-Service activity

-Quantitative information
-economic decision
Lesson 3

Accounting concepts and principles

Guideline on basic accounting principles and concept

Business entity principle (economic entity/accounting entity)

A business enterprise is separate and distinct from its owner or investor. Any personal transactions of
its owner should not be recorded in the business accounting book unless the owner’s personal
transaction involves adding and/or withdrawing resources from the business.

Time period principle

Financial statements are to be divided into specific time intervals

Going concern principle

A business is expected to continue indefinitely. On this basis, generally, assets are recorded based on
their original cost and not on market value. Assets are assumed to be held and used for an indefinite
period of time or during its estimated useful life. Those assets are not intended to be sold immediately
or liquated

Monetary unit principle

Are amount stated into a single monetary unit. The business financial transactions recorded and
reported should be in the monetary unit, such as Philippines pesos, us dollar euro. Thus, any non
financial or non monetary information that cannot be measured in monetary units are not recorded in
the accounting books, but instead, a memorandum will be used.

Matching principle cost

Should be with the revenue generated. This principle requires that revenue recorded, in a given
accounting period should have an equivalent expense recorded, in order to show the true profit of the
business.

Accounting period

This principle entails a business to complete the whole accounting process over a specific operating time
period. Accounting period maybe monthly quarterly or annually for annual accounting period it may
follow a calendar or fiscal year

Historical Cost

All business resources acquired should be valued and recorded based on the actual cash equivalent or
original cost of acquisition, not the prevailing market value or future value. The exception to the rule is
when the business is in the process of closure and liquidation

Conservatism principle

It is also know as prudence. In case of doubt assets and income should not be overstated while
liabilities and expenses should not be understated. The principle of conservatism gives guidance on
how to record uncertain events and estimate. The principle conservatism states that one should always
consider an error on the most conservative side of any transaction. This means minimizing profits by
recording uncertain losses or expenses and not recording uncertain or estimated gains, tampered and
doubt
Consistency principle

The consistency principle states that companies should use the same accounting treatment for similar
events and transactions over time. The consistency principle does not state that business always have to
use the same accounting method forever.

Materiality principle

In case of assets that are immaterial to make a difference in the financial statements, the company
should instead record it as an expense. Materiality constraint states that financial information is
material to the financial statements if it would change the opinion or view of reasonable person. The
concept of materiality is relative in size and importance

Objectivity principle

Financial statements must be presented with supporting evidence. The objectivity principles states
that accounting information and financial reporting should be independent and supported with
unbiased evidence. This means that accounting information must be based on research and facts, not
merely preparer’s opinion. The objectivity principle is aimed at making financial statements more
relevant and reliable

Accrual Accounting Principle

-revenue should be recognized when earned regardless of collection and expenses should be recognized
when incurred regardless of payment. On the other hand, the cash basis principle in which revenue is
recorded when collected and expenses should be recorded when paid. Cash basis is not the generally
accepted principle today.

Revenue recognition principle

- The revenue recognition principle states that revenue should be recognized when it is realized
or realizable and when it is earned.

Cost Principle

- an account should be recorded initially at cost

Disclosure principle

- All relevant and material information should be reported

Function of accounting is to provide and quantitative information

Nature of accounting

Art

Financial

Process

Information system

Accounting is a service activity.

Accounting provides assistance to decision makers by providing them financial reports that will guide
them in coming up with sound decisions.

Accounting is a process.

A process refers to the method of performing any specific job step by step according to the objectives
or targets. Accounting is identified as a process, as it performs the specific task of collecting, processing
and communicating financial information. In doing so, it follows some definite steps like the collection,
recording, classification, summarization, finalization, and reporting of financial data.

. Accounting is both an art and a discipline.

Accounting is the art of recording, classifying, summarizing and finalizing financial data. The word ‘art’
refers to the way something is performed. It is behavioral knowledge involving a certain creativity and
skill to help us attain some specific

Accounting deals with financial information and transactions.

Accounting records financial transactions and data, classify these and finalize their results given for a
specified period of time, as needed by their users. At every stage, from start to finish, accounting deals
with financial information and financial information only. It does not deal with non-monetary or non-
financial aspects of such information.

Accounting is an information system.

Accounting is recognized and characterized as a storehouse of information. As a service function, it

collects processes and communicates financial information of any entity. This discipline of knowledge
has evolved to meet the need for financial information as required by various interested groups.
  The Cradle of Civilization

Around 3600 B.C., record-keeping was already common from Mesopotamia, China and India to
Central and South America. The oldest evidence of this practice was the “clay tablet” of Mesopotamia
which dealt with commercial transactions at the time such as listing of accounts receivable and accounts
payable.

 14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally considered to be the

dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’) in 14th century
Italy. Pacioli was much revered in his day, and was a friend and contemporary of Leonardo da Vinci. The
Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern accounting and
were the first to commonly use Arabic numerals, rather than Roman, for tracking business accounts.
Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a detailed chapter on
double-entry bookkeeping.

French Revolution (1700s)

The thorough study of accounting and development of accounting theory began during this
period. Social upheavals affecting government, finances, laws, customs and business had greatly
influenced the development of accounting.

The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during this period.

The Present - The Development of Modern Accounting Standards and Commerce

The accounting profession in the 20th century developed around state requirements for financial
statement audits. Beyond the industry's self-regulation, the government also sets accounting standards,
through laws and agencies such as the Securities and Exchange Commission (SEC). As economies
worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to
observe International Accounting Standards. This is to assure transparency and reliability, and to obtain
greater confidence on accounting information used by global investors.

Nowadays, investors seek investment opportunities all over the world. To remain competitive,
businesses everywhere feel the need to operate globally. The trend now for accounting professionals is
to observe one single set of global accounting standards in order to have greater transparency and
comparability of financial data across borders.
  19th Century – The Beginnings of Modern Accounting in Europe and America

The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria
granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the
Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain came to
the U.S. to audit British investments. Some of these accountants stayed in the U.S., setting up
accounting practices and becoming the origins of several U.S. accounting firms. The first national U.S.
accounting society was set up in 1887. The American Association of Public Accountants was the
forerunner to the current American Institute of Certified Public Accountants (AICPA).

In this period rapid changes in accounting practice and reports were made. Accounting standards to
be observed by accounting professionals were promulgated. Notable practices such as mergers,
acquisitions and growth of multinational corporations were developed. A merger is when one company
takes over all the operations of another business entity resulting in the dissolution of another business.

Businesses expanded by acquiring other companies. These types of transactions have challenged
accounting professionals to develop new standards that will address accounting issues related to these
business combinations.
Accounting – is the language employed to communicate financial information of a concern to such
parties

Slavin and Reynolds

“Accounting is the discipline that provides information on which external and internal users of the
information may base decisions that result in the allocation of economic resources in society”

Two broad categories of users of financial information

INTERNAL USERS

- are those individuals inside a company who plan, organize, and run the business. These users are
directly involved in managing and operating the business. These include marketing managers,
production supervisors, finance directors, company officers and owners.

1. MANAGEMENT
2. EMPLOYEES

3. OWNERS/INVESTOR/STOCKHOLDERS
1. Management

Information need: income/earnings for the period, sales, available cash, production cost

Decisions supported: analyze the organization's performance and position, and take appropriate
measures to improve the company results, sufficiency of cash to pay dividends to stockholders; pricing
decisions

2. Employees

Information need: profit for the period, salaries paid to employees

Decisions supported: job security, consider staying in the employ of the company or look for other
employment opportunities

3. Owners/Investors/Stockholders

Information need: profit or income for the period, resources or assets of the business, liabilities of the
business

Decisions supported: considerations regarding additional investment, expanding the business,

borrowing funds to support any expansion plans. Accounting information is presented to internal
users usually in the form of management accounts, budgets, forecasts and financial statements. This
information will support whatever decision of the internal users.

EXTERNAL USERS

- are individuals and organizations outside a company who want financial information about the
company. These users are not directly involved in managing and operating the business.

Two most common types of external

Potential Investors- use accounting information to make decisions to buy shares of a company.

Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting
credit or lending money.

Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors
according to the assessment of their customers' financial health. Creditors include suppliers as well as
lenders of finance such as banks

Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.

Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a
stable source of supply in the long term.
Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can
earn a reasonable return on their investment before they commit any financial resources to a company.

Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information
is in accordance with the rules and regulations set in order to protect the interests of the stakeholders
who rely on such information in forming their decisions.

Types of information needed by each group of users

- An accounting information include both financial (quantitative information) and non financial
(Qualitative information) used by the decision making

- Qualitative analysis- means looking at the intangibles

- Quantitative analysis- means looking at the actual numbers.

- Comprehensive analysis- should include looking at both qualitative and quantitative factors that
would impact decision-makers.

Business entity principle

time period principle

going concern principle

monetary unit principle

matching cost principle

accounting period

historical cost

conservatism principle

consistency principle

materiality principle

Objectivity principle

Accrual accounting principle

Revenue recognition principle

Cost principle

Disclosure principle
Qualitative Characteristics of financial information

RELEVANCE

- The concept of relevance implies that financial statements can have predictive value and
feedback value. This means the financial statements are accurate and can be used to predict
future company performance

Three main characteristics of relevant accounting information

1. Predictive value
2. Feedback value
3. Timeless

 PREDICTIVE VALUE
Predictive value refers to the fact that quality financial information can be used base
predictions, forecast, and projections on. Financial analysts and investors can use past financial
statements to chart performance trends and make predictions about future performance and
profitability.
 FEEDBACK VALUE
Quality information has a feedback value when it can confirm or correct previous
expectations. In other words, users can examine financial information and confirm or adjust
their predictions made on previous performance trends. Based on the feedback, users can make
future decisions.
 TIME LESS
Timeless is one of the most important factors in relevant information. Out of date
information does not do investors or creditors any good when they are trying to make current
and future decisions. Financial reporting must be timely and current in order to be used by
investors and creditors.

 REALIABILITY
The concept of reliability implies that financial information can be verified by many
source with evidence and that all financial information is presented. In other words, the
favorable and unfavorable financial information are presented in the financial statements.
Three main attributes that all reliable financial information has:
1. Verifiability
2. representational faithfulness, and
neutrality.
 VERIFIABILITY
Financial information is verifiable when multiple, independent measures are used to come
up with the same result.
 REPSENTATIONAL FAITHFULNESS
Representational faithfulness simply means that the financial statements represent
reality or what actually happened during the year.
 NEUTRALITY
Finally, in order for financial statements to be reliable they must be neutral. By
definition, financial statements that are prepared by company management are somewhat
biased because the management want to see the company improve.
 COMPARABILITY
Comparability is a quality of accounting information that addresses the usability of
financial information. Information that is prepared using the same measurement techniques and
reported in a similar and can be judged side by side other similar financial information.
Comparability is extremely important to the end users of financial statement.

Branches of accounting

1. Financial accounting
2. Management accounting
3. Government accounting
4. Auditing
5. Tax accounting
6. Cost accounting
7. Accounting education
8. Accounting researching
Types of business according activities

Business – is an organization that converts inputs or resources such as material, labor, and overhead
into outputs which are usually either goods and services

3 types of business

1. Service Companies –
Are firms that generally use their employees to provide intangible products or services to
customers. These services include professional skills advice expertise and other related products
Service Revenues – primary source of revenues of service companies is the performance of
services.
Cash on hand – Pays employees and other expenses – perform services – receive payment from
customers

Advantage
- Absence of inventory
- No production facilities

Disadvantages
 - Inability to standardize services
- Maintaining human capital

2. Merchandising companies – firms that buy finishes or almost finished goods from their supplier
and resell the same to customers

Sales revenue or sale

Earn revenues from the sale of the goods or merchandise

2 types of merchandising

Retailers – a merchandising company that sells goods direct to customers

Wholesales – is a merchandising company that sell good to retailers

Operating cycles of merchandising companies

- Cash on hand – buys a good – Stores good as inventory – sells inventory – Receives payment
form the customers -
3. Manufacturing companies – firms that create their own products
- Cash on hand – pays inputs (materials, labor, overhead) - Converts inputs into finished goods –
Stores finished goods as inventory – sells inventory – receives payments from customers

A music production and recording company

Forms of business organization

1. Sole Proprietorship
- This business was formed by a single individual.
- The simplest form
- Do not have separate legal existence from the owner
- Can operate under their own names or use fictitious names such as “aling nene sari sari store”
- Enter to a contact under the owners name

Advantages

- Easy of formation
- The owner has full control of the business
- Owners can mix personal and business assests
- Owners have all the profits for themselves
- Simple Taxation

Disadvantages

- Unlimited liability
 - Difficult of raising additional capital
- Owner’s bias

2. Partnership
(according to the partnership code of the Philippines, Title IX of the Civil Code of the
Philippines) A partnership – is a contract whereby two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of dividing the
profits among themselves

- Two or more persons are needed to form a partnership.

- A money is not the only resource that a person can contribute in a partnership
- PROPERTY refers to the other assets owned by a person (ex. Land, Buildings, vehicles, etc.)
- INDUSTRY refers to the skills and expertise of a person
1. Partnership must be established for the purpose of the obtaining profit. If an organization is
created for purposes other than generation of profit (Ex. Charitable institutions, public
hospital,) it cannot take form of partnership
2. Partnership are the common form of business organizations used by companies who
generate profits by the practice of a profession (ex. Law firms, auditing firms)

General Features of a partnership

- Separate legal existence

- Mutual Agency
- Unlimited liability
- Limited life
1. Partnership dissolution – occurs when one of the partners withdraws from the partneship or
if the partner is admitted
2. Partnership Liquidation – ends of the operation
- Co-ownership of partnership property
1. ABC partnership, assume bart contributed a delivery van valued at 5000.000 bat cannot
subsequently claim that he is the owner of the van, from the moment he contributed the
deliver van to the partnership, he only has a proportionate share on the asset, andre, bart
and Charles become co-owners of the van
- Partnership agreement
Contract – are perfected through oral or written
Articles of partnership
a. Names of the partnership
b. Location of the principal office of the partnership
c. The names, citizenship, and residence of the partners
d. Term for which the partnership is to exist.
e. The purpose for which the partnership is formed
f. Original capital contributions of the partners
g. Profits and loss sharing agreement among the partners
Advantages:

- Easier to create than a corporation

- Better ability to acquire additional capital than a sole proprietorship
- Large pool of human capital than a sole proprietorship
-

Disadvantages

- Unlimited liability
- Mutual agency
- Limited life

Other forms of a partnership

- Limited partnership
General Partnership – having unlimited liability
Limited partnership – having limited liability
- Limited liability partnership
Is a type of partnership that aims to protect innocent partners from the malpractice and
wrongdoings of other partners
Ex. Lawyer, accountants, medical professionals, auditors
- Limited liability company
1. Is another form of an organization having partnership characteristics
2. Feature both partnership and corporation
3. The owners are called members and they enjoy limited liability

Corporation

An artificial being created by operation of law, having the right of succession and powers, attributes and
properties expressly authorized by law or incident to its existence

THESE DEFINITIONS EMPHASIZE FOUR THINGS ABOUT CORPORATION

1. A corporation is an artificial being. It means that it is an entity separate and distinct from its
owner
2. A corporation is created by operations
3. A corporation has the rights can be passed to other persons through sale, donation, or any other
mode of transfer
4. The law is the source of the power and attributes of a corporation. Being the source, the law can
likewise restrict the authority of corporations in performing acts.
 General Features of Corporation

1. Separate legal existence

- The act of the owners or stock holders generally do not bind the corporation
- Owners or stockholders are often involved in decision making through voting but his does not
give them the right to perform acts of for the corporation

2. Limited Liability
- Advantage of the corporation.
- The personal assets of the stock holders of the corporation are protected from the claims of the
creditors and other outside parties
- Even the corporation is bankrupt or have unpaid claims due to accidents and lawsuits, the
stockholders cannot be obligated to pay any deficiency.

3. Transferable ownership rights

- Owners rights in corporation are presented by stocks.
- STOCKS.
- Is an intangible (no physical form) asset evidencing a proportionate share in the properties of a
corporation
- Are presented by a stock certificate
- He or she is an owner of the company
- Can be transferable to other persons, through sale, donation, or other modes of transfer.
- Can be transferred even without the consent of the other stockholders unless the corporation is
privately held.
- Transfers of stock do not result in the dissolution or liquidation.

4. Virtually unlimited life

- Shall exist for a period not existing 50 years
- There is no limit to the number of the extension
- Not affected by the withdrawal death and admission of stockholder

5. Corporation management
- Stockholder are the owner of a corporation
- Stockholders may elect a board of directors to manage a corporation
- Board of directors represents the interest of the stock holders and is responsible for creating
operating policies
- Stockholders can also be a member of the board of directors
 6. Government regulations
- Large corporations provide employment opportunities to the public and stimulate the growth of
the company
- The bankruptcy can cause the whole economy to spiral downwards.
- Government regulations also protect stockholders

7. Double taxation
- The income of corporation
- Is taxed on the corporate level and the individual level
- Already taxed before being distributed to the stockholder receives his to her share of the
income, it is included in his or her tax return and will be taxed for the second time

8. Dividends
- The stockholders will only be entitled to deceive a share the income once the board of directors
approves the distribution to stockholders is called dividends
- Cash, stock, or property
- Cash dividends are the distribution of income in the form of cash
- Stock dividends are like the distribution of income in the form of additional stocks. (Stated in
percentage term)
- Property dividends enable stockholders to receive a certain value of a property of the company
for very share of the stock.
Advantages

- Ability to acquire additional capital

- Transferable ownership rights
- Limited liability of stockholders
- Large pool of human capital
- Virtually unlimited life

Disadvantage

- Heavily regulated by the government

- Double taxation
- Not easy to form
- More expensive to form than sole proprietorship and partnership

Cooperative

According to the cooperative code of the Philippines, “a cooperative is duly registered association of
persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful
common social or economic end, making equitable contributions to the capital required ad accepting a
fair share of the risks and benefits of the undertaking in accordance with the universally accepted
cooperative principles”

Objectives and Purposes

- To encourage thrift and savings mobilization among the members

- To generate fund and extend credit to the members for productivity and provident
- To encourage among members systematic production and marketing
- To provide goods and services and other requirements to the member
- To develop expertise and skills among its members
- To acquire lands and provide housing benefits for the members
- To insure against losses of the members
- To promote and advance the economic, social, and education status of the member

Cooperative may be formed by at least 15 person

Other characteristics of cooperative include the following:

1. It can sue and be used under its own name

2. It has the right of succession
3. Members of cooperative are subjects to limited liability
4. It shall exist for a period not exceeding 50 years from the date of formation. The cooperative
term may be extended for periods has not exceeding 50 years
5. A cooperative has its set of board of directors
 6. Income of a cooperative called net surplus belong to its members

Accounting equation
Assets = Liabilities + Equity
Elements in accounting

Asset

- These are resources that can entity own in order to derive some future benefits
1. CASH
- it is the money that we use comprising of the bills and coins we use in our everyday lives in
order to buy the goods that we want and also avails the services that we need
- When accounting for cash, we also considered cash as the money that is deposited in the banks
and even deposited checks from customers
2. ACCOUNTING RECEIVABLE
- This represent amounts that are collectable from customers. They arise when a business sells its
goods or services an account or on credit

Sales – Accounts Receivable – Cash Flow

3. INVENTORIES
- When going to a sari sari store, you would notice piles of assorted products piles of assorted
products being offered to be sold. One can easily find various items such as food and household
items to satisfy whatever he or she needs.
- Such products are normally owned by the sari sari store. These products are inventory which is
normally held for sale by the store in its normal operations
4. EQUIPMENT
- Pandesal shops would need oven & furnaces in order to properly and actually create their
goods. The product of these oven is the pandesals which would be sold later on and eventually
increase the cash of the shop
5. LAND AND BUILDING
- Physical stores like (Building & shops)
6. INTANGIBLE ASSETS
- Neither be seen nor touched.
- Examples: Software used by computer shops

Liabilities

- Represents the claims of the entity creditors.

- Debts of the entity to external creditors
1. Account payable
 - When a local supermarket or convenience store like 7-eleven buys its goods, it is unsual for it to
immediately pay cash for such goods. Normally, it would only incur an obligation to pay its
supplier after a certain number of days
- For example: when it gets a delivery of milk, it might have an agreement to pay its supplier only
after 30 days. Thus, In the meantime that the products have not been paid yet, it would only
carry a “payable in its book”
2. Unearned Revenue - unearned revenue is prepaid revenue. This is money paid to a business in
advance, before it actually provides goods or services to a client.
- Telecommunication companies such as Globe and Smart normally offer prepaid load to
customers. These load credits can be later on used or to call other people. On the other hand,
when Globe, or Smart receive payments from the customers, it creates an obligations to give
their services are recorded as liabilities.

Equity - Capital

- Represents the residual interest or net asset of the owners of the entity

2 sources:
1. Directly from the owners in the form of investments of capital
2. Income of the business from its normal operations

Note: the net income or net loss of the business from its operations can be determined by
using the following equation.

Revenue – Expenses = net income or loss

1. Revenue
- When it sells its products or its services
- Business revenue is money income from activities that are ordinary for a particular corporation,
company, partnership, or sole-proprietorship.
2. Expenses
- The money spent on something
- An expense is the cost of operations that a company incurs to generate revenue.
3. Capital
- Net investments of the business
- The capital of a business is the money it has available to pay for its day-to-day operations and to
fund its future growth

Resources = Claims

Resources = Claims of Creditors + Claims of Owners

 Basic formula
A = L + C/E
L = A – C/E
C/E = A - L

Using the accounting equation

Accounting identity – which means that equality must be

maintained throughout all transactions.

Identity property – which states that both sides of an

equation should be equal to each other at all times

Transactions of the entity would have to effect at least

two accounts in order for the equation to remain
balance
- +Asset and -Asset
- +Asset and +Equity
- +Asset and +Liability
Example
MANAG ROSIE’S FAMOUS BARBECUES
Credit – Account payable
TYPES OF MAJOR ACCOUNT

Assets
Non Current Assets
Current Assets
1. Cash
- Most basic and Familiar of all assets
- Money means everything composed of bills and coins
(Philippine peso and US dollar)
- Includes money in the form of bank deposits in checking
accounts and savings accounts
- Also included checks, such as those provided by customers
in payment for goods and services received
- Cash equivalent are a short – term investment which is
considered subject to negligible changes in fair – value &
are maturing within three – month from the date of their
purchase

2. Account Receivable
- Are oral promises to the entity to receive cash at later date
- In selling goods, delivering services or lending your friend
- Trade receivables – rises from the normal course of
business
- Companies also set up a contra – assets account called
allowance for doubtful accounts or bad debts allowance
 that estimates how much of their current receivables are
uncollectible

3. Short-Term investment
- Accounts contain the company’s investment in low-risk,
highly liquid assets such as bonds and stocks, which are
expected to be liquidated in less than a year

- The primary downside of putting excess cash into short-

term investment is the added risk of change in value and
lesser readiness for conversion.

4. Notes receivable
- Account represents promises to the entity to receive cash
at a later date, with the main distinction that notes
receivable are all written, and hence, more formal than
accounts receivable
- It is also called promissory notes

5. Inventories
- Are items that ready to sold.
- Once the items entered into production, but awaiting
completion is called work-in-process items
 - Supplies are items which do not actually serve as an input
for a product but are nevertheless used during the
production
- Completing production, the end products are now called
finished goods

Prepayments
- Is an amount simply paid in advance for goods or services
anticipated to be received by the entity in the future
- Ex. Rent, salaries, utilities, and insurance paid in advance.

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
1. Investment
Includes all the companies investment which it does not
expect to realize within 1 yr.
Includes the bonds and stocks.
(ex. Real-estate, long-term notes, government treasury
bills and funds)

2. Fixed cost
- Are what can be called as the most tangible, longest-
serving assets a company can have.
 - Placed as means of production

Ex. Land, building, machineries, equipment, furniture and

fixtures
- Depreciation-deterioration.

3. Intangible Assets
- Lack physical substance, and yet are similarly realizable
over a long periods of time.
- Ex. Patents, copyrights franchises, goodwill, trademarks,
and licenses.
- The value of most intangible assets would likewise decease
an subject to some form of depreciation, appropriately
called as amortization.

Liabilities
Current Liabilities
- Are liabilities which are expected to be settled or paid out
by the entity within 12 months
- Paying out does not necessarily mean payment through
cash, but can also include conversion and refinancing

1. Account payable
- Is the opposite of account receivable
- Paying side = borrower
- Contemplate only about borrowings involved in the
company’s production process (ex. Purchase of raw
materials)
- Borrowing through accounts payable usually foregoes
available cash discounts, and the entity has to pay full
invoice price (if it pays due date), or an amount of a
significantly lesser discount (if it pays at date earlier than
maturity.)

2. Notes payable
- Are written promises of the entity to pay a sum certain in
a future determinable time.
- They are opposite of notes receivable, the entity here
instead of being the lender, is the borrower.
- Pay interest regularly
- Can also be paid in lump sum or installments

3. Accrued liabilities
- Are all other accounts which the company should pay,
arising from the normal course of business
- Ex. Water and electricity wages and rent

4. Current portion of long-term debts

- Long term debt payable within coming year
 - The current portion of such debt is considered, for our
purposes, a current liability, not with standing the fact that
the remaining deb may be due many years from now.

5. Other payables
- Include those which are due from the entity outside the
normal course of its business
- Include common items such as dividends payable and
interest payable. & unusual items such as payables arising
from lawsuit.

Non-current liabilities
- Form the residual portion of liabilities. 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

1. Bonds Payable
- Are even a degree more formal than notes and payable
- Are form of long-term debt, often In huge sums contained
in an agreement called as the bond indenture
- Have stated interest rates, which many differ from
prevailing marketing interest rates, causing their fair
values to change from time to time
 - They are usually issued by the government, banks and
huge corporations seeking huge financing sources
- Bonds which have principal that mature in a single date
are called term bonds; those mature in multiple dates are
called serial bonds
- Another sources of funds, debts issued through bonds
payable can easily raised in large amounts. These lenders
can either wait until the company pays back the principal
in maturity, or sell the bonds to other persons who are
interested in investing in them

Equity/Owner’s Capital/Stockholder’s Equity

- Residual Claims

1. Common stock
- Is a security which represents ownership in a corporation.
- Those who own common stock of a corporation are called
common stockholders
Common Stockholder rights:
- Right to vote in the stockholders meeting
- Right to receive dividends
- Pre-emptive right which is the right to be offered first to
buy additional shares in the events of future issuance
Remember:
- All common stock comes with a par value
- PAR VALUE is a nominal value assigned to it, and it is
illegal for it to be issued for less than this price
- In balance sheet, the common stock account represents
the number of common shares issued and outstanding
multiplied by the stock par or stated value

2. Preferred stock
- Represents the number of preferred shares issued and
outstanding multiplied by the stock’s par value.
- Is also a security which represents ownership in a
corporation, and owners of preferred stock are called
preferred Stockholders

3. Additional Paid-in Capital

- Also called share premium, is the excess over par value
contributed by the company’s shareholders in a stock
issue
- Its arises because the selling value of a stock is almost
always greater than its par value

4. Retained Earnings
 - Also represents the accumulated net income from
operations over several period
- It is a measure of how much the company earned since
day one of its operation
- Magkano ang kinita ng operasyon sa buong taon

Increases in equity

- Equity increases as a result of revenues, gain, or capital

contributions
- REVENUES – are the amounts received by a business
earned as a result of selling something or rendering a
service
Revenues can be classified as follows
1. Operating Revenue – revenues that originate from the
main business operations (ex. Sales, service, revenue, etc.)
2. Non-operating Revenue – revenues that do not originate
from the main business operations and are result of some
side activities (ex. Internet value, rent revenue of business
not engaged in the renting industry)

Examples of revenue accounts are the following

 1. Sales Revenue – main source of revenue for business that
sell products (supermarkets, convenience store, food
manufactures)
2. Service Revenue – main source of revenue for businesses
that render services (barber shops, accounting firms)
3. Interest Revenue – revenue earned as result of
investment in debt securities or receivables from other
entities
4. Dividend Revenue – revenue earned as a result of
dividend declaration of a company where in a business has
invested stocks
5. Contributions Revenue – revenue earned by not-for-profit
organizations usually in the form of donations outside
parties
Remember:
GAIN – are increases in equity as a result of non-recurring
activities or the increase in value of investment
CAPITAL CONTRIBUTIONS – are increases in equity as a result of
transactions with owners

Decreases in equity
- Equity decreases as result of expenses, losses, and
distribution to owners.
 EXPENSES – are the amounts consumed by the business to
operate

Examples of expense accounts are the following:

1. Cost of Goods sold
2. Utility Expense
3. Depreciation Expense – a result of using building and
equipment
4. Office Supplies Expense
5. Insurance Expense – binabayaran para mainsure yung
bahay
6. Salaries Expense
7. Bad Debt Expense – an estimate of how much accounts
receivable the company will not be able to collect
8. Interest Expense

Remember:
LOSSES – are direct opposite of gains
DISTRIBUTION TO OWNERS – are is assets given to owners,
usually in cash. (dividends)
LIQUIDATIONG DIVIDENDS – if the dividends originate from
some other equity account.