COMPUTER COMMUNICATION DEVELOPMENT INSTITUTE

Sikatuna St., Old Albay, Legazpi City

MODULES FOR

ONLINE LEARNING MANAGEMENT SYSTEM

A. Y 2020-2021

Subject:

Fundamentals of Accountancy, Business and Management 1

Prepared By:

Ma. Gina A. Jacob

Subject Teacher

Noted by: Approved by:

Engr. Jay A. Dadea, MIT Ramon Severo L. Moraleda, LLB

School Dean Administrator
 Week 1

The Nature of Accounting and Its Business Environment

Learning Objectives:
After studying the module, you should be able to:

1. Define Accounting
2. Describe its nature and functions in business
3. Differentiate the branches of accounting
4. Explain the types of services rendered in each branch of accounting
5. Know the different types of business organizations
6. Classify the different types of business operations
Introduction

Does anyone use and need accounting?

Yes, everyone uses and needs accounting information in one form or another. For example, when you think
about buying a dress or a pair of shoes you shall use accounting information to determine whether you can
afford it or not. Likewise, when you are deciding to atted college, you have to consider the costs ( the tuition,
textbooks, and other expenses). In most likelihood you would also consider the benefits of this decision which
may include the ability to obtain a higher-paying job or a more desirable occupation.

Is accounting important to you?

Yes, accounting is important both in your personal life as well as in your career, even though you may not
become as accountant.

Accounting as the Language of Business

Accounting is called the language of business. It is important to understand this language in order to work
effectively in the business world. Accounting clerks, bookkeepers, and accountants must understand
accounting to perform their jobs. Accounting skills provide additional job opportunities for sales clerks,
customer service representatives and office workers. Small business owners need accounting knowledge to
run their business effectively.

Knowing the language of accounting helps one understand the impact of economic events on a specific
company. Whether one intends to work in accounting or in another area, it is important to have a clear
understanding of this language.

An understanding of the principles of accounting is of paramount importance to a modern business executive.

Without it, the executive lacks fundamental tool needed for problem-solving.

The primary objective in this text is to illustrate basic financial accounting concepts that will help you to make
good not only personal but also business decisions.

What is Accounting?

Accounting is the systematic process of measuring and reporting relevant financial information about the
activities of an economic organization or unit. Its uderlying purpose is to provide financial information. It
is capable of being expressed in monetary terms.

The American Institute of Certified Public Accountants (AICPA) defines accounting asa the art of recording,
classifying, and summarizing in a significant manner and in terms of money, transaction, and events, which
are in part atleast of a financial character, and interpreting the result thereof.

The Philippine Institute of Certified Public Accountants (PICPA) defines accounting as a service. Its function
is to provide quantitative information, primary financial in nature, about economic entities, tat is intended to
be useful in making economic decisions.
Nature of Accounting

The nature of accounting is in its definition as follows:

1 Accounting is a systematic process.

Process is a series of actions that produce something or that lead to a particular result. As such, the
performance of the four aspect of accounting, which are recording, classifying, summarizing, and
interpreting leads to communicating to its users the relevant financial information needed by the
parties interested.

2 Accounting is an art.
Art is a skill acquired by experience, study, or observation. It is also defined as an occupation
requiring knowledge or skill. The four aspects of accounting require both knowledge and skill
through experience, study or observation as a means to produce the key end product which
are the financial reports.

3 Accounting is a service activity.

Service is the occupation or function of serving. Activity is something that is done as work or for
a particular purpose. Combining the meaning of the two words, accounting is a work or occupation
for serving a particular purpose. Hence, since its purpose is to provide financial information, the data
that it will process in terms of the four aspects of accounting should be expressed in monetary
terms. In short, it is interested in activities that can be measured and expressed in terms of the
value of money.

Four Aspects of Accounting

1 Recording - writing down of business transactions chronologically in the books of account as

they transfer.
2 Classifying - sorting similar and relatedbusiness transactions into the three categories of assets,
and owner's equity.
3 Summarizing - preparing the financial statements from the transactions recorded in the books of
account that are designed to meet the information needs of its users.
4 Interpreting - representing the qualitative and quantitative financial information about the business
transactions in a language comprehensible to the users of financial statements. By interpreting the
data in the financial statements, users are able to determine the financial standing of the company
as well as its stability and growth potential. Users interpret financial information relating to specific
business decisions.

The Basic Function of Accounting in Business

The aspect of accountinng can be summed up to one basic function which is the generation of relevant
and timely financial information for interested parties. The data provided by accountants can assist
investors, government agencies, creditors, and management in making sound decisions. The financial
information provided about the activities of an economic organization makes it easily comprehensible
for users to assess its financial position as of a given time and results of operations for a given period.used
This qualitative and quantitative financial data by users relating to specific business decisions makes
accounting the language of business.
A Brief History of Accounting

Ancient Accounting in Egypt, Mesopotamia, Greece, and Rome

The history of accounting dates back to ancient times. The abacus which functioned as a calculator in the
ancient times, was developed by the Sumerians in 5,000 BCE followed by the papyrus which was
developed by ancient Egyptians in 4,000 BCE. The papyrus not only allowed recording of commercial
transactions but also the transcription of religious text, music, literature, and more. In Egypt, archaeologist
Dr. Gunter Dreyer of the German Institute of Archaeology unearthed clay tablets considered to be amoung
the oldest written tax accounting records.

Mesopotamia had clay tokens and clay tablets to record their loans, herds, crops, and system of trade. The
scribes who performed extensive duties in writing and recording in the Mesopotamian civilization are the
equivalent of present-day accountants. Aside from writing down commercial transactions, scribes assured
that the agreements were in compliance with the detailed code requirements for commercial transactions.

The Greeks also made significant contributions to the development of accounting. In 600 BCE, they introduced
money in the form of coins. Moreover, they adopted the Phoenician writing system and invented a Greek
alphabet which they used to facilitate record-keeping. As early as those times, bankers in Greece offered
credit and helped people transfer funds to banks in other cities as evidenced by the bankers' books of account.
It was the same in Rome where accounting helped established their finance and legal system. The Romans
introduced the use of an annual budget which coordinated estimated revenues and taxes paid by the citizen
in relation to the nation's expenditures. A cash book was maintained by households for their expenses.

14th Century - The Birth of Double-Entry Bokkeeping

During the 14th century, Luca Pacioli of Italy, otherwise known as Friar Luca dal Borgo, a mathematician
and considered to be the the "Father of Accounting" wrote Summa de Arithmetica, Geometri, Proportioni et
Proportionalita (Everything About Arithmetic, Geometry and Proportion). One section of this book, De
Computis et Scripturis (of Reckonings and Writings), composed of 36 short chapters that describe bookkeeping.
The accounting cycle, similar to the modern day accounting cycle is also included in this book. The book also
explains the extensively used balance sheet of today, the method of using memorandums journals and ledgers,
the use of accounts such as assets, liabilities, owner's equity, revenue and expenses, year-end closing entries,
and the use of the trial balance to prove a balanced ledger.

19th Century - The Dawn of Modern Accounting in Europe and America

Domination of the Theories of accounts (rather than accounting theories) marked not only the beginning but
also the latter part of the nineteenth century. In England, the Industrial Revolution which replaced hand tools
with machine or power tools, otherwise known as the factory system, transformed accounting into an actual
profession. Businesses continued to expand requiring the expertise of accountants to gain corporate control
of their flourishing business.

In Scotland, Queen Victoria granted a royal charter to the Institute of Accountants in Glasgow on July 6, 1854,
thereby creating the profession of chartered accountants (CA). Thus, accounting became a formal profession.
In the latter part of the 19th century, because large amounts of British capital were invested in flourishing
industries in the United States, Scottish or British chartered accountants were sent to the United States to
audit British investments. Some of these accountants decided to stay in America and became provenances of
various accounting firms which they set up to practice their profession. The year 1887 saw the birth of the
first national US accounting society. The American Association of Public Accountants which provided a formal
certification process for accountants was the predecessor of the present American Institute of Certified Public
Accountants (AICPA).

20th Century - The Evolution of Modern Accounting Standards

The American Institute of Certified Accountants (AICPA), the first national professional association for
Certified Public Account (CPA), was formed in the young but prosperous nation of the United States. Because
of economic depression, the Securities and Exchange Commission (SEC) was formed. Periodic reports vouched
by certified public accountants were filed by all public-traded companies who had to register with the SEC
before selling their securities to the public. Thus, the AICPA was tasked to set the accounting and auditing
standards for these reports until the establishment of the Financial Accounting Standards Board (FASB) in
1973. The FASB is the result of the demand for more reliable and comparable financial reporting by the
Congress and SEC. Thus, the FASB and the Government Accounting Standards Board (GASB) are currently
two of the significant authorities establishing the generally accepted accounting principles (GAAP) in the
US. In response to the continuing expansion of businesses, large accounting firms offered consultancy
services aside from their auditing function.

The Information Age

The Information Age, otherwise known as the Computer Age, Digital Age, or New Media Age, has brought
about a significant change in the work load of accountants. Manual, tedious and time-consuming tasks were
replaced by faster and more accurate computer methods. Transactions can be consummated online with the
help of the internet. Various software applications in accounting have been developed to expedite procedures
and accommodate the numerous needs and demands of the different bisinesses.

21st Century - Accounting in the Modern Times

The 21st century opened with the replacement of the International Accocunting Standards Committee (IASC)
by the International Accounting Standards Board (IASB) establishes in January 2001. In the same year, the
Enron Scandal, the greatest corporate fraud case recorded in American history, caused Arthur Andersen, one
of the top audit firms in the United States to close business. In order to protect investors from corporate
misinformation, the Subanes-Oxley Act was passed by US Congress in 2002. The impose tougher restrictions
on accountants conducting consultancy services.

With constant developments in modern technology and the globalization of businesses, accountants continue
to cope up with the changing trends. Many countries including the Philippines have adopted the International
Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) in order to support
comparability and understandability of financial statements across the globe. As a result, the accountants of
today reduces, the time, effort, and cost of recordkeeping, minimizes errors as well as a processes, and
summarizes large volumes of data input. As such, accountants must always be updated with the latest
innovations affecting their profession.

The Different Branches of Accounting

1. Financial Accounting

Financial accounting deals with the theoretical framework covering accounting principles and concepts
relative to measurement and valuation as applied to assets, liabilities, stockholder's equity, retained earnings,
revenue, and expense accounts in relation to the preparation and presentation of financial statements. These
financial statements included disclosure disclosure requirements as governed by the generally accepted
accounting principles (GAAP).

2. Management Accounting

The Institute of Management Accountants (IMA) defines management accounting as a profession that involves
partnering in management decisions making, devising planning and performance management systems, and
providing expertise in financial reporting and control to assist management in the formulation and implemen-
tation of an organization's strategy.

3. Government Accounting

Section 109 of Presidential Decree (PD) No. 1445 states that government accounting encompasses the
process of analyzing, classifying, summarizing , and communicating all transactions involving the receipt
and disposition of government funds and property, and interpreting the results thereof. The agencies
responsible in performing government accounting functions are the Commission of Audit (COA), the
Department of Budget and Management (DBM), and the Bureau of Treasury (BTr).

4. Auditing

Auditing is the examination and review of accounting reports in order to ascertain their fairness, propriety,
and reliability. The independent auditor's opinion provides the company's financial position and results of
operation in accordance with the generally accepted accounting principles (GAAP).

5. Tax Accounting

Tax services provided by accountants include the preparation of monthly value added tax, percentge tax,
expanded withholding tax returns, quarterly and annual tax returns, and any other taxes applicable to business.
Accountants work closely with clients in order to avoid tax problems with the Bureau of Internal Revenue
(BIR) and other local agencies through proper tax compliance while while advising clients about ways and
measures to minimize taxes.

6. Cost Accounting

Cost accounting includes the collection, determination, allocation, assessment, interpretation, and control of
cost of production includes the raw materials, direct labor, factory overhead, and other costs involved
incident in each stage of production of the finished goods.

7. Accounting Education

Accounting education involves planned grading and formal teaching in an educational institution. The
professional accountant imparts knowledge to students enrolled in an accounting subject either in basic
accounting or higher accounting subjects. Accountants in the usually take post graduate studies to achieve
the required tenure.

8. Accounting Research

Accounting research involves conducting a careful and diligent study aimed at discovering and interpreting
facts, revising accepted theories in the light of new facts, or the practical application of such new or revised
theories for the generation of a new knowledge.
Users of Financial Information

Internal Users

Internal users are the primary users of financial users of financial information who are inside the reporting
entity and are directly involved in managing the company's daily operations. They are the decision makers
who make the strategic and operational decisions for the company.

1. Investors/Owners/Stockholders

These parties provide the financial resources to keep the business going. They decide whether to invest or
not depending on the estimated amount of income on the investment. Upon investment, they would want to
know the financial position or results of operation of their business investment.

2. Management

Organizational managers use financial information to set goals for their companies. Managers evaluate their
progress towards these goals and use financial data as a guide for future management actions.

3. Employees

Although the employees are not directly involved in the decision making of the company, they are nonetheless
interested in the financial information of the company to determine if they have a future in the company.

External Users

External users are secondary users of financial information who are parties outside the company. They may
not be directly involved in the company's operations but their decisions may significantly affect the business
entity.

1. Financial Institutions/Creditors

Before extending credit, financial institutions use financial information to determine the capacity of the
business organization to pay its obligations and their interests at the appropriate time.

2. Government

Financial information is important for tax purposes and in checking of compliance with Securities and
Exchange Commission (SEC) requirements.

3. Potential Investors/Creditors

Before making an investment or extending credit, potential investors or creditors may not only be interested
in the company's current financial position and results of operations, but also in the company's financial
history. This should give them the assurance that their investment will yield a reasonable rate of return or
the credit extended will be paid within a reasonable period of time.

Types of Business Organization

1. Sole/Single Proprietorship is a business owned and managed by only one person.

Advantages
a. There are minimal costs and requirements in the formation.
b. The owner can withdraw the assets and profits of the business anytime at his or her own discretion.
c. Decision making is solely in the hands of the owner.
d. The duration of the life of the business solely depends on its owner.

Disadvantages
a. Resources are limited as the capital is provided only by the owner.
b. The liability of the owner is unlimited as he or she is accountable to all creditors of the business.
c. Infusion of knowledge in the management of the business is limited to one person only, which
is the owner.

List down examples of sole proprietorship form of business

establishment you know.

2. Partnership is a business organization owned and managed by two or more people who agee to contribute
money, property, or industry to a common fund for the purpose of earning a profit.

Advantages
a. There are minimal costs and requirements in the formation.
b. There are more funds contributed from the investment of the partners.
c. There is infusion of more knowledge, experience, and skills from two or more partners.
d. There can be division of labor between or among partners.

Disadvantages
a. The partners are liable for the actions of each partners as a result of mutual agency.
b. A general partner has unlimited if the other partners are limited partners or are insolvent.
c. Disagreement between or among partners can lead to the withdrawal of one or more partners.
d. The death, retirement, withdrawal, or incapacity of a partner results in the dissolution of the
partnership.
e. Admission of a new partner depends upon the approval of other partners.

List down examples of partnership form of business

establishment you know.

3. Corporation is a form of business organization managed by an elected board of directors. The investors
are called stockholders and the unit of ownership is called share of stock.
Advantages

a. The stockholders only have limited, liability, as their liability extends only up to the amount of
their capital investment.
b. A corporation has continuous existence as its life is indefinite.
c. There is more infusion of funds from the stockholders or investors.
d. Shares of stocks can be transferred without the consent of other shareholders.
e. Management of the corporation is vested upon its board of directors.

Disadvantages
a. A corporation entails many requirements and is more costly than a partnership.
b. The government exercises strict control over corporations and imposes high taxes.
c. Shareholders have little or no participation in the management of the corporation.
d. Distribution of net income depends upon the declaration of dividends by the board of directors.
e. In large corporations, there is formal or impersonal relationship between employees and
management due to the big number of employees.

List down examples of corporation form of business establishment

you know.

Three Types of Business Activities/Operations

1. Service is a type of business operation engaged in the rendering of services. A service type of business
earns based on the skill or quality of service it offers. In order for the business to grow, its people or
employees have to be trained. For example, a well known hair cutter cannot perform all hair and makeup
services to his or her customer. He/She must train employees to replicate quality of the service he/she
renders. Constant monitoring, evaluating, and updating of knowledge of the staff are necessary. He/She
has to continuously maintain, if not improved, the quality of service offered to his/her customers.

Examples: dental clinic, barber shop, laundry service

List down examples of business establishment you know that

render services.

2. Trading/Merchandising is a type of business engaged in the buying and selling of goods. Merchandising
includes the process to managing and marketing the products sold to its customers. Sales have to be
optimized in order to make money. Customer demands have to be satisfied with the quality of products
sold. The tedious processes of forecasting, purchasing, pricing, and marketing of products in order to
generate sales are essential in the trading or merchandising business.
Examples: grocery, sari-sari store

List down examples of business establishment you know that

sell merchandise.

3. Manufacturing is engaged in the production of the of items to be sold. It involves the puchasing and
converting o raw materials to finished goods. This type of business incurs overhead costs aside from
wages and materials used in production of goods produced. A rise in price in one of these costs causes
an increase in the price of goods produced. Aside from this, there are certain expenses incurred even
during period of non-manufacturingsuch as rent, insurance, worker benefits, and machine depreciation.
Examples: shoe factory, food processing

List down examples of business establishments you know that

manufacture goods.

Exercises 1.1: Types of Business Organization According to Activity

Check ( ) the appropriate column for the proper classification of the given company according to their
main business activities.

Company Name Service Merchandising Manufacturing

1. Mercury Drug Store
2. Gerry's Grill
3. Globe Telecom
4. National Bookstore
5. Nestle Philippines
6. LCC Supermarket
7. Unilever Philippines
8. Philippine Airlines
9. SM City Legazpi
10. PLDT
Exercises 1.2

Having learned different branches of accounting. What

career path in accounting would I like to pursue? In what
form of business organization would I like to be part of?

Exercise 1.3 Provide example of the financial information needed by the following stakeholder:

1. Management
____________________________________________________________________________________________________________
2. Investors/Stockholders
____________________________________________________________________________________________________________
3. Lenders
____________________________________________________________________________________________________________
4. Suppliers
____________________________________________________________________________________________________________
5. Customers
____________________________________________________________________________________________________________
6. Employees
____________________________________________________________________________________________________________
7. Government
____________________________________________________________________________________________________________
BEFORE YOU PROCEED TO THE NEXT UNIT

Discuss your new learnings. Write them on the lines.

 Week 3

Accounting Concepts and Principles

The Accounting Equation

Learning Objectives:

After studying this module, you should be able to:

1. Define generally accepted accounting principles (GAAP)

2. Know and appreciate the basic accounting principles used in the practice of accounting
3. Identify the qualities that make accounting information useful
4. Explain and describe the various basic accounting concepts
5. Explain the accounting equation and its elements
 T he basic concepts are the ground rules that govern how accountant smeasure, process, and
communicate financial information. These principles have been developed by the accounting profession
over the years to provide a consistent system of financial reporting in a constantly changing business
environment.

These frameworks assure users of financial statements that the reports are prepared in specific ways so that
they are reliable and comparable since usefulness of these reports rests on their reliability and comparability.

Generally Accepted Accounting Principles (GAAP)

▪ These are broad, general statements or "rules" and "procedures" that serve as guides in the
practice of accounting.

▪ These are standards, assumptions, and concepts with general acceptability

▪ These are measurements techniques and standards used in the presentation and preparation
of financial statements.

Accounting system comprises the methods used by a business to keep records of its financial activities
and to summarize these accounts in periodic accounting reports.

Transaction is a completed action which can be expressed in monetary terms.

Fundamental Concepts

1. Entity Concept regards the business enterprises a separate and distinct from its owners and from other
business enterprises.

Example: Dr. Teng has a skin clinic and a spa. The skin clinic is considered as a separate entity distinct from
the spa and the owner, Dr. Teng. The expenses of the skin clinic should not be mixed with the expenses of the
spa and the personal expenses of Dr. Teng. The two businesses are considered to be separated economic units,
separate and distinct from their owner. As such, they should be treated as a different from each other, although
owned and operated by only one person. Hence, the personal expenses of Dr. Teng should not be mixed with
the expenses of any of the businesses.

2. Periodicity is the concept behind providing financial accounting information about the economic activities
of an enterprise of an enterprise for specified time periods. For reporting purposes, one year is usually
considered as one accounting period.

An accounting period may be classified as either of the following:

a. Calendar year - a twelve-month period that starts on January 1 and ends on December 31.

b. Fiscal year - a twelve-month period that starts on any month of the year other than January and ends
twelve months after the starting period, e.g., a business whose fiscal year starts May 1, 2019 ends its fiscal year
on April 30, 2020.

Note: A natural business year is any twelve-month period that ends when business activities are at their
lowest point.
3. Going Concern is a concept which assumes that the business enterprise will continue to operate
indefinitely.

Example: In preparing the financial statements of the skin clinic and the spa, the accountant assumes that the
businesses will not close or shut operations within the next years.

Basic Accounting Principles

1. Objectivity principle states that all business transactions that will be entered in the accounting records
must be duly supported by verifiable evidence.
Example: Payments must be supported by official receipts and bank deposits must be supported by
deposit slips.

2. Historical cost means that all properties and services acquired by the business must be recorded at their
original acquisition cost.
Example: Land bought in 2005 for two million pesos should be recorded at two million pesos even though its
market value is the year 2020 is already three million pesos.

3. Accrual principle states that income should be recognized at the time it is earned such as when goods are
delivered or when services have been rendered. Likewise, expenses should be recognized at the time they
are incurred, such as when goods and services are actually used and not at the time when the entity pays
for the goods and services.
Example: A resort cannot consider as income the advance payment of a customer who paid his two-week
resort accommodation in advance until the customer has checked in. This is because the resort has not yet
rendered the service to the customer. As such, the advance payment by the customer should be considered as
a liability on the part of the resort in the form of service to be rendered.

4. Adequate disclosure states that all material facts that will significantly affect the financial statements
must be indicated.
Example: Land bought at two million pesos in 2005 should be recorded at historical cost in in the 2020
financial statements. However, the current market value of three million pesos in the year 2020 may be
indicated in the financial statements for the uear 2020 in the form of a footnote or parenthetical note,

5. Materiality means that financial reporting is only concern with information significant enough to affect
decisions. This refers to the relative importance of an item or event. An item is considered significant if
knowledge of it would influence prudent users of the financial statements.
Example: Items of insignificant among such as paper clips can be charged outright to expenses.

6. Consistency means that approaches used in reporting must be uniformly employed from period to period
to allow comparison of results between time periods. Any changes must be clearly explained.
Example: If the straight line method of depreciation is being used by the company, then the method should
be uniformly used by the company in computing its annual depreciation.
The Accounting Equation

The financial statements are based on the most basic principle of accounting, the accounting equation.

This equation expresses the constant relationship among the assets, liabilities and owner's equity. This
is often expresed as

Economic Resources = Claims to Economic Resources

or

Assets = Liabilities + Owner(s)' Equity

In this equation, assets appear on the left-hand side while the economic claims against the assets, the
liabilities ad owner(s)' equity appear on the right-hand side.

It means that assets must equal equities, which consist of liabilities (the creditor's equity) plus capital,
the owner's equity in their business.

The three elements of financial statements that report the status of an entity at a particular time are
assets, liabilities, and equity.

A. Assets, liabilities, and equity are linked by the basic accounting equation.

The relationship between the status elements is expressed by the basic accounting equation as follows:

ASSETS = LIABILITIES + EQUITY

or

A = L + E

B. Assets are present economic resources controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.

To qualify as assets, the resources must:

a) have the potential to produce economic benefits.

b) be under management's control (can be freely deployed or disposed of).
c) result from past transactions (be in place now, as opposed to being under contract for manufacture,
creation or delivery).

C. Liabilities are present obligation of the entity to transfer an economic resources as a result of
past events. An obligation is a duty or responsibility that the ntity has no practical ability
to avoid.
 To qualify as liabilities, obligation must:

a) require transfer of economic benefits.

b) specify to whom that assets must be transferred (the terms, parties, and conditions under which assets
transfers will take place must be specified).
c) result from past operations (be binding obligations now, as opposed to obligation that will exist once
pending transacions are completed).
d) represent a duty or responsibility that the entity has no practical ability to avoid.

D. Equity is the owner's residual interest in the assets of an entity that remains after liabilities
are deducted.

As just stated, liabilities are sources of resources provided by creditors. It follows, than that equity of
an entity is the amount of resources (assets) provided by sources other than creditors which comes
from the owner(s).

Illustration

1. Given liabilities of ₱50,000 and the owner's equity of ₱150,000, find the value of assets.
Solution:
Assets = Liabilities + Owner's Equity
= ₱50,000 + ₱ 150,000
= ₱200,000

2. Given assets of ₱180,000 and the owner's equity of ₱110,000, find the liabilities.
Solution:
Liabilities = Assets - Owner's Equity
= ₱180,000 - ₱ 110,000
= ₱70,000

3. Given assets of ₱250,000 and liabilities of ₱90,000, find the owner's equity.
Solution:
Owner's Equity = Assets - Liabilities
= ₱250,000 - ₱ 90,000
= ₱160,000

Test Your Understanding

Activity 1.4 Find the missing amounts

ASSETS (₱) LIABILITIES (₱) OWNER'S EQUITY (₱)

1 650,000 340,000
2 295,000 305,000
3 967,000 660,000
4 788,000 345,000
5 845,000 533,000
Activity 1.5 Using the basic accounting equation, answer the following questions. Show your
computations in good form.

1. The total assets of Zed Company amount to 7,000,000, and the owner has 1 75% interest in it. How
How much are the liabilities of Zed?

Solution:

2. If the total liabilities of Tang Company amount to 1,000,000 and its 30% of the total assets of the company,
how much id he total capital?

Solution:

3. If the total capital of Louise Company is equal to the amount of its liabilities amounting to 200,000, how
much are the total assets of the company?

Solution:

Activity 1.6 State the accounting principle applicable in each case.

1. Paper clips were automatically charged to expense.

2. Even though a project will take five years to finish, an annual report was
furnished to the investors.

3. There are around five beauty salons in the vicinity and the business doesn't
earn much due to stiff competition. However, the accountant prepares the
annual financial statements with the assumption that the business will not
close any time.

4. Separate financial statements were prepared for the restaurant and the
barber shop of Mr. Santos.

5. The market value of the land was ignored for purposes of financial
statement reporting.

6. A buiness agreed to pay downpayment for the purchase of additional ten

machines early next year in line with the business expansion. This was an
added note to the financial statements.

7. The telephone bill for the month, received end of the month, was recorded
although it will be paid on third day of the following month.
Reference

Ong, Flocer O. Fundamentals of Accountancy, Business, and Management 1. 2016. C & E Publishing, Inc.
839 EDSA, South Triangle, Quezon City

Binuya, Maria Veronica Joy M. Fundamentals of Accountancy, Business and Management Book 1. 2016.
JFS Publishing Services. 168 D. Jorge Street, Pasay City

Valenzuela-Manalo, Marivic. 2016. Learning to Succeed in Business with Accounting Vol. 1. The Phoenix
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