Types of Accounts and The Account Titles: Assets

TYPES OF ACCOUNTS AND THE ACCOUNT TITLES

As we learned from the previous semester, accounting concepts start from
the basic equation: Assets = Liabilities + Equity. But what actually makes
up assets? What compose liabilities and equity? Things such as cash, plant
and equipment, long-term debts would now enter into the picture. All of
these are components of one of the three parts of the accounting equation,
called accounts. In this chapter, we will discuss the major accounts that are
contained in the accounting equation. Later in this chapter, we will also
explore revenues and expenses, which are accounts representing some of
the changes in equity.

Types of Accounts

 Assets
1.
a. Current Assets
b. Noncurrent Assets
 Liabilities
1.
a. Current Liabilities
b. Noncurrent Liabilities.
 Owner’s Equity
 Income
 Expenses

☞W hat are the classifications of assets and liabilities?

ASSETS

Assets are resources controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to the
enterprise (per IFRS Framework). These assets are used by the company
in its normal operations such as the manufacture of goods or delivery of
services. The main feature of these assets is their capability to give
benefits to the entity. These benefits are usually in the form of their ability
to directly or indirectly increase the inflow of cash to the entity or a
reduction of its outflows. In simple terms, assets are valuable resources
owned by the entity. Assets should be classified only into two: current
assets and noncurrent assets.
Source: https://www.vectorstock.com/royalty-free-vector/company-business-assets-
pictograph-human-vector-26128696
» What are current assets and its examples?

Current assets are all assets which are expected to be realized within the
ordinary course of business, or a span of 12 months, whichever is
longer. Realization here only means that these assets are expected to be
converted into cash, sold, or disposed after a certain time, or through the
passage of time.

a. Cash  Cash is any medium of exchange that a bank will

accept for deposit at face value, perhaps the most basic,
liquid, and familiar of all assets.
 This includes bills, coins, checks, bank accounts.

Examples:
1. Petty Cash Fund – cash used to pay petty or small

amounts.
2. Cash on Hand – cash in the possession and
custody of the business.
3. Cash in Bank – cash that are deposited in the
banks.
 These are claims against customers arising from
b. Accounts sale of services or goods on credit.
Receivable This type of receivable offers less security than a
promissory note.
 A written pledge that the customer will pay the
business a fixed amount of money on a certain date.
c. Notes  Represented by a promissory note which ensures
Receivable that in the case of default by the borrower, the company
can seek additional legal remedies to recover what has
been lent.
These are assets which are:
d. Inventorie1. held for sale in the ordinary course of business;
s 2. in the process of production for sale; or
3. in the form of materials or supplies to be consumed
in the production process or in the rendering of services.
 The expenses paid for by the business in advance.
 It is an asset because the business avoids having to
pay cash in the future for a specific expense.
 These represent future economic benefits – assets
– until the time these start to contribute to the earning
process; these, then, become expenses.

e. Prepaid Examples:
Expenses
1. Prepaid Advertising – advance payment of
advertising in all media types and promotional campaigns.
2. Prepaid Insurance – advance payment of insurance
whether it is life insurance or non-life insurance.
3. Prepaid Rent – advance payment of rent by the
tenant or lessee.
4. Prepaid Supplies – advance payment of office
supplies and/or store supplies.

» What are noncurrent assets and its examples?

All other assets which are not current, basically fall into the definition of
noncurrent assets. Take note that they do not need to have at least 12
months remaining before their expected realization; as long as they do not
meet current asset classification, they are classified here.

 These are tangible assets that are held by an

enterprise for use in the production or supply of goods
or services, or for rental to others, or for administrative
purposes and which are expected to be used during
more than one period/year.

Examples:
1. Land – refers to the surface of the earth that is not

a. Property,
covered by a body of water.
Plant, and
2. Building – a structure with roof and walls that is
Equipment
constructed on land.
(PPE)
3. Machinery – an equipment that has power to
produce movements or forces.
4. Furniture and Fixture – furniture refers to movable
things that are result of design (i.e., sofa, tables, chairs);
fixture refers to something attached to a property such
as walls (i.e., lightnings, toilet fixtures).
5. Office Equipment – refers to business machines
used in workplace (i.e., computer, copier machines).
6. Transportation Equipment – refers to vehicles
whether land transport, sea transport, or air transport.
 It is a contra account that contains the sum of the
b. Accumulate periodic depreciation charges.
d  The balance in this account is deducted from the
Depreciation cost of the related asset – equipment and buildings – to
obtain book value.
c. Intangible  These are identifiable, nonmonetary assets
without physical substance held for use in the
production or supply of goods or services, for rental to
others, or for administrative purposes.
Assets  These include goodwill, patents, copyrights,
licenses, franchises, trademarks, brand names, secret
processes, subscription lists and non-competition
agreements.

Take note:
Contra assets are those accounts that are presented in the asset portion of
the statement of financial position but are reductions to firm’s assets (i.e.,
allowance for doubtful accounts, accumulated depreciation).
LIABILITIES

The present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits (per IFRS Framework). A plain
definition would be – liabilities are obligations of the entity to outside parties
who have furnished resources.
Source: https://www.vectorstock.com/royalty-free-vector/company-business-liability-
pictograph-human-vector-26128697

» What are current liabilities and its examples?

An entity shall classify a liability as current when:
1. It expects to settle the liability in its normal operating cycle.

2. It holds the liability primarily for the purpose of trading.
3. The liability is due to be settled within twelve (12) months after the
end of the reporting period.
4. The entity does not have an unconditional right to defer settlement of
the liability for at least twelve months after the end of the reporting period.
Paying out does not necessarily mean payment through cash, but it can
also include conversion and/or refinancing.

 This account represents the reverse relationship of

a. Accounts the accounts receivable.
Payable  By accepting the goods or services, the buyer
agrees to pay for them in the near future.
 Notes payable are written promises of the entity to
pay a sum certain in future determinable time.
b. Notes
Payable  The business entity is the maker of the note; that
is, the business entity is the party who promises to pay
the other party.
 Amounts owed to others for unpaid expenses.
 These refers to the benefits received by the
company but not yet paid.

Examples:
c. Accrued 1. Salaries/Wages Payable – unpaid salaries and
Liabilities wages of the employees.
2. Utilities Payable – unpaid communication,
electricity, and water bills
3. Interest payable – unpaid interest in a loan
transaction.
4. Rent Payable – unpaid rent.
5. Taxes Payable – unpaid property and business
taxes to be paid in the government.
d. Unearned  This refers to cash received in advance but not yet
Revenues earned.
 When the business entity receives payment before
providing its customers with goods or services, the
amounts received are recorded in the unearned revenue
account (liability method).
 When the goods or services are provided to the
customer, the unearned revenue is reduced and income
is recognized.

» What are noncurrent liabilities and its examples?

These are liabilities which the entity expects to settle after more than a
year, or have the legal or contractual capacity to defer payment
accordingly.

· This account records long-term debt of the business

entity for which the business entity has pledged certain
a. Mortgage assets as security to the creditor.
Payable · In the event that the debt payments are not made,
the creditor can foreclose or cause the mortgaged
asset to be sold to enable the entity to settle the claim.
· The bond is a contract between the issuer and the

lender specifying the terms of repayment and the
interest to be charged.
b. Bonds
Payable · Business organizations often obtain substantial
sums of money from lenders to finance the acquisition
of equipment and other needed assets, they obtain
these funds by issuing bonds.
EQUITY
The equity reflects the residual claims or net assets of the owners of an
entity. This is similar to the net worth of the SALN of our public servants.
Take note that these are residual interest in the assets of the enterprise
after deducting all its liabilities (per IFRS Framework). This is also why
net worth of individuals is computed by subtracting their liabilities from
their assets.
Source: https://www.vectorstock.com/royalty-free-vector/equity-funds-mutual-fund-
that-invests-principally-vector-30409246

Generally, equity comes from two sources. The first one comes directly
from the owners in the form of investments of capital. The other comes
from the income of the business from its normal operations. The net
income or net loss of the business from its operations can be
determined by using the following equation:

Revenues – Expenses = Net Income or (Net Loss)

A business will have net income if its revenues exceed expenses and
will have a net loss if its revenues are less than its expenses.

The following are the accounts that affect the equity:
1. Capital
2. Withdrawal
3. Revenues/Income
4. Expenses

☞I n the different forms of business, what are the items included under the
equity account?
Equity may pertain to any of the following depending on the form of
business organization:
1. In a sole proprietorship, there is only one owner’s equity account

because there is only one owner.
2. In a partnership, an owner’s equity account exists for each partner.
3. In a corporation, owners’ equity, or shareholders’ or stockholders’
equity, consists of share capital or capital stock, retained earnings and
reserves representing appropriations of retained earnings among others.

 This account is used to record the original and

additional investments of the owner of the business
entity.
 It is increased by the amount of profit earned
a. Capital
during the year or is decreased by a loss.
 Cash or other assets that the owner may
withdraw from the business ultimately reduce it.
 This account bears the name of the owner.
 When the owner of a business entity withdraws
b. Withdrawal cash or other assets, such are recorded in the
s drawing or withdrawal account rather than directly
reducing the owner’s equity account.

☞W hat are the items that increase/decrease equity?

INCOME – Increases in Equity

Income is increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities
that result in increase in equity, other than those relating to contributions
from equity participants (per IFRS Framework).
Source: https://www.vectorstock.com/royalty-free-vector/income-trendy-infographic-
template-thin-line-vector-28081473

1. Service Income – the income derived from rendering or performing
services for a customer or client and is the primary income for a service
business.
2. Sales – revenues earned as a result of sale of tangible products.

Other type of income includes the following:

1. Interest Income – income earned as a result of investment in debt

securities or receivables from other entities.
2. Rent Income – income from the use of the land or unit space.
3. Dividend Income – income from share investments as a result of
dividend declaration of a company.

EXPENSES – Decreases in Equity

Expenses are decreases in economic benefits during the accounting period
in the form of outflows or depletions of assets o incurrences of liabilities
that result in decreases in equity, other than those relating to distributions
to equity participants (per IFRS Framework). Expenses include the costs of
any material, labor, supplies, and services used in an effort to produce
revenue.
Source: https://steemit.com/business/@aoliver/reducing-expenses-is-often-easier-to-
reduce-revenues-than-ad-revenues

Examples of expenses are the following:

1. Cost of Sales (Cost of Goods Sold) – the cost incurred to purchase or

to produce the products sold to customers during the period.
2. Salaries or Wages Expense – includes all payments as a result of an
employer-employee relationship such as salaries or wages, 13th month pay,
cost of living allowances and other related benefits.
3. Utilities Expense – expenses related to use of telecommunications
facilities, consumption of electricity, fuel and water.
4. Supplies Expense – expense of using supplies in the conduct of daily
business.
5. Rent Expense – expense for space, equipment or other asset rentals.
6. Insurance Expense – portion of premiums paid on insurance
coverage (e.g., on motor vehicle, health, life, fire, typhoon or flood) which
has expired.
7. Interest Expense – an expense related to use of borrowed funds.
8. Bad Debt Expense – the amount of receivables estimated to be
doubtful of collection and charged as expense during an accounting period.
9. Depreciation Expense – the portion of the cost of a tangible asset
(e.g., buildings and equipment) allotted or charged as expense during an
accounting period.

Other expenses may also include the following:
1. Advertising Expense
2. Tax Expense
3. Repair and Maintenance Expense
4. Miscellaneous Expense

SIMPLE ACTIVITY:

Classify each of the following accounts either as asset (A), liability (L),
equity (E), income (I), or expense (Ex) on the column A and determine their
normal balance side as debit (Dr) or credit (Cr) on the column B.

A B A B
1. Accounts
6. Equipment
Payable
2. Accounts
7. Furniture
Receivable
3. Additional Paid-
8. Inventories
in Capital
4. Cash 9. Notes Payable
5. Common Stock 10. Sales
6. Tax Expense 11. Supplies
7. Loans Payable 12. Interest Income

GENERALIZATION
In accounting, there are five major accounts: assets, liabilities, equity,
income, and expenses. Assets are grouped into two: current and
noncurrent assets. Liabilities are also grouped into two: current and
noncurrent liabilities. Equity is the residual interest of the owners in the
assets of the business after considering all liabilities. Furthermore, equity
increases as a result of revenues, gains, or capital distributions, and equity
decreases as a result of expenses, losses, and distribution to owners.

 One of the main reasons why business
entity exist is because of its transaction
and the only possible way to at least
understand it is by way of knowing the
different account titles.
 In accounting, to record transactions
means to determine the account titles.

ACCOUNTING BOOKS – JOURNAL AND LEDGER

☞W hat is a journal?

A journal is a chronological record of the entity’s transactions listed by date.
It is often referred to as the book of original entry. This is because we first
record the business transaction in this book. Each transaction is initially
recorded in a journal rather than directly in the ledger. A journal entry
shows all the effects of a business transactions in terms of debits and
credits. The nature and volume of transactions of the business determine
the number and type of journals needed. The recording of financial
information into the journal is known as the process of journalizing.

In journalizing, transactions and events are recorded as the events
happened chronologically. The date when the event happened is the
primary factor that determines what transaction should be recorded first.
The journal entry is primarily based on the source document. The
journalizing process implies that business activities, regardless of their
nature, are recorded in accordance with the time of occurrence. The
journal, therefore, is a mixture of several types of accounts.

Illustration: Assume that on February 14, 2021, Mr. Nilo Co invested
₱1,200,000 to open his business, Nilo Co Moving On Shipping.
The journal entry follows:

Account Titles and

Date P.R. Debit Credit
Explanation
2021
Cash
Feb. 14 ₱1,200,000
Co, Capital
₱1,200,000

To record the initial
investment of Mr. Nilo Co.

☞W hat is the simple and compound entry?

 SIMPLE ENTRY
A journal entry with only one debit and one credit entry. In other words,
only two account titles are affected by the transaction.

A simple journal entry appears as follows:

Account Titles and

Explanation
2021
January Cash
₱10,000
2
Accounts Receivable ₱10,000

To record collection.

 COMPOUND ENTRY
A journal entry that has multiple debits or credits. It arises when some
transactions require the use of more than two accounts. A compound
entry may have the following combinations:
1. There is only one debit and two or more credits.

2. There are two or more debits and one credit.
3. There are two or more debits and credits.

A sample of compound entry appears as follows:

Account Titles and

Explanation
2021
January Cash ₱10,000

2
Accounts Receivable ₱5,000

Service Income ₱15,000

To record service income.

☞W hat is the difference between general journal and special

journals?

 THE GENERAL JOURNAL

Most businesses, especially large companies, may adopt different kinds of
journal but all business organizations use the most basic and simplest type
of journal which is the general journal. The general journal typically displays
the transaction’s date, account titles and explanations, posting reference,
and respective amounts of corresponding accounts. A sample format of a
journal is shown below:

Account Titles and

Explanation
2021
January Cash 101
₱200,000
1 Shayne, Capital
301 ₱200,000

Owner’s investment of

cash in the business
Property, Plant and

2 Equipment 140 ₱50,000
Shayne, Capital 301 ₱50,000
equipment in the business.
Inventory
3 121 ₱20,500
Cash
101 ₱20,500

Purchase of inventories

from supplier through cash
Accounts Receivable
111 ₱50,000
4 Sales
400 ₱50,000
Sales of inventories to

customer on account.
Cost of Goods Sold
500 ₱15,000

Inventory
121 ₱15,000
Sale of inventories to

customer
Inventory
8 121 ₱40,000
Accounts Payable
201 ₱40,000


from supplier on account.
12 Cash 101 ₱60,000

Sale 400 ₱60,000

customer
Cash
14 101 ₱24,000
Accounts Receivable
111 ₱24,000

Collection of customer’s

accounts receivable.
Sales Return
401 ₱5,000
15
Accounts Receivable
111 ₱5,000
Return of merchandise

from customer.

Inventory
121 ₱1,500
Cost of Goods Sold
500 ₱1,500

from customer.
Accounts Payable
25 201 ₱10,000
Cash
101 ₱10,000

Payment of accounts

payable to supplier.
Shayne, Drawing
30 Cash 302 ₱2,000

Withdrawal of cash from 101 ₱2,000
the business for her
personal use.
Salaries Expense
31 505 ₱5,000
Cash
101 ₱5,000

Paid salaries to employees

for the month.

With the forgoing illustration, we can see the significance of the journal in
the accounting process. First, it shows a chronological record of the
company’s transactions. Through the journal, companies can easily detect
if there are missing or unrecorded transactions. Like a person’s diary, the
journal narrates the different business dealings of the company by date of
occurrence. Next, it discloses the full effect of each of the transactions per
entry. Like in the first journal entry of the given illustration, we can easily
identify the transaction has an effect on the company’s assets (cash) and
equity (Shayne, Capital). Lastly, the journal serves as a check-and-balance
tool of the company. It provides the transaction’s corresponding debits and
credits. We learned from the passed lessons that the debits should always
equal the credits of each entry. As such, each entry in the journal helps
prevent and locate errors as the debits and credits can be easily compared.

Other illustration:

In the year 2021, the following transactions were made in the first quarter.

February 14 Acquired vehicle for ₱950,000.
March 1 Purchased office equipment for ₱150,000; paying ₱80,000
in cash and the balance next month.

Account Titles and

Explanation
2021
February Service Vehicle

₱950,000
14 Cash
₱950,000

To record the acquisition
of service vehicle.
March 1 Office Equipment ₱150,000

Cash

Accounts Payable ₱80,000

The purchase of office ₱70,000
equipment on cash and on

account.
☞W hat are the essential parts of a general journal?

The standard contents of the general journal are as follows:

 Date
Shows the date of the occurrence of the transaction. The year and the
month are not rewritten for every entry unless the year and month have
changed, or a new page is needed.
 Account Titles and Explanation
Shows the account debited and credited as well as a brief explanation of
the transaction. The account to be debited is entered at the extreme left
of the first line while the account to be credited is entered slightly
indented on the next line. A brief description of the transaction is usually
made on the line below the credit.
 Posting Reference (P.R.)
This will be used when the entries are posted, that is, until the amounts
are transferred to the related ledger accounts. The posting process will
be described later.
 Debit
Corresponding amount of the account debited is entered in this column.
 Credit
Corresponding amount of the account credited is entered in this column.

 THE SPECIAL JOURNALS

Large companies often engage in hundreds of transactions each day. In
order to expedite the journalizing process, a company usually utilizes
special journals in addition to the general journal. Special journals are used
to record typical and similar types of transactions. The number of special
journals managed by a company is dependent on the types of transactions
that occur frequently.

☞W hat are the examples of special journals?

Some of the most common special journals and respective formats used by
companies are shown below.

 Sales Journal – Used in journalizing all sales of merchandise on
account.

SALES JOURNAL
Dr. Accounts
Account Invoice
Date Reference Receivable
Debited Number
Cr. Sales

 Purchases Journal – Used to record purchases of inventory made on
account.

PURCHASES JOURNAL
Dr. Inventory
Account
Date Terms Reference Cr. Accounts
Credited
Pable

 Cash Receipts Journal – Used to record all cash that had been
received.

CASH RECEIPTS JOURNAL
Dat Account Dr. Cr. Accounts Cr. Cr. Other

Reference
e Credited Cash Receivable Sales Accounts

 Cash Payments Journal – Used to record transactions involving cash
payments. It is also known as cash disbursement journal.

CASH PAYMENTS JOURNAL
Dr.
Dat Check Account Dr. Other Cr.
Reference Accounts
e Number Debited Accounts Cash
Payable

In cases where a company has other recurring transactions not mentioned
in the foregoing, the company may opt to add further special journals.
Consequently, the company records the rest of the transactions that cannot
be entered in the special journals on the general journal. In addition,
correcting, adjusting, and closing entries are recorded in the general
journal.

After journalizing the business transactions in the general journal and
special journals, the company will now proceed to the process of
posting. Posting involves the process of transferring of the same
information found in the journal to the ledger accounts to bring together the
effect of the transactions to the individual accounts of the company.

The journal does not reflect information like outstanding balance of the
account or the total balance of an account. It is, rather, a chronological
listing of transactions, where the value received and value parted with are
given importance.

Posting, basically, is a sorting process. It groups similar transactions
according to their nature and type. Another distinct difference between
journalizing and posting is that journalizing is undertaken daily; while
posting is usually done at the end of the month.

The grouping of the transactions follows the accounting elements – assets,
liabilities, equity, income, and expenses. The grouping of transactions is
done in the ledger. Hence, information found in the general journal are
transferred to the ledger.

In the process of transferring the information from the journal to the ledger,
the following guidelines may be observed:

1. No alterations should be made.

2. Debit entries in the journal shall be transferred to the debit side of the
ledger.
3. Credit entries in the journal shall be transferred to the credit side of
the ledger.

The terms “debit entries” and “credit entries” include the date, debit or
credit account, and debit or credit amount.

☞W hat is a ledger? What is its purpose?

THE LEDGER
Ledger is a grouping of the entity’s accounts showing its respective
outstanding balances. It is also called the book of final entry of accounting
transactions. It presents the changes in specific account balances. All
account balances presented in the financial reports of the company are
derived from the ledger. The two kinds of ledgers are the general ledger
and the subsidiary ledgers.

 GENERAL LEDGER

A general ledger is the reference book of the accounting system and is
used to classify and summarize transactions, and to prepare data for basic
financial statements. It contains all the asset, liability, and owner’s equity
accounts of the company. The ledgers are usually grouped according to
their chart of accounts and arranged according to the order on how they
appear on the financial statements. Each account is numbered based on
the chart of accounts for easier and faster reference. The general ledger
shows the amount outstanding on each of the company’s accounts as of a
certain date.

The accounts in the general ledger are classified into two general groups:

1. Balance Sheet or Permanent Accounts (assets, liabilities and owner’s

equity).
2. Income Statement or Temporary Accounts (income expenses).
Temporary or nominal accounts are used to gather information for a
particular accounting period. At the end of the period, the balances of these
accounts are transferred to a permanent owner’s equity account.

☞W hat are the essential parts of a general ledger?

1. Account Title – The general ledger contains all of the company’s

accounts and its balances.
2. Ledger Account Reference Number – With the reference to the
company’s chart of accounts, each of the account titles corresponds to a
reference number.
3. Date – The date of the transaction is also entered in reference to the
journal.
4. Explanation – A brief description of the business transaction is
defined. This is sometimes omitted since the entries on the journal already
provide an explanation of the transaction.
5. Journal Reference (J.R.) – This column displays the journal page
number from which the transaction was posted.
6. Debit – Amounts debited to the account are inputted.
7. Credit – Amounts credited to the account are entered.
8. Balance – What distinguished a ledger from the journal is the running
outstanding balances provided by the ledger. After every transaction, the
balances of each of the accounts are known. On year-end, these balances
will be the basis of the amounts presented in the financial statements of the
company.

To further understand ledger and to picture what it looks like, using the
information from the sample general journal of Shayne, a sample format of
a general ledger is illustrated as follows.

Account: Cash Account No. 101
Date Explanation J.R. Debit Credit Balance
2021
January Investment of capital by

J1 ₱200,000 ₱200,000
1 owner.
3 J1 ₱20,500 179,500
from supplier.
Sales of inventories to
12 J1 60,000 239,500
customers.
14 J1 24,000 263,500
Payment of accounts
25 J1 10,000 253,500
Withdrawal of cash from

30 J1 2,000 251,500
the business.
Paid salaries to
31 employees for the J1 5,000 246,500
month.
31 Balance ₱246,500
Account: Accounts Receivable Account No. 111
2021
January Sale of inventories to

J1 ₱50,000 ₱50,000
4 customer on account.
14 J1 ₱24,000 26,000
15 J1 5,000 21,000
from customer.
31 Balance ₱21,000

Account: Inventory Account No. 121
2021
January Purchase of inventories

J1 ₱20,500 ₱20,500
3 from supplier through cash.
4 J1 ₱15,000 5,500
customer.
8 J1 40,000 45,500
from supplier on account.
12 J1 18,000 27,500
customer.
15 J1 1,500 29,000
from customer
31 Balance ₱29,000
Account: Property, Plant and Equipment Account No. 140
2021
January Owner’s investment of

J1 ₱50,000 ₱50,000
2 equipment.
31 Balance ₱50,000
Account: Accounts Payable Account No. 201

2021
January Purchase of inventories

J1 ₱40,000 ₱40,000
8 from supplier on account.
Payment of accounts
25 J1 ₱10,000 30,000
31 Balance ₱30,000
Account: Shayne, Capital Account No. 301
2021
January Investment of capital by

J1 ₱200,000 ₱200,000
1 owner.
2 J1 50,000 50,000
equipment
31 Balance ₱250,000
Account
Account: Shayne, Drawing
No. 302
2021
January Withdrawal of cash from the

J1 ₱2,000 ₱2,000
30 business.
31 Balance ₱2,000
Account: Sales Account No. 400
2021

J1 ₱50,000 ₱50,000
4 customer on account.
12 J1 60,000 110,000
customer.
31 Balance ₱110,000
Account
Account: Sales Return
No. 401
2021
January Return of merchandise from

J1 ₱5,000 ₱5,000
15 customer.
31 Balance ₱5,000
Account: Cost of Goods Sold Account No. 500
2021
J1 ₱15,000 ₱15,000
4 customer.
12 J1 18,000 33,000
customer.
Return of merchandise from

15 J1 ₱1,500 31,500
customer.
31 Balance ₱31,500
Account
Account: Salaries Expense
No. 405
2021
January Paid salaries to employees for

J1 ₱5,000 ₱5,000
31 the month
31 Balance ₱5,000

With the illustration, it will be easier for the company to determine the
balances of each of its accounts. These are as follows:

Assets
 Cash ₱246,500
 Accounts Receivable 21,000
 Inventory 29,000
 Property, Plant and Equipment 50,000
Liabilities
 Accounts Payable ₱ 30,000
Equity
 Shayne, Capital ₱250,000
 Shayne, Drawing 2,000
 Sales 110,000
 Sales Return 5,000
 Cost of Goods Sold 31,500
 Salaries Expense 5,000

The general ledger aids in knowing the balances of each of the accounts at
any given time. Unlike the journal, the general ledger classifies the
transactions into accounts and provides the outstanding balances of each.
Additionally, the general ledger, together with the subsidiary ledgers,
serves as a control account to check for errors and misstatements in
posting. At month-end or year-end, the company reconciles the balances of
its general ledger and subsidiary ledgers.

☞W hat are the advantages of using subsidiary ledgers?

 SUBSIDIARY LEDGERS

Large companies have thousands of transactions from their hundreds of
customers who buy goods and merchandise on credit. If the company only
utilizes a general ledger, imagine the time it will take to determine the
outstanding balances of each of its individual customers. The same is also
true when it comes to the company’s individual creditors.

To ease their burden, large companies use subsidiary ledgers.
A subsidiary ledger is a group of accounts with a similar characteristic. It is
an additional record to the general ledger utilized by the company to track
the per-individual accounts of the company’s customers, creditors, and the
like.

The two most common types of subsidiary ledgers are the accounts
receivable ledger and the accounts payable ledger.

 Accounts Receivable Ledger – Used in tracking individual accounts
receivable balances of company’s customers.

Illustrations:

Ianbabes & Co.
Date J.R. Debit Credit Balance
2021
March 5 J1 ₱40,000 ₱40,000
10 J1 60,000 100,000
31 J1 ₱20,000 80,000
Jowsie & Co.
2021
March 1 J1 ₱33,000 ₱33,000
4 J1 47,000 80,000
29 J1 24,000 104,000
31 J1 ₱85,000 19,000

Ryanbear & Co.
2021
March 9 J1 ₱80,000 ₱80,000
17 J1 ₱30,000 50,000
31 J1 50,000 0

The format of an accounts receivable subsidiary ledger is the same as that
of the general ledger. The only difference is that the accounts receivable
subsidiary ledger provides a running balance of each of the company’s
customer on credit. In the illustrations, it is recognized without effort that the
balances of Ianbabes & Co., Jowsie & Co., and Ryanbear & Co. as of
March 31 are ₱80,000, ₱19,000, and ₱0 respectively.

 Accounts Payable Ledger – Used in tracking individual accounts
payable balances of company’s creditors.

Illustrations:

TedSchmosby Inc.
2021
March 1 J1 ₱20,000 ₱20,000
16 J1 30,000 50,000
27 J1 ₱15,000 35,000
31 J1 10,000 25,000
Scherbatsky Ltd.
2021
March 5 J1 ₱10,000 ₱10,000
6 J1 25,000 35,000
7 J1 30,000 65,000
19 J1 50,000 115,000
Barney WaitForlt Stinson & Co.
2021
March 6 J1 ₱5,000 ₱5,000
21 J1 ₱3,000 2,000
22 J1 2,000 0
23 J1 20,000 20,000

Like the accounts receivable subsidiary ledger, the format of an accounts
payable subsidiary ledger is the same as that of the general ledger. The
accounts payable subsidiary ledger provides a running balance of each of
the company’s suppliers or creditors. From the foregoing illustrations, the
balances of TedSchmosby Inc., Scherbatsky Ltd., and Barney WaitForlt
Stinson & Co. are determined easily – ₱25,000, ₱115,000, and ₱20,000
respectively.

Subsidiary ledgers are valuable especially in large companies with
thousands of transactions from numerous customers and creditors. This
provides an up-to-date information on the different individual account
balances. In addition, the subsidiary ledgers help in detecting errors and
misstatements in posting of entries in the ledger. At year-end or month-end,
the company can easily reconcile the balance of the general ledger account
to the total of the individual subsidiary ledgers to determine whether there
are transactions not posted. Finally, like the special journal, the subsidiary
ledger allows greater division of labor for the company. As the two kinds of
ledgers are being utilized, different employees can post in the general
ledger and in the subsidiary ledgers simultaneously.

☞W hat is the T-Account in accounting?

The T-Account is the alternative way of preparing a general ledger. This is
used in times when an accountant needs to know the ending balance or
transaction of a single account. This is also used to post journal entries
(normally not too many) in a particular period to arrive at a trial balance.

The T-Account is termed as the simplest form of an account because you
can summarize transactions through this without using the general ledger
book and one can already prepare a trial balance. At the top of the T-
account is where you write the account name or title, on the left side of the
T-account is where you write or post the debit transactions and on the right
side of the T-account is where you write or post the credit transactions.
Then pencil footing is applied at the bottom of the T-account to determine
the balances.

Pencil footing is a method used in accounting to add together all the figures
on the debit and credit columns then write the results in small pencil figures
at the bottom of the columns. The pencil footing is then used to carry over
the figures to another page.

The T-account is literally a broad and very wide letter “T” with the debit on
the left side and the credit on the right side and account name at the center
on top of the letter “T”.

Account Title
Debit Credit

Let’s take a few examples of transactions and post these to the T-account.

Illustration:
July 1 Mr. Cruz invested to his business for ₱225,000 in cash.
July 5 The owner purchased supplies for ₱5,000 in cash.
July 10 The owner purchased furniture on account for ₱23,000.
July 15 Paid rent for the month, ₱5,000.

Now, let us first journalize the transactions.

Account Titles and

Explanation
Cash
July 1 ₱100,000
Cruz, Capital
₱100,000

To record owner’s
investment.
Supplies
July 5 ₱5,000
Cash
₱5,000
To record purchase of

supplies.
Furniture
July 10 ₱23,000
Accounts Payable
₱23,000

To record purchase of
furniture on account.
Rent Expense
July 15 ₱5,000
Cash
₱5,000

To record rental for the
month
Posting to the T-account

CASH CRUZ, CAPITAL
1 225,000.00 5 5,000.00 1 225,000.00
1
5,000.00
5
225,000.00 10,000.00
Bal
215,000.00
.

SUPPLIES FURNITURE
1
5 5,000.00 23,000.00
0

ACCOUNTS PAYABLE RENT EXPENSE
1 1
23,000.00 5,000.00
0 5

This means that the outstanding balances of the following accounts, using
the t-account, as of July 15 are as follows:

Debit Credit
Cash ₱215,000
Supplies 5,000
Furniture 23,000
Accounts
₱23,000
Payable
Cruz, Capital 225,000
Rent Expense 5,000
₱248,000 ₱248,000

The result of t-account is the same as the ledger, which it leads us to the
amounts to be used in the unadjusted trial balance.

Take note:

When using the ledger and the t-account, the result of their outstanding
balances must be equal across all accounts. T-account is a tool devised and
used by accountants up to the present to counter check the validity of the ledger
or to determine the outstanding balance of a specific account to save time.

SAMPLE EXERCISE

Prepare the journal entries and determine the outstanding balances each
account using the T-account of the following transactions of JJ Company
owned by Jam was established in March 2021:

March 1 Jam established JJ Company and invested ₱740,000 cash
and a laptop, ₱25,000.
2 Jam applied for a business loan from TNB Bank amounting
to ₱180,000 and signed a mortgage contract having her
personal vehicle as the collateral.
4 Bought various office supplies such as papers, pen, and ink
for ₱3,100.
5 Registered her business in the city hall and barangay, and
pad business permits and other fees amounting ₱2,200.
6 Purchased a printer from Enigma Enterprise for ₱9,100 on
account.
7 Purchased a land from Lumina Realty for ₱300,000 cash.
8 Purchased cabinets, tables, chairs, and other fixtures from
G&W Trading for ₱72,200 with a 40% down payment and the
balance on account for 60-days.
10 Rendered services to Toyo Company for ₱63,000 cash.
12 Made a partial payment of ₱5,000 Enigma Enterprise.
13 Rendered services to AOT Company for ₱84,000 receiving
a 30% down payment and the balance on account.
15 Paid ₱11,400 for the office space.
16 Paid ₱1,700 to the newspaper agency to advertise the
company services.
17 Received ₱15,000 from AOT Company as partial settlement
of the account.
19 Received ₱2,200 from Tori Marketing for the service
rendered.
21 Paid light and water bills amounting ₱4,900.
22 Jam withdrew cash of ₱2,000, and ink and bond paper of
₱350 for her personal use.
25 Purchased additional furniture for ₱22,000.
27 Paid ₱3,400 for additional office equipment.
30 Rendered services to Aiko Company for ₱29,700 with a down
payment of ₱10,000 and the balance is on account.
31 Paid the salary of the office assistant for ₱12,000.

SIMPLE EXERCISE (Week 1)
Answer Key

A B A B
1. Accounts
L Cr A Dr 8. Equipment
Payable
2. Accounts
A Dr A Dr 9. Furniture
Receivable
3. Additional Paid-
E Cr A Dr 10. Inventories
in Capital
A Dr 4. Cash L Cr 11. Notes Payable
E Cr 5. Common Stock I Cr 12. Sales
Ex Dr 6. Tax Expense A Dr 13. Supplies
L Cr 7. Loans Payable I Cr 14. Interest Income

1. » GENERALIZATION
There are two major books of accounts – the journals and ledgers.
The journal is a chronological record of the company’s transactions listed
by date. It is often referred to as the book of original entry. The basic type
of journal is the general journal. The general journal typically displays the
transaction’s date, account titles and explanation, posting reference, and
respective amounts of corresponding accounts. Special journals are used
to record typical and similar types of transactions. Some of the most
common examples of special journal are: sales journal; purchases journal;
cash receipts journal; and, cash payments journal.
The ledger is the grouping of all accounts of a company showing its
respective outstanding balances. It is also called the book of final entry of
accounting transactions. Subsidiary ledgers group accounts with similar
characteristics. It is created or maintained if individualized data is needed
for a specific general ledger account. Some of its examples are the
accounts receivable ledger and accounts payable ledger. The total amount
of all individual subsidiary ledgers should equal the balance of that account
in the general ledger.

The accounting books play a very

important role in the life of any
businesses as they narrate the course of
actions and transactions a business entity
ventured into.
What is the complete set of financial statements?

An entity shall present with equal prominence all of the financial
statements in a complete set of financial statements. Per revised
International Accounting Standards (IAS) No. 1, a complete set of financial
statements comprises:

1. statement of financial position at the end of the period;

2. statement of comprehensive income for the period;
3. statement of changes in equity for the period;
4. statement of cash flows for the period;
5. notes, comprising a summary of significant accounting policies and
other explanatory information; and
6. statement of financial position as at the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial
statements or when it reclassifies items in its financial statements.

For this week’s lesson, we begin our study of financial statements with
the Statement of Financial Position (SFP) or commonly referred to as
Balance Sheet.

THE STATEMENT OF FINANCIAL POSITION

☞W hat is a Statement of Financial Position (SFP)?

The Statement of Financial Position is a report based on the accounting
equation: Assets = Liabilities + Owner’s Equity. Most students endearingly
refer to the accounting equation as ALOE. It is also called as balance
sheet because the sum of the assets should be balanced to the sum of the
liabilities and equity. The SFP is balanced as a consequence of double-
entry accounting.

Basically, SFP is a snapshot of the financial position of the company that
reports the resources available for the company to use, obligations that the
company is required to settle and the equity that belongs to the owners of
the company.

☞W hich method of presenting SFP should be used by a business

entity?

The balance sheet can be presented in either the report format or the
account format. The report format simply lists the assets, followed by the
liabilities then by the owner’s equity in vertical sequence. The account
format lists the assets on the left and the liabilities and owner’s equity on
the right. Either balance sheet format is acceptable.

CLASSIFICATION

The revised IAS No. 1 does not prescribe the order or format in which an
entity represents items in the statement of financial position; what is
required is the current and noncurrent distinction for assets and liabilities.
Assets can be presented current then noncurrent. Liabilities and equity can
be presented current liabilities then noncurrent liabilities then equity.

It is proper to present a classified balance sheet; that is, the assets and
liabilities are separated into various categories. Assets are sub-classified
as current assets and non-current assets; while liabilities as current
liabilities and non-current liabilities. At this point, it is advisable to review
the definitions of the foregoing. Classifying a balance sheet aids in the
analysis of financial statement data.

To make accounting information useful to decision-makers, the items in
the balance sheet may be grouped and arranged in accordance with the
following guidelines:

 Assets are classified and presented in decreasing order of liquidity.
Cash is the most liquid. Assets that are least likely to be converted to cash
are listed last.
 Liabilities are generally classified and presented based on time of
maturity such that obligations which are currently due are listed first.

As you already learned, the total assets in the balance sheet does not
tally with the total debits in the balance sheet columns of the worksheet.
Likewise, the total liabilities and owner’s equity do not equal the total
credits in the balance sheet columns of the worksheet. The reason for
these differences is the accumulated depreciation and withdrawals
are subtracted from their related accounts in the balance sheet
but added in their respective columns in the worksheet.

☞H ow do you prepare a Statement of Financial Position?

 » 1. Title and Heading
1.
a. Legal name of the company. This is presented in the first line of
the heading.
b. The name of the report. It is presented in the second line of the
heading. Indicate if it is the statement of financial position.
c. Reporting date. For SFP, start with the phrase “as of the
month/year ended” followed by the date presented as month, date, and
year.

Example:
Green Pasteur
Statement of Financial Position
As of the Year Ended December 31, 2021

 » 2. Theseare headings within your statement. It designates major
elements with details below them for the total and subtotaled. For
statement of financial position, it has three primary elements: Assets,
Liabilities and Equity.

 » 3. The extreme margin on the left is used for describing the major
classifications of accounts under the major elements. Followed by an
indention for describing the accounts.

Example:
ASSETS
Current Assets
Cash
Accounts Receivables
Prepaid Supplies

 » 4. Money Columns. The money columns are on the right side of
the account. The total for the major classification of accounts are placed on
the extreme right while the details are on the inner money column for the
amounts for each account described.

Example:
ASSETS
Current Assets
Cash ₱250,000
Accounts Receivables 175,000
Prepaid Supplies 25,000 ₱450,000

 » 5. Currency Sign. The peso sign (₱) is placed on the top of each
money column. A peso sign is also placed at the final amount. (See
example in number 6)

 » 6. A single line or rule is drawn under the last amount to be added
or subtracted and a double line or rule is drawn under the final amount.

Example:
ASSETS
Current Assets
Cash ₱250,000
Accounts Receivables 175,000
Prepaid Supplies 25,000 ₱450,000
Noncurrent Assets
Land 1,000,000
Furniture and Fixture 225,000
Equipment 2,125,000
Building 5,000,000 8,350,000
Total Assets ₱8,800,000

 » 7. Arrangement of Accounts. The accounts are arranged according
to liquidity. Thus, current assets are arranged based on their convertibility
to cash while noncurrent assets are arranged from the lowest amount to
the highest amount except for the land that generally listed first. On the
other hand, the liabilities are arranged based on time of maturity where the
currently due are listed first.

For better understanding, the illustration below was extracted from
the previous lesson for you to be able to connect the lesson and to
gain a clearer understanding on the two formats of presenting
statement of financial position. Thus, let us again use the data from
the Del Mundo Landscape Specialist.

☞ The classified balance sheet of Del Mundo Landscape Specialist

in report format is:

Del Mundo Landscape Specialist

As of the Month Ended November 30, 2020

Assets
Current Assets
Cash ₱182,250
Accounts Receivable 10,000
Supplies 500
Prepaid Rent 14,000
Prepaid Insurance 22,000 ₱228,750
Noncurrent Assets (Net)
Equipment ₱54,000
Less: Accumulated
(1,000) ₱53,000
Depreciation
Vehicles ₱300,000
Less: Accumulated
(4,500) 395,500 348,500
Depreciation
Total Assets ₱577,250
Liabilities
Current Liabilities
Notes Payable 100,000
Salaries Payable 1,600
Interest Payable 1,400

Unearned Revenues 11,250 ₱115,250
Owner’s Equity
Del Mundo, Capital, 11/30/2020 462,000
Total Liabilities and Owner’s Equity ₱577,250
☞ The classified balance sheet of Del Mundo Landscape Specialist

in account format is:


As of the Month Ended November 30, 2020
Liabilities and Owner’s

Assets
Equity
Current Current

Assets Liabilities

₱182,2 ₱1,00
Cash Accounts
50 0
Payable
Accounts Notes 100,0

10,000
Receivable Payable 00

Supplies 500 Salaries 1,600
Payable
Prepaid 14,000 Interest 1,400

Rent Payable

Unearne
Prepaid ₱228,7 11,25 ₱115,2
22,000 d
Insurance 50 0 50
Revenue
s
Noncurrent
Assets
(Net)
Del
Mundo,
₱54,00 462,00
Equipment Capital,
0 0
11/30/20
20
Less:
Accumulate
d ₱53,00
(1,000)
0
Depreciatio
n
₱300,0
Vehicles
00
Less:
Accumulate
d 295,50 348,50
(4,500)
0 0
Depreciatio
n
Total ₱577,2 Total ₱577,2

Assets 50 Liabilities 50
and
Owner’s
Equity

Remember that in presenting statement of financial position, either
way is acceptable. Furthermore, whichever form of presentation, the
total assets and the total liabilities and equity of both formats should
be the same or equal.
INTRODUCTION

Financial statements are considered the end product of the accounting process.
Last week we discussed the Statement of Financial Position that shows the financial
position or condition of an entity by listing the assets, liabilities and owner’s equity as at
a specific date.
For this week, we are still on the financial statements but we are going to focus
on the lessons about the Statement of Comprehensive Income (SCI).

MY PERSONAL INCOME

Have you ever wondered how much you earn or save? Even in these trying times, as an
ABM student you should also be aware on how to have a personal check of your
finances. Were you still being able to save or not? Let us consider your savings as your
income and try this activity.

1. Get a pen and a piece of paper (any paper will do).

2. Write your monthly allowance if you are still receiving some, or if not, recall how
much is your monthly allowance during the face-to-face class
3. List down your estimated monthly expenses on food, phone load, etc.
4. Deduct the total amount you spent from your monthly allowance.
5. Consider your allowance as revenue and spending as expenses.

From that activity, were you still able to save or earn? Considering the excess as your
profit.

LET US GET STARTED!

One of the reasons why people establish their own business is to create value for
themselves or to the company as a whole. The business creates value when the
revenues generated are greater than its expenses.
How do we determine when revenues are greater than expenses? The answer to
this is to gather all the revenues generated and all the expenses incurred and prepare a
summative report showing if the firm resulted to a net income or net loss. Net income is
a situation where the sums of all the revenues are greater than the sum of the overall
expenses of the business. However, the business incurs a net loss if the overall
expenses are greater than the total revenues of the company.
In some cases, businesses do not undergo in such a tedious process that they
only estimate if their business is generating revenues. However, doing such puts the
business in a risky situation for not knowing exactly the financial result of the operations.
Besides reporting the result of the operations is a requirement by the government for
the purpose of taxation.

THE STATEMENT OF COMPREHENSIVE INCOME (SCI)

☞W hat is a Statement of Comprehensive Income (SCI)?

We continue our study of financial statements with the Statement of Comprehensive
Income (SCI). The SCI is a statement that results the operations of the business for one
accounting period. This statement contains the following information:

a. revenue generated by operating the business;

b. costs spent to generate the revenue; and
c. other income that is incidental to the operations of the business.

For our purposes, the SCI is the same as the Income Statement. The difference
between the SCI and the Income Statement is beyond the scope of high school
accounting and will be discussed more in advanced accounting subjects.

When the SCI is prepared, the heading always states as “For the year ended” or
“For the month ended” then followed by the month, date and year. It is indicated in such
a way in order to determine that the amounts presented in the statement include only
those amounts within that given period. For instance, if the heading states “For the year
ended December 31, 2020”, it simply means that it only covers the period from January
1, 2020 to December 31, 2020. And if the heading states “For the month ended July 31,
2020”, it simply means that it only covers the period from July 1 to July 31, 2020.

☞W hat are the elements of the statement of comprehensive income?

There are two elements under the Statement of Comprehensive Income; they are
the income and expenses.

INCOME

Under the Conceptual Framework, income is defined as increases in economic
benefits during the period in the form of cash inflows or enhancements of assets or
decreases in liabilities that result in increases in equity, other than those resulting from
contributions of equity participants. The word income encompasses both the revenue
and gain.

☞W as there a difference between revenue and gain?

The Revenue

Revenue arises from the main producing activities of the business. Basically, it
refers to income generated from the primary operations of the business. Revenue is
derived from any or combination of the following:
 Service Business. The revenue is derived primarily from rendition of service(s).
Examples are doctors, engineers, architect, lawyers and accountant.
 The business generates revenue from selling of goods. The firm buys the good
and sells them at a higher price.
 These are companies that buy the raw materials and process them to form a
finished product. The manufacturing firm may also perform as a merchandising
company.

The Gain

On the other hand, gain derived from other activities of the business. For instance, a
merchandising business that has excess cash placed in a time deposit and generates
an interest income. The interest income obtained by the firm is only an incidental for
having excess cash and not as the primary activity to generate income being a
merchandising company. Gain may also result to selling of an old asset whose book
value is lower than the selling price.

EXPENSES

Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletion of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.
The definition of expenses encompasses losses as well as those expenses that
arise in the course of the ordinary activities of the enterprise. There are various classes
of expenses but they are generally classified as cost of services rendered or goods
sold, distribution or selling expenses, administrative expenses or other operating
expenses.

Losses represent other items that meet the definition of expense and may or may not
arise in the course of the ordinary activities of an enterprise. Losses represent decrease
in economic benefits and as such are no different in nature from other expenses.
Hence, they are not regarded as a separate element per IFRS Framework.

☞H ow to present a Statement of Comprehensive Income?

In general, there are two formats used in the preparation of Statement of
Comprehensive Income. They are the nature of expense method and the function of
expense method. But for this week’s lesson, let us focus on the nature of expense
method.

THE NATURE OF EXPENSE METHOD

The nature of expense method also known as the single-step approach lists all the
revenues and expenses together. Expenses are aggregated or combined in the income
statement according to their nature and are not reallocated among various functions
within the entity. This method is simple to apply to in many smaller enterprises because
no allocation of operating expenses between functional classifications is necessary.

(Sample Format)
LUCIOUS COMPANY
Statement of Comprehensive Income
For the year ended December 31, 20XX
Revenues
Service Revenue P xx
Interest Income xx
Total Revenue and Income XX
Less: Expenses
Salaries Expense xx
Rent Expense xx
Utilities Expense xx
Insurance Expense xx
Total Expenses (XX)
Profit/Net Income XX

However, the use of this format limits external users to make an analysis regarding
efficiency and profitability ratio of the company due to the groupings of the revenues
and expenses. This format of presentation is normally used for a simple business such
as that of a service business.
Listed below is an example of a single-step approach:


Income Statement
For the Month Ended November 30, 2020

Revenues

Expenses
Salaries Expense ₱5,600
Supplies Expense 500
Rent Expense 7,000
Insurance Expense 2,000
Utilities Expense 1,500
Advertising Expense 1,750
Depreciation Expense – Vehicles 4,500
Depreciation Expense – Equipment 1,000
Interest Expense 1,400
Total (25,250)
Profit ₱17,000

Key points to remember in using the nature of expense method:

 Group all revenue items together and all expense items together.
 Net income is deducted using only one step, deducting total expenses from
total revenues.
 Generally used by small businesses and service business.

Take note that information about the performance of an enterprise, in particular its
profitability, is required in order to assess potential charges in the economic resources
that is likely to control in the future. It is also useful in predicting the capacity of the
enterprise to generate cash flows from its existing resource base.

SAMPLE EXERCISE
Prepare for the Income Statement of the given problem using the nature of expense
method.

During September, a mini grocery store had the following transactions involving revenue
and expenses.
 Paid ₱1,200 for rent.
 Provided services for ₱2,750 in cash.
 Paid ₱250 for telephone service.
 Provided services for ₱1,900 on credit.
 Paid salaries of ₱1,675 to employees.
 Paid ₱350 for office cleaning service.
Did the firm earn a net income or incur a net loss for the period? What was the amount?

SAMPLE EXERCISE (Week 3)
Answer Key

M&B Services Agency

As of the Year Ended December 31, 2020
Assets
Current Assets
Cash ₱992,500
Accounts Receivable 75,000 ₱1,067,500
Noncurrent Assets
Office Equipment ₱22,500
Furniture and Fixture 45,000 67,500
Total Assets ₱1,135,000
Liabilities
Current Liabilities
Notes Payable 750,000 ₱765,750
Owner’s Equity
Palm, Capital, 12/31/2020 369,250
Total Liabilities and Owner’s Equity ₱1,135,000
Take note:
The business can also do the Statement of Comprehensive Income on a semi-
annual, quarterly or monthly basis. The more often the report is generated, the better
because it helps the company to immediately determine its performance.
» GENERALIZATION

The Statement of Comprehensive Income, also known as Income Statement, is a
formal statement showing the performance of the enterprise for a given period of time. It
summarizes the revenues earned and expenses incurred for that period of time. The
SCI has two major elements, the income and expenses respectively. Income increases
assets or decreases liabilities leading to increase in equity resulting from the operations
of the business and not from the owner’s contribution. On the other hand, expenses are
related to the primary operations of business while losses are from other activities of the
business. Furthermore, there are two ways to present the SCI, the nature of expense
method and the function of expense method.
How do you prepare the income statement of a merchandising business?

The statement may be prepared by referring to the income statement columns of the
worksheet. Per revised IAS No. 1, an enterprise should present an analysis of expenses
using a classification based on either the nature of expenses or their function within the
entity, whichever provides information that is reliable and more relevant. Entities are
encouraged to present the analysis of expenses on the face of the income statement.

THE FUNCTION OF EXPENSE METHOD (MULTI-STEP

APPROACH)

This method, also referred to as the “cost of sales” method, classifies expenses
according to their function as part of cost of sales, distribution/selling, administrative and
other operating activities. This presentation often provides information that is more
relevant to users than the nature of expense method but the allocation of costs to
functions can be arbitrary and involves considerable judgment. This method provides
multiple classifications and intermediate differences to highlight significant relationships.

In a merchandising business, net sales arise from the sale of goods while cost of
sales or cost of goods sold represents the cost of inventory the entity has sold to
customers. The difference between net sales and cost of sales is called gross profit.

Then, other operating income is added and operating expenses (like distribution
costs, administrative expenses and other operating expenses) are deducted from gross
profit to arrive at operating profit.

Investment revenues, other gains and losses, and finance costs (e.g., interest
expense) are considered to arrive at profit before tax then income tax expense is
deducted to arrive at profit from continuing operations. Finally, profit from discontinued
operations (net of tax) is taken to account to get profit for the period.

Net Sales ₱ xxx
Cost of Sales (xxx)
Gross Profit ₱ xxx
Other Operating Income xx
Total ₱ xxx
Operating Expenses
Distribution Costs ₱ xx
Administrative Expenses xx
Other Operating Expenses xx (xx)
Operating Profit ₱ xxx
Finance Costs (xx)
Investment Revenues xx
Profit from Continuing Operations ₱ xxx
Profit from Discontinued Operations x

Profit ₱ xxx

The difference between the two methods lies in the items above operating profit. The
standard does not prescribe any format. The choice between the two methods
depends on historical and industry factors and the nature of the entity.
☞H ow do you prepare the function of expense method and what are the
additional elements present in it?

Sales Revenue
Sales revenue is the account title used by merchandisers and manufactures for
the selling of goods. Some are simply using Sales and some are using a more
specified account such as Food Sales, Book Sales, Car Sales and other that can
easily associate with their product.

Sales revenue is said to be earned when the merchandiser or manufacturer
transfer the goods to customer. The sale is supported by a sales invoice.

Discounts
Discounts help both the merchandisers and customers to reduce payments on
what they bought. Both parties may have different objectives in buying but both
parties benefit from discount by making lesser payment. Discounts have two types:
trade discount and cash discount. In the context of preparing income statement
using the multi-step approach, discount is presented as sales discount.

Sales Returns and Allowances
In certain cases, a customer may return merchandise bought. The possible
reasons are goods that are damaged; it is defective, or possibly not in accordance to
the specification given by the buyer. In such case, the seller will give credit to the
customer by means of cash refund or reducing the receivable. Or as an alternative,
the seller may give certain allowance for the goods sold.

Net Sales
At the time the Statement of Comprehensive Income is prepared, the sales
discounts and sales return and allowances are deducted from sales revenue to
arrive at net sales.

Sales ₱ xxx
Less: Sales Discount ₱xxx
Sales Returns and Allowances xxx (xxx)
Net Sales ₱xxx

Cost of Goods Sold
The cost of goods sold represents cost of merchandise sold to the customer. The
merchandise represents the stock of goods purchased by the merchandiser for
resale to its customers. Most of the time, the merchandisers have variety of goods
for sale. Take for example at a furniture company. You can find that their inventories
consist of tables, cabinets, chairs and other similar items that could be sold. This is
also called as cost of sales.

Merchandise Inventory
The merchandise is the item bought with the intention of reselling for profit.
Under the cost of goods sold, you will see the merchandise inventory, beginning –
the items unsold from the previous accounting period transferred to the next
accounting period and the merchandise inventory, end – the items unsold at the end
of the current account period. Any unsold merchandise at the end is transferred to
the next accounting period and becomes the merchandise inventory, beginning of
the succeeding accounting period.

Purchases
Purchase is an account used for the merchandise bought for resale. Purchases
are added to the merchandise inventory, beginning to arrive at total goods available
for sale. The other accounts affecting the purchase account are the following:
freight-in, purchase discount and purchase return and allowances.

Freight-In
When merchandise is shipped by the supplier to the buyer, the shipping
company prepares a freight bill in accordance to the agreement between the buyer
and the seller. The shipping company show the shipping term as Free on Board
(FOB) shipping point. A freight-in is an additional cost to purchases and is generally
paid by the buyer. Others also called it transportation-in.

Purchase Discount
In several occasions, cash discount is offered to buyers on account. The cash
discount is granted when the obligation is paid within the discount period. It is
computed based on the invoice price of the merchandise bought. A purchase
discount is from the buyer’s point of view while sales discount is from the seller’s
point of view.

Purchase Discount and Allowances
In some cases, the merchandise bought resulted to the defective, damaged or
did not meet the specifications given by the buyer. In that case, merchandise bought
may be returned to the seller. In such case, the seller is giving a credit memo to the
buyer – it is either a cash refund or deduction from the amount to be paid. However,
in some cases, instead of returning the goods, the buyer may just request for a
reduction in the price. This will decrease the cost of the purchases as well as the
amount of the liability to be paid. Just like the purchase discount, purchase return
and allowances are deducted from the cost of purchases.

Cost of Goods Sold
Merchandise Inventory, Beginning ₱xxxx
Purchases ₱xxxx
Less: Purchases Returns & Allowances ₱xxx
Purchases Discount xxx (xxx)
Net Purchases ₱xxxx
Freight-In xx
Net Cost of Purchases xxxx

Goods Available for Sale ₱xxxx
Less: Merchandise Inventory, End (xxx)
Cost of Goods Sold ₱xxxx

Gross Profit
The gross profit is the difference between the net sales and cost of goods sold. In
order to get a positive gross profit, the merchandiser has to sell the merchandise at
a price higher than the cost of goods sold. The gross profit is the one that absorbs
the operating expense. For this reason, the pricing of the merchandise should not
only allow covering the cost of goods sold but also enough to cover the operating
expenses.

Operating Expenses
Operating expenses are the expenses incurred by the company other than the
cost of sales. They are the expenses that support the main operation of the business
to generate profits.

☞W hat comprises the Operating Expenses?

Operating expenses are primary recurring costs associated with central operations,
other than cost of goods sold, which are incurred to generate sales. These expenses
are classified into:

 Distribution Costs or Selling Expenses are those expenses related directly to the
entity’s efforts to generate sales. For example, sales salaries, commissions, advertising,
travels and promotions, transportation out, depreciation of store and delivery equipment,
and store supplies.
 Administrative Expenses are expenses related to the general administration of
the entity’s operations. For example, officers and office salaries, office supplies,
depreciation of office furniture and fixtures, telecommunications, accounting and legal
services, business licenses and fees, and uncollectible accounts.

Note that some expenses, like rent, insurance and utilities, can be properly allocated
between the two categories.

To fully understand the lesson and to see what multi-step approach looks like, let us
take a look on the income statement for T. Calaguas Traders using the function of
expense method that is presented below:

Theodore Calaguas Traders

Income Statement
For the Year Ended December 31, 2016
Net Sales
Gross Sales ₱2,463,500
Less: Sales Returns &

₱27,500
Allowances
Sales Discounts 42,750 (70,250)
Net Sales ₱2,393,250
Cost of Sales
Merchandise Inventory,

₱528,000
1/1/2016
₱1,264,00
Purchases
0
Less: Purchases Returns &

₱56,400
Allowances
Purchases Discount 21,360 (77,760)
₱1,186,24
Net Purchases
0
Transportation In 82,360
Net Cost of Purchases 1,268,600

₱1,796,60
Goods Available for Sale
0
Less: Merchandise Inventory.

(483,000)
12/31/2016
Cost of Sales (1,313,600)
Gross Profit ₱1,079,650
Operating Expenses
Selling Expenses
Sales Salaries ₱225,000
Transportation Out 57,400
Store Supplies Expense 15,400
Insurance Expense –
5,600
Selling
Total Selling Expenses ₱303,400
Administrative Expenses
Office Salaries Expense ₱171,000
Utilities Expense 48,000
Depreciation Expense –
26,000
Building
Depreciation Expense –
22,000
Office Equipment
Office Supplies Expense 12,040
Insurance Expense –
3,600
General
Total Administrative
282,640
Expenses
Total Operating Expenses (586,040)
Operating Profit ₱493,610
Finance Costs (38,400)
Profit ₱455,210
Take note:
 The business can also do the Statement of Comprehensive Income on a semi-
annual, quarterly or monthly basis. The more often the report is generated, the
better because it helps the company to immediately determine its performance.
 Finance cost is synonymous to interest expense.
SAMPLE EXERCISE
Prepare the Income Statement and fill the missing elements of the given problem using
the function of expense method.

Missing Elements – Reconstruction

To test your knowledge of the relationships of these items, insert the missing
figures in the following income statement. Note that the gross profit is 40% of net sales
and profit is 10% of net sales.

Net Sales
Gross Sales ₱
Less: Sales Returns & Allowances ₱45,000
Sales Discounts 15,000

Net Sales ₱
Cost of Sales
₱220,00
Merchandise Inventory, 1/1/2016
0
₱985,00
Purchases
0
Less: Purchases Returns &

₱31,000
Allowances
Purchases Discount 20,000
Net Purchases ₱
Transportation In 36,000
Net Cost of Purchases
Goods Available for Sale ₱
Less: Merchandise Inventory.

12/31/2016
Cost of Sales
Gross Profit ₱620,000
Operating Expenses
Profit ₱
SAMPLE EXERCISE (Week 4)
Answer Key

Mini Grocery Store

Income Statement
For the month ended September
Revenues
Expenses
Rent Expense ₱1,200
Utilities Expense 250
Salaries Expense 1,675
Cleaning Expense 350
Total 3,475
Profit ₱1,175
» GENERALIZATION

Income statement reports all income and expenses during the period. There are two
types of income statement: the nature of expense method and the function of expense
method. Nature of expense method groups all revenue items together and all expense
items together and it is generally used by small businesses and service business.
Meanwhile, the function of expense method classifies expenses according to their
function as part of cost sales, distribution/selling, administrative and other operating
activities.

This week, we focused on the function of expense method. The expenses are
arranged in a more relevant and usable accounts based on their function. The expenses
are arranged according to cost of goods sold, operating expenses broken as selling and
administrative expense, and finance cost.

The multi-step form highlights the gross profit, which is the difference between the
net sales and cost of goods sold; and the operating income, which is the difference
between the gross profit and operating expenses. If there is other income and other
expenses such as interest income, commission income or interest expense, they will be
presented after the operation income.

Business operation is the main source of the entity. However, in the course of
business, the entity can earn additional income from incidental activities like the
interest of the money kept and place in the bank under the account of the business;
rentals on unused equipment and/or facilities, and etc. Indeed, such
activities/operations can greatly affect the profitability and wealth maximization of a
business entity.
THE STATEMENT OF CHANGES IN EQUITY

The Statement of Changes in Equity summarizes the changes that occurred in
owner’s equity. This statement is now a required statement as per revised International
Accounting Standards (IAS) No. 1.

As defined, equity is the residual interest in the assets of the enterprise after
deducting all its liabilities. Equity may pertain to any of the following depending on the
form of business organization:

 In sole proprietorship, there is only one owner’s equity account because there is
only one owner.
 In partnership, an owner’s equity account exists for each partner.
 In corporation, owner’s equity or shareholders’ equity consist of share capital,
retained earnings and reserves representing appropriations of retained earnings among
others. (See the book of Win Ballada for your reference.)

Key points of SCE:
 Summarizes the changes that occurred in owner’s equity.
 Shows a reconciliation of the beginning and ending balances of the equity
accounts.
 Initial Investment – the very first investment of the owner.
 Additional Investment – increases to owner’s equity.
 Withdrawals – decreases to owner’s equity.

As we go further with our discussion, we’ll be learning about the various forms of
business organization. In order for you to understand better, we’ll be discussing it one
by one, namely, Sole Proprietorship, Partnership, Corporation, and Cooperative.

☞W hat are the advantages and disadvantages of each form of business
organizations?

FORMS OF BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP
 It is a business owned by only one person and has full control/authority over the
business.
 It is easy to set-up and is the least costly among all forms of ownership.
 The sole proprietor (owner) owns all the assets, personally owes all the business
liabilities and suffers all losses but enjoys all the profits.
 Owner faces unlimited liability.
 It is usually adopted by small business entity as it is the most common form of
business organization.
 A sole proprietorship must apply for a business name and registered with the
Department of Trade and Industry (DTI).
Advantages Disadvantages
 Ease of formation and

dissolution.  Unlimited liability.
 Ownership of all profits.  Limited life.
 Subject to fewer regulations.  It may be difficult for an

individual to raise capital.
 No corporate income taxes.
Unlimited liability means that creditors, customers, the government, and other outside
parties can go after the personal assets of the owner even after extinguishing all the
assets of the business in the satisfaction of their claims. The law does not provide
protection to the personal assets of the owner unlike in corporations.

PARTNERSHIP
 A business owned by two or more persons who contribute resources into the
entity.
 Two or more persons bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profit among themselves. Two or
more persons may also form a partnership for the exercise of profession. (Civil Code of
the Philippines, Article 1767)
 A partnership business must register with the Securities and Exchange
Commission (SEC).

CHARACTERISTICS OF A PARTNERSHIP

The characteristics of partnerships are different from the sole proprietorships. Some
of the more important characteristics are as follows:

o Mutual Contribution. There cannot be a partnership without contribution of
money, property or industry (i.e., work or services which may either be personal manual
efforts or intellectual) to a common fund.

o Division of Profits or Losses. The essence of partnership is that each partner
must share in the profits or losses of the venture.

o Co-Ownership of Contributed Assets. All assets contributed into the partnership
are owned by the partnership by virtue of its separate and distinct juridical personality. If
one partner contributes an asset to the business, all partners jointly own it in a special

o Mutual Agency. Any partner can bind the other partners to a contract if he is
acting within his express or implied authority.

o Limited Life. A partnership has a limited life. It may be dissolved by the
admission, death, insolvency, incapacity, withdrawal of a partner or expiration of the
term specified in the partnership agreement.

o Unlimited Liability. All partners (except limited partners), including industrial
partners, are personally liable for all debts incurred by the partnership. If the partnership
cannot settle its obligations, creditors' claims will be satisfied from the personal assets
of the partners without prejudice to the rights of the separate creditors of the partners.

o Partners' Equity Accounts. Accounting for partnerships are much like accounting
for sole proprietorships. The difference lies in the number of partners' equity accounts.
Each partner has a capital account and a withdrawal account that serves similar
functions as the related accounts for sole proprietorships.

Advantages versus Sole Proprietorship:

a. Brings greater financial capability to the business.
b. Combine special skills, expertise and experience of the partners.
c. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporations:

a. Easier and less expensive to organize.
b. More personal and informal.
Disadvantages:
a. Easily dissolved and thus unstable compared to a corporation.
b. Mutual agency and unlimited liability may create personal obligations to
partners.
c. Less effective than a corporation in raising large amounts of capital.

KINDS OF PARTNERS

1. General Partner – one who is liable to the extent of his separate property after all
the assets of the partnership are exhausted.
2. Limited Partner – one who is liable only to the extent of his capital contribution.
He is not allowed to contribute industry or services only.
3. Capitalist Partner – one who contributes money or property to the common fund
of the partnership.
4. Industrial Partner – one who contributes his knowledge or personal service to the
partnership.
5. Managing Partner – one whom the partners have appointed as manager of the
partnership.
6. Liquidating Partner – one who is designated to wind up or settle the affairs of the
partnership after dissolution.
7. Dormant Partner – one who does not take active part in the business of the
partnership and is not known as a partner.
8. Silent Partner – one who does not take active part in the business of the
partnership though may be known as a partner.
9. Secret Partner – one who takes active part in the business but is not known to be
a partner by outside parties.
10. Nominal Partner or Partner by Estoppel – one who is actually not a partner but
who represents himself as one.

SEC REGISTRATION

When the partnership capital is P3,000 or more, in money or property, the public
instrument must be recorded with the Securities and Exchange Commission (SEC).
Even if it not registered, the partnership having a capital of P3,000 or more is still valid
and therefore has legal personality.

The purpose of registration is to set “a condition for the issuance of the licenses
to engage in business or trade. In this way, the tax liabilities of big partnerships cannot
be evaded, and the public can also determine more accurately their membership and
capital before dealing with them.”

☞W hat is the effect of dissolution and liquidation to partnership?

DISSOLUTION – Changes in Ownership

The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished from
the winding up of the business of the partnership (Civil Code of the Philippines, Article
1828).

On dissolution, the partnership is not terminated, but continues until the winding
up partnership affairs is completed (Article 1829). Winding up is the process of settling
the business or partnership affairs after dissolution. Termination is that point in time
when all partnership affairs are wound up or completed, and is the end of the
partnership life.

Limited life is one of the characteristics of a partnership. Any change in the
membership of this form of business organization will result to dissolution. Dissolution of
the partnership does not necessarily imply that business operations will come to an end.

☞W hat are the situations to consider for partnership to dissolve?

CAUSES OF DISSOLUTION

1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
5. Insolvency of any partner
6. Civil interdiction of a partner

LIQUIDATION

The liquidation of a partnership is the winding up of its business activities
characterized by sale of all non-cash assets, settlement of all liabilities and distribution
of the remaining cash to the partners. The conversion of non-cash assets into cash is
referred to as realization.

CORPORATION
 A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. (The Corporation Code of the Philippines, Sec.2)
 A corporation is a business owned by its
 It has a separate legal personality from its owners.
 Ownership in a stock corporation is represented by shares of stock.
 Corporation is a business entity formed by at least five (5) but not more than
fifteen (15) persons. The originally forming the corporation are called incorporators.
 Just like partnership, corporation must be registered with the Securities and
Exchange Commission (SEC).

ATTRIBUTES OF A CORPORATION

o A corporation is an artificial being with a personality separate and apart from its
individual shareholders or members.

o It is created by operation of law. It cannot come into existence by mere
agreement of the parties as in the case of business partnerships. Corporations require
special authority or grant from the State, either by a special incorporation law that
directly creates the corporation or by means of a general corporation law (i.e., The
Corporation Code of the Philippines).

o It enjoys the right of succession. A corporation has the capacity of continued
existence subject to the period stated in the Articles of Incorporation. The death,
withdrawal, insolvency or incapacity of the individual shareholders or members will not
dissolve the corporation. The transfer of ownership of shares of stock does not dissolve
the corporation.

o It has the powers, attributes and properties expressly authorized by law or
incident to its existence.

1. The corporation has the legal 1. A corporation is relatively

capacity to act as a legal entity. complicated in the formation and
management.
2. Shareholders have limited liability.
2. There is a greater degree of
3. It has continuity of existence.
government control and supervision.
4. Shares of stock can be transferred
3. It requires a relatively high cost of
without the consent of the other
formation and operation.
shareholders.
4. It is subject to heavier taxation than
5. Its management is centralized in the
other forms of business organizations.
5. Minority shareholders are subservient
board of directors. to the wishes of majority.
6. Shareholders are not general agents 6. In large corporations, management

of the business. and control have been separated from
ownership.
7. Greater ability to acquire funds.
7. Transferability of shares permits the
uniting of incompatible and conflicting
elements in one venture.

COMPONENTS OF A CORPORATION

1. Corporators – are those who compose a corporation whether as shareholders or

members, at any time.
2. Incorporators – are shareholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and are signatories to
said articles of incorporation.
3. Shareholders or Stockholders – are corporators in a stock corporation. They may
be natural or juridical persons.
4. Members – are corporators of a non-stock corporation.
5. Subscribers – are persons who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed.
6. Promoters – are persons who bring about or cause to bring about formation and
organization of a corporation.
7. Underwriters – are usually investment bankers.
There is no prohibition in the law against a shareholder being a director or officer of
two or more corporations. The Corporation Code does not prohibit a corporate officer
from occupying the same position in another corporation organized for the same
purpose. However, such situation may be prohibited by special law, the articles of
incorporation or the corporate by-laws. Thus, a corporation is authorized to prescribe
qualifications for its directors.

COOPERATIVE
 It is a business organization owned by a group of individuals and is operated for
their mutual benefit.
 An autonomous and duly registered association of persons, with a common bond
of interest, who have voluntarily joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable contributions to the capital required,
patronizing their products and services and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative
principles. (Philippine Cooperative Code of 2008)
 Membership in a cooperative shall be voluntary and available to all individuals
regardless of their social, political, racial, or religious backgrounds and beliefs and it
may be formed by at least fifteen (15) persons.

KEY FACTORS OF COOPERATIVES

o Member – includes a person either natural or juridical who, adhering to the
principles set forth in the Philippine Cooperative Code of 2008 (Republic Act 9520) and
in the articles of cooperation, has been admitted by the cooperative as member.
1.
a. Regular Member – is one who has complied with all the membership
requirements and entitled to all the rights and privileges of membership.
b. Associate Member – is one who has no right to vote nor to be voted upon
and shall be entitled only to such rights and privileges as the bylaws may provide:
Provided, that an associate member who meets the minimum requirements of regular
partnership, continues to patronize the cooperative for two (2) years, and signifies
his/her intention to remain a member shall be considered a regular member.

o General Assembly – the full membership of the cooperative duly assembled for
the purpose of exercising all the rights and performing all the obligations pertaining to
cooperatives, its articles of cooperation and bylaws.

o Cooperative Development Authority (CDA) – the government agency in charge of
the registration and regulation of cooperatives.

o Liability of Members – a member shall be liable for the debts of the cooperative
to the extent of his contribution to the share capital of the cooperative.
Source: Lighthouse Cooperative Official FB Page

Lighthouse Cooperative is a church-based association delivering excellent services

and quality products, developing entrepreneurship among its members.

PURPOSES OF COOPERATIVES

A cooperative may be organized and registered for any or all of the following
purposes:

1. To encourage thrift and savings mobilization among the members;

2. To generate funds and extend credit to the members for productive and
provident purposes;
3. To encourage among members systematic production and marketing;
4. To provide goods and services and other requirements to the members;
5. To develop expertise and skills among its members;
6. To acquire lands and provide housing benefits for the members;
7. To insure against losses of the members;
8. To promote and advance the economic, social and educational status of the
members;
9. To establish, own, lease or operate cooperative banks, cooperative wholesale
and retail complexes, insurance and agricultural/industrial processing enterprises, and
public markets;
10. To coordinate and facilitate the activities of cooperatives;
11. To advocate for the cause of the cooperative movements;
12. To ensure the viability of cooperatives through the utilization of new technologies;
13. To encourage and promote self-help or self-employment as an engine for
economic growth and poverty alleviation; and
14. To undertake any and all other activities for the effective and efficient
implementation of the provisions of the Cooperative Code.

OBJECTIVES & GOALS OF COOPERATIVES

The primary objective of every cooperative is to help improve the quality of life of its
members. Towards this end, the cooperative shall aim to:

1. Provide goods and services to its members to enable them to attain increased
income, savings, investments, productivity, and purchasing power, and promote among
themselves equitable distribution of net surplus through maximum utilization of
economies of scale, cost-sharing and risk-sharing;
2. Provide optimum social and economic benefits to its members;
3. Teach them efficient ways of doing things in a cooperative manner;
4. Propagate cooperative practices and new ideas in business and management;
5. Allow the lower income and less privileged groups to increase their ownership in
the wealth of the nation; and
6. Cooperate with the government, other cooperatives and people-oriented
organizations to further the attainment of any of the foregoing activities.

1. Shared control
1. Equality of members 2. Lack of necessary technical skill in
2. Tax benefits management.
3. Limited liability of members 3. Prone to corruption
4. Greater ability to attract capital 4. Lack of mutual interest of members.
5. Perpetual existence 5. Limited resources

6. Lack of secrecy in operation.

Businesses are organizations commonly made to earn profit. Throughout its life, a
company deals with multiple groups of individuals to achieve its end goal of profit
generation. Nonetheless, there are organizations established not for the pursuit of profit.
These are nonprofit organizations which include charitable institutions, public hospitals,
publics schools, etc.

There are four forms of business organizations available to aspiring businessmen –
sole proprietorship, partnership, corporation, and cooperative. Each form has its own
advantages and disadvantages. Aspiring businessmen take these into consideration
before deciding what form their business will take. However, some types of businesses
are not permitted to use some form of business organization. For example, businesses
formed by individuals for the practice of their profession are not allowed to be
corporations.

☞H ow can you prepare a Statement of Changes in Equity of a sole

proprietorship?
For you to appreciate more the lesson for this week, I’ll be showing you examples of
Statement of Changes in Equity of a sole proprietorship and partnership. But take note
that we will only focus on the Statement of Changes in Equity of a sole proprietorship.

Sole Proprietorship
Lucius Service
Statement of Changes in Equity
For the year ended December 31, 2020

Lucius, Capital, 01/01/2020 ₱380,000.00
Add Additional Investments by Owner ₱10,000.00

:
Net Income/Profit 25,000.00 35,000.00
Total: ₱415,000.00
Less: Withdrawals (21,000.00)
Lucius, Capital, 12/31/2020 ₱394,000.00

In the case of a sole proprietorship, increases in owner’s equity arise from additional
investments by the owner and profit during the period. Decreases result from
withdrawals by the owner and from the loss for the period. The beginning balance and
additional investments are taken from the owner’s capital account in the general ledger.
The profit or loss figures comes directly from the income statement while the
withdrawals from the balance sheet columns in the worksheet.

Partnership
ISKO BUKOL PARTNERSHIP
Statement of Changes in Equity
For the year ended December 31, 2020
Isko, Capital Bukol, Capital Total

Partners' Equity, 01/01/2020 ₱400,000.00
₱200,000.00 ₱200,000.00
Add: Additional Investments 50,000.00 - 50,000.00

Net Income/Profit 60,000.00 40,000.00 100,000.00
Total: 310,000.00 240,000.00 550,000.00
Less
Withdrawals (8,000.00) (5,000.00) (13,000.00)
:
Partners' Equity, 12/31/2020 ₱302,000.00 ₱235,000.00 ₱537,000.00

As contrasted with sole proprietorship, the number of capital and drawing
accounts has made the preparation of this statement of changes in equity all the more
useful for a partnership. Changes in an entity’s equity between the beginning and the
end of the reporting period reflect the increase or decrease in its net assets during the
period.

» GENERALIZATION

The form of business organization – sole proprietorship, partnership, corporation,
and cooperative – determines the equity accounts reported on the financial statements.
As we have discussed above, the form of business organization differs in terms of
number of owners and the transferability of ownership. These inherent characteristics of
business organizations led to the difference in the presentation of equity.

The Statement of Changes in Equity portrays the changes in the capital balance of
the business over a particular accounting period. It is also the statement where the net
income after tax earned during the period is added to the beginning capital balance of
the owner. On the contrary, any net loss is deducted from the capital balance.

Other than the net income or net loss, an investment, withdrawal and other possible
adjustments affecting the owner’s equity are also included to arrive at the ending capital
of the owner.

Capital, in the viewpoint of accounting, signifies the investment of the owner in the
business. This is used to finance the daily operation of the business to generate profit
and to acquire assets of the entity. The capital is a manifestation that the business
entity is in good shape or not. The higher the capital versus liability, generally means
that the profit is high and majority of the assets were funded/invested by the owner.
Thus, capital is not just simply use to fund the operation of the business but also
reflects the capital structure and wealth maximization of an entity.
Week 7
STATEMENT OF CASH FLOWS

The Statement of Cash Flows (SCF) provides information about the cash
receipts and cash payments of an entity during a period. It is a formal statement that
classifies cash receipts and cash payments into operating, investing and financing
activities. This statement shows the net increase or decrease in cash during the period
and the cash balance at the end of the period; it also helps project the future net cash
flows of the entity.

The net increase or decrease in cash during the period is known by comparing
two successive balance sheets. It is not the change in cash itself that is emphasized in
the statement of cash flows but the reasons for the change in cash. Each item in the
statement helps explain why cash changed by the amount it did during the period.

The Statement of Cash Flows is the financial statement that explains the net
change in cash for the year. Like the SCI and SCE, the SCF is dated “for the year
ended”. The statement shows the transactions for the year that reconciles the beginning
balance of cash to its year-end balance. The report is presented based on the three
major activities of the business.

TAKE A LOOK AT THIS!

☞W hat is Cash?

Cash is legal tender – currency or coins – that can be used to exchange goods,
debt, or services. Sometimes it also includes the value of assets that can be easily
converted into cash immediately, as reported by a company.
Understanding Cash

Cash is also known as money, in physical form. Cash, in a corporate setting,
usually includes bank accounts and marketable securities, such as
government bonds and banker's acceptances. (For related reading, see "Cash vs.
Bonds: What's the Difference?")
Although cash typically refers to money in hand, the term can also be used to
indicate money in banking accounts, checks, or any other form of currency that is easily
accessible and can be quickly turned into physical cash.
KEY TAKEAWAYS:
 Cash is legal tender that can be used to exchange goods, debt, or services.
 The term "cash" can sometimes also include the value of assets that can be
converted into cash immediately.
 Cash has been used for as long as goods and services have been traded.

Cash in its physical form is the simplest, most broadly accepted and reliable form
of payment, which is why many businesses only accept cash. Checks
can bounce and credit cards can be declined, but cash in hand requires no extra
processing. However, it's become less common for people to carry cash with them, due
to the increasing dependability and convenience of electronic banking and payment
systems.

☞W hat are the three (3) major activities of cash flows?

The following are the various cash flow activities:


o Operating Activities
1.
1.
a. Direct Method
b. Indirect Method

o Investing Activities
o Financing Activities

☞H ow can you prepare a statement of cash flows?

The data below shows the format in presenting statement of cash flows.

USL Company
Statement of Cash Flows
For the Year Ended December 31, 20XX

Cash Flows from Operating Activities
Cash Transactions ₱ xxx
Net cash provided by (used in) operating
activities ₱ xxx

Cash Flows from Investing Activities
Cash Transactions xxx
Net cash provided by (used in) investing
activities xxx

Cash Flows from Financing Activities
Cash Transactions xxx
Net cash provided by (used in) financing
activities xxx
Net Increase (Decrease) in Cash and Cash Equivalents ₱ xxx

Cash and Cash Equivalents, Beginning xxx
Cash and Cash Equivalents, End ₱ xxx

Cash Flows from Operating Activities

Operating activities generally involve providing services, and producing and
delivering goods. Cash flows from operating activities are generally the cash effects of
transactions and other events that enter into the determination of profit or loss. This
cash flow can be presented using either the direct or the indirect method.

Direct Method
The entity’s net cash provided by (used in) operating activities is obtained by adding the
individual operating cash inflows and then subtracting the individual operating cash
outflows. In essence, this is the “cash basis” income statement.
Cash Flows from Operating Activities:

Cash receipts from sale of goods ₱ xxxx
Cash paid for purchases of inventory (xx)
Cash paid for salaries expense (xx)
Cash paid for utilities expense (xx)
Cash paid for interest expense (xx)
Net Cash Provided by (used in) Operating
Activities ₱ xxx

(Note: For this week, we will focus on the direct method under operating activities.)

☞W hat to remember in Operating Activities?

 Operating activities involve providing services, and producing and delivering
goods.
 The cash effects of transactions and other events that enter into the
determination of profit or loss.
 Reports the current ability of the business to generate cash from its operations.

In order for you to understand better, you must also know the differences
between cash inflows and outflows. Moreover, knowing these could aid you to
differentiate the different cash flow activities.

The following are the major classes of operating cash flows using the direct
method:

Cash Inflows
 Receipts from sale of goods and performance of services.
 Receipts from dividends, royalties, rental fees, commissions and other revenues.

Cash Outflows
 Payments to suppliers of goods and services.
 Payments to employees.
 Payments for taxes.
 Payments for interest expense.
 Payments for other operating expenses.

Cash Flows from Investing Activities

Investing activities involve cash used for acquisition and/or cash proceeds from
the disposals of PPE, intangible assets and other long-term assets. Further, it also
provides hints on the company’s ability to generate cash in the future. A negative cash
flows from investing activities implies that the company used cash to acquire long-term
assets intended to generate cash and revenue in the future. On the other hand, a
positive cash flow from investing activities may indicate that the company is divesting or
downsizing.

Investing activities include making and collecting loans; acquiring and disposing
of investments in debt or equity securities; and obtaining and selling of property and
equipment and other productive assets.

The following are examples of cash flow transactions reported under investing
activities:

Cash Inflows
 Receipts from sale of property and equipment.
 Receipts from sale of investments in debt or equity securities.
 Receipts from collections on notes payable.

Cash Outflows
 Payments to acquire property and equipment.
 Payments to acquire debt or equity securities.
 Payments to make loans to others generally in the form of notes receivable.

Cash Flows from Financing Activities

Meanwhile, financing activities include obtaining resources from owners (equity
financing) and creditors (debt financing). It reports cash received and cash paid to
equity owners and long-term creditors.
The following are examples of cash flow transactions reported under financing
activities:

Cash Inflows
 Receipts from investments by owners.
 Receipts from issue of preference and ordinary shares.
 Receipts from issuance of notes payable.

Cash Outflows
 Payments to owners in the form of withdrawals.
 Payments of dividends.
 Payments to settle notes payable.

☞W hy do you need to study and understand the Statement of Cash Flows?

Listed below are the purposes of statement of cash flows:

1.
1. It provides relevant information about the cash receipts and cash
payments of the enterprise for the given period.
2. It states the changes in the financial position of the firm.
3. It presents information on the structural health, liquidity and profitability of
the firm.
4. It gives us an insight on the different activities of the firm.
5. It provides information on the capability of the firm to produce cash and
cash equivalents.

Accounting greatly the business owners in the day-to-day operation of the
business. It greatly affects the decision-making of the managers. Accounting reveals the
present status of the company through the financial statements. These financial
statements, as the end product of accounting that have emerged from the operations
and transactions made by the business for a given period were created and prepared
based ion the various accounting concepts and principles. Indeed, some cases might
not literally showcase how much money does the company earned or received in a
period.

An example is the income statement, we can see the profit amount for the period
but we can also infer that it is not the actual cash received by the company for the
period. That is, because of the accrual basis of accounting, cash income and credit
income need to be reported for the period even if the cash from credit income was not
yet received. The same manner applies in the case of expenses.

Thus, it is really important to understand and be able to prepare the Statement of
Cash Flows to be able to determine where cash came from and where it goes. It
provides an advantage for business owners to make plans and decide the course of
actions on how to continuously run the business by having a more understanding of the
cash flows.

This implies that the more knowledgeable the business owners of the cash flow,
the more empowered they can become in making decisions for the business, in
maximizing the use of their cash, and in utilizing the operation of the business.

To further understand cash flows, visit the
link: https://www.investopedia.com/terms/c/cash.asp. Open and watch the video on
“Understanding Cash Flow”.

To gain broader understanding of the lesson, take a look at the given illustration
below.

Illustration: Direct Method

Designs “R” Us
Statement of Cash Flows
For the Month Ended May 31, 2016

Cash Flows from Operating Activities:
Cash from Clients ₱ 60,400
Payments to Suppliers (10,000)
Payments to Employees (13,800)
Payments for Office Rent (8,000)
Payments for Insurance (14,400)
Payments for Utilities (3,000)
Net Cash Provided by (used in) Operating
Activities ₱ 11,200
Cash Flows from Investing Activities:

Payments to Acquire Service Vehicle ₱ (420,000)
Payments to Acquire Office Equipment (15,000)
Net Cash Provided by (used in) Investing
Activities (435,000)
Cash Flows from Financing Activities:

Cash Investments by Owner ₱ 250,000
Cash from Borrowings 210,000
Payments for Withdrawals by Owner (14,000)
Net Cash Provided by (used in) Financing
Activities 446,000
Net Increase in Cash and Cash Equivalents ₱ 22,200

Cash and Cash Equivalents, Beginning -
Cash and Cash Equivalents, End ₱ 22,200

(Note: The items above were based on cash receipts and disbursements made. For the
cash and cash equivalents, beginning, no amount to be placed if it is the first year of the
business.)

» GENERALIZATION

In finance and banking, cash indicates the company's current assets, or any
assets that can be turned into cash within one year. A business's cash flow shows the
net amount of cash a company has, after factoring in both incoming and outgoing cash
and assets, and can be a good resource for potential investors. A company's cash flow
statement shows all incoming cash, such as net income, and outgoing cash used to pay
expenses such as equipment and investments.

The Statement of Cash Flows (SCF) is the financial statement that explains the
net change in cash for the year, thus, it summarized the cash transactions that occurred
during the year.
The Statement of Cash Flows reports cash flow transactions during the year
classified by operating, investing, and financing activities. Operating activities are
related to the main revenue-producing activities of the business. Cash transactions
related to acquisition and disposal of long-term assets such as property, plant, and
equipment, and intangible assets are classified as investing activities. Finally, cash
transactions with equity owners and creditors are reported as financing activities.

Cash flows from operating activities can be presented using the direct method or
the indirect method. Direct method of presenting cash flows from operating activities
shows summarized cash transactions.

In general, statement of cash flows analyzes the cash receipts (cash inflows) and
disbursements (cash outflows) of the business. Furthermore, the term “net cash
provided by” is used in each of the activity once the net effect is an inflow. Otherwise,
the term “net cash used in” is used.

Unlike the statement of financial position and statement of comprehensive
income, the statement of cash flow is prepared under the cash basis of accounting.

Types of Accounts and The Account Titles: Assets

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TYPES OF ACCOUNTS AND THE ACCOUNT TITLES

☞W hat are the classifications of assets and liabilities?

» What are current assets and its examples?

a. Cash  Cash is any medium of exchange that a bank will

1. Petty Cash Fund – cash used to pay petty or small

 These are tangible assets that are held by an

1. Land – refers to the surface of the earth that is not

» What are current liabilities and its examples?

1. It expects to settle the liability in its normal operating cycle.

 This account represents the reverse relationship of

· This account records long-term debt of the business

· The bond is a contract between the issuer and the

Revenues – Expenses = Net Income or (Net Loss)

1. In a sole proprietorship, there is only one owner’s equity account

 This account is used to record the original and

☞W hat are the items that increase/decrease equity?

INCOME – Increases in Equity

1. Interest Income – income earned as a result of investment in debt

EXPENSES – Decreases in Equity

1. Cost of Sales (Cost of Goods Sold) – the cost incurred to purchase or

4. Cash 9. Notes Payable

5. Common Stock 10. Sales

6. Tax Expense 11. Supplies

7. Loans Payable 12. Interest Income

ACCOUNTING BOOKS – JOURNAL AND LEDGER

Account Titles and

☞W hat is the simple and compound entry?

Account Titles and

1. There is only one debit and two or more credits.

Account Titles and

January Cash ₱10,000

☞W hat is the difference between general journal and special

Account Titles and

Property, Plant and

12 Cash 101 ₱60,000

Account Titles and

February Service Vehicle

March 1 Office Equipment ₱150,000

☞W hat are the essential parts of a general journal?

☞W hat are the examples of special journals?

CASH RECEIPTS JOURNAL

Dat Account Dr. Cr. Accounts Cr. Cr. Other

CASH PAYMENTS JOURNAL

1. No alterations should be made.

☞W hat is a ledger? What is its purpose?

1. Balance Sheet or Permanent Accounts (assets, liabilities and owner’s

☞W hat are the essential parts of a general ledger?

1. Account Title – The general ledger contains all of the company’s

Account: Cash Account No. 101

Date Explanation J.R. Debit Credit Balance

January Investment of capital by

Withdrawal of cash from

Account: Accounts Receivable Account No. 111

Date Explanation J.R. Debit Credit Balance

January Sale of inventories to

Date Explanation J.R. Debit Credit Balance

January Purchase of inventories

Account: Property, Plant and Equipment Account No. 140

Date Explanation J.R. Debit Credit Balance