deposit

• Type of Account

• Currency

• Amount in words and in figures – the amount that the depositor wishes to put into his account. The amount to be deposited maybe in
form of cash or check. If it is a cash deposit, the breakdown of the cash is usually listed in the deposit slip if it is a check deposit, the
details of the checks are indicated in the deposit slip, for example: Issuing Bank, Address of the Issuing Bank, date of the check and
the amount.

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Fundamentals of Accountancy Business and Management 2
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Identify and prepare check (cheque)
A check is a document that orders a bank to pay a specific amount of money from a person's account to the person in
whose name the cheque has been issued. The person writing the cheque, the drawer, has a transaction banking account
where his money is held. The drawer writes the various details including the monetary amount, date, and a payee on the
cheque, and signs it, ordering his bank, known as the drawee, to pay that person or company the amount of money stated.
Checks are a type of bill of exchange and were developed as a way to make payments without the need to carry large
amounts of money. The check number is usually indicated in the upper right portion of the check.

The following are the parties involved in a transaction that uses check as medium of exchange:

• Drawer, the person or entity who makes the check

• Payee, the recipient of the money

• Drawee, the bank or other financial institution where the cheque can be presented for payment.

Identify and understand the contents of a bank statement

At the end of every month, the bank furnishes a statement to the depositor showing the movement of the account. It
contain all the withdrawals, deposits and balance of your account after every transaction. It may also indicate bank
charges that were deducted by the bank automatically. Also, interest earned by the account is likewise reflected.

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Fundamentals of Accountancy Business and Management 2
August 2020
The date column indicates the date the transaction was made. The check number indicates the details of the check paid by the bank.
The transaction code is normally a bank code for the transactions. The Debit column represents all charges or deduction made by
the bank to your account. The Credit column represents the deposits or additions to your account that was made by the bank. The
Balance column is the running balance after considering the effect of the transaction to your account.

Samples of Debit transaction

• Bank service charge - monthly fee charged by the bank for its services (Ex. cost of printing checks writing funds to other locations
and other fees)

• NSF - (Not Sufficient Fund) – Banks also use a debit memorandum when a deposited check from a customer “bounces” because of
insufficient funds. Nowadays bank refer to this as DAIF (Drawn Against Insufficient Fund) or DAUD (Drawn Against Uncleared
Deposits)

Samples of Credit transactions

• Collection of cash proceeds from notes receivables.

• Interest income earned by the deposit.

As part of control, the bank statement received from the bank is compared with the accounting records of the business. This process
is called bank reconciliation. Bank reconciliation will be discussed in the succeeding chapters.

Together with the bank statements, the banks will include the copies of checks cleared or paid by the bank for that particular month.

Why companies issue checks?

• Payment of debts

• Gifts

• Payment of supplies

• Payment of electric bills

Quiz # 8
Essay.

1. What is a bank statement and discuss the importance of a bank statement to a depositor?
2. What is a check and who are the parties involved in the issuance of a check? Discuss the role of each
party.

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Fundamentals of Accountancy Business and Management 2
August 2020