Accounting Elements

 quantitative information reported in the financial statement

considered as the building blocks of the financial statements.

Accounting Elements are:

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

2. Nominal accounts
elements directly related to the measurement of financial
performance
income and expenses
provide information on the changes in equity as the result of
business operation
usefulness is limited to the year when they are incurred and their
year end balances are not forwarded to the next accounting
period.
Assets
properties or rights on properties owned by the business
used in their day to day activities.
controlled by the entity
result of a past transaction or event
provides future economic benefits
cost of the asset can be measured reliably.

Classification of Assets
 Current Asset
 Non-current asset
Current Asset
An asset shall be classified as current when it satisfies any
of the following criteria:
 The asset is cash or cash equivalent unless the asset is
restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting
period.
 The entity holds the asset primarily for the purpose of
trading
 The entity expects to realize the asset within twelve
months after the reporting period
 The entity expects to realize the asset or intends to sell or
consume it within the entity’s normal operating cycle
Examples of current assets and contra-accounts:
1. Cash - includes currency or cash items on hand, cash in bank, cash
fund (petty
cash fund, payroll fund)
2. Cash equivalents - are short term highly liquid investment that are
readily
convertible to known amounts of cash and so near their maturity
that they
present insignificant risk of changes in value. Only highly liquid
investments that are acquired three months before maturity date
can
qualify as cash equivalents.
3. Trading securities - investments which are readily marketable and
represent
temporary investment of funds available for current operations.
 Allowance for doubtful accounts - a contra-asset account which is
provided for
possible loss from uncollected accounts.
5. Note receivable - amount collectible evidenced by a promissory note.
6. Merchandise inventory - goods held for sale by trading concern
7. Finished goods, goods in process, raw materials and factory supplies –
inventories held by manufacturing firm
8. Prepaid expenses - expenses paid in advance not yet incurred (prepaid
rent,
prepaid insurance)
9.Unused supplies - supplies purchased for use and are still unused
10.Accrued income - income earned but not yet received (accrued interest
income, accrued rent income)
Non-Current Asset
A. Property, Plant, and Equipment or Fixed Assets
1. Office equipment
2. Store equipment
3. Delivery equipment
5. Furniture and Fixtures
6. Land
 Accumulated depreciation - contra-account used
to accumulate expired cost of fixed assets. It is a
deduction from property, plant and equipment.
B. Long Term Investments
assets held by the enterprise for the accretion of wealth
through capital distribution, such as interest, royalties,
dividends and rentals, for capital appreciation or for other
benefits to the investing enterprise.
An investment may either be current or non-current. A
current investment is readily realizable and is intended to
be held for not more than one year. A long term
investment is intended to be held for more than
one year.

Examples: investments in bonds, investment in

subsidiaries
C. Intangibles
identifiable non-monetary assets without physical substance.
It must be controlled by the enterprise as a result of past event
and from which future economic benefits are expected to flow to
the enterprise.
Example:

1. Copyright – right granted to authors, composers, playwrights,

artists,
publishers or distributors to publish, and dispose of their
works for
a limited time.
2. Franchise – right granted to operate a utility or to manufacture
or to
market a product of another company within a specified
area.
4. Goodwill – an intangible advantage that increases earnings over
what is
normal, It is the excess of agreed value over contributed
value.
5. Trademark or brand name – a symbol, sign, slogan or name used
to
mark a product or distinguish it from other products
6. computer software, leasehold rights

D. Other non-current assets

Include assets that do not fit into the definition of the above-
mentioned non-current assets.
These include long-term advances to officers or employees,
abandoned property, and long-term refundable deposits.
Liabilities
debts or obligations of the business.
present obligations of an enterprise from past
transactions or events, the settlement of which is
expected to result in an outflow from the enterprise
resources embodying economic benefits.

I. Current Liabilities
II. Non-current liabilities
Current Liabilities
A liability shall be classified as current when it satisfies any
of the following criteria:
 Settlement of the liability within the entity’s normal
operating cycle
 The entity holds liability primarily for the purpose of
trading
 due to be settled within twelve months after the reporting
period
 does not have an unconditional right to defer settlement
of the liability for at least twelve months after the
reporting period.
Examples:
 Accounts payable - amounts due to suppliers for the purchase of
goods or services on credit
 Notes payable - amounts due to other parties evidenced by a
promissory note
 Accrued expenses - expenses incurred but not yet paid
 Interest payable - unpaid interest on borrowings
 Salaries payable
 Bank loans payable
 Unearned revenue / Unearned income- income received but not yet
earned
 SSS premium payable
 Philhealth premium payable
 Withholding tax payable
Non-Current Liabilities
Examples:
 Mortgage payable - economic obligations secured by
collateral
 Notes payable - debts supported by notes and payable
beyond one year
 Deferred revenue - income received in advance but not yet
earned and which will be realized as income over a period of
more than one year or the normal operating cycle if it
exceeds one year.
Equity
Equity is the difference between assets and liabilities.
 If the business owns assets worth P2,000,000 and has debts
worth P1,500,000, the capital or owner’s equity is P 500,000.
represents residual interest in the assets of the enterprise
after deducting all liabilities, otherwise known as net assets
or net worth.
Terms used in reporting the equity of an enterprise are
owner’s equity or capital in sole proprietorship, partner’s
equity or capital in a partnership, and stockholder’s equity or
shareholder’s equity in a corporation.
 Owner’s drawing - this is used in recording the withdrawal
capital made by the owner.
Income / Revenue
 refers to the earnings of the enterprise
 includes sale of merchandise, income due to performance or
other type of income realized in the operation s of the
business.
 the increase in economic benefits during the accounting
period in the form of inflow or increase in asset or decrease in
liability that results in increase in equity other than the
contribution from equity participants.
Income accounts in a service concern:
• Service income - charges to clients or customers for services
rendered
• Professional fees
• rent income
 repair income
 laundry income
 ticket sales
The income accounts for a merchandising firm:
 Sales
 Sales returns - represent deduction from sales due to
merchandise returned by customers
 Sales allowance - represent deductions from selling price of
goods with defects or goods sent to customers but not as
ordered
 Sales discounts - deductions from the selling price due to
payment of customers within the discount period.
Expenses
 decrease in economic benefit during the accounting period in
the form of an outflow or decrease in asset or increase in
liability that results in decrease in equity , other than
distribution to equity participants.

 Specifically, expenses include the following: cost of sales,

distribution or selling expenses, administrative expenses,
other operating expenses and income tax expense.
Cost accounts - these accounts represent the value of the
goods sold. These include:
 Purchases - represent the original acquisition price of the
goods for resale
 Purchase return - represent coat of goods purchased but
returned to suppliers because of damage, defect or
unacceptable
 Purchase allowance - represent the reduction in the cost of
defective or damaged goods bought but not returned to the
supplier
 Purchase discounts - represent the reduction in the amount
paid to the supplier due to payment of account within the
discount period
 Freight in - represent the cost of transporting goods
purchased from the suppliers to the store or warehouse
Other expense accounts:
 salaries and wages
 advertising expense
 rent expense
 repairs and maintenance
 transportation expense
 taxes and licenses – amount of taxes and licenses paid to the
government
 Doubtful accounts expense / bad debts expense – possible
loss or portion of the uncollectible receivables allocated as
expense for the period.
 depreciation expense - is the portion of the cost of the fixed
asset that is charged or allocated as expense for the period.
 insurance expense
 supplies expense
 utilities expense
 representation and entertainment - represent value placed
on activities that will promote goodwill and increase
customers’ patronage.
 SSS, Pag-ibig premiums – contributions of the employer to
SSS and |Pag-big
 Miscellaneous expense – relatively small amount paid for
items or services which do not fall under the above accounts.
ACCOUNTS PAYABLE
ACCOUNTS RECEIVABLE
ACCRUED SALARIES PAYABLE
BUILDING
CASH
CASH IN BANK
COMPUTER EQUIPMENT
COPYRIGHT
DEFFERED REVENUE
DEPRECIATION EXPENSE
FRANCHISE
FREIGHT IN
FURNITURES & FIXTURES
GOODWILL
LAND
LONG TERM BANK LOAN
LONG-TERM INVESTMENT
MARKETABLE SECURITIES
MERCHANDISE INVENTORY
MOTOR VEHICLE
NOTES PAYABLE
NOTES RECEIVABLE
OFFICE SUPPLIES
OFFICE SUPPLIES EXPENSE
PREPAID INSURANCE
PREPAID RENT
PREPAID SUBSCRIPTION
PURCHASE DISCOUNT
PURCHASES
INSURANCE EXPENSE
RENT INCOME
REPAIRS AND MAINTENANCE EXPENSE
SALARIES AND WAGES EXPENSE
SALES
SALES RETURN AND ALLOWANCE
SECURITY SERVICES EXPENSE
TAXES PAYABLE
TICKET SALES
TRADE ACCOUNTS PAYABLE
TRAVEL EXPENSE
UNEARNED PROFESSIONAL FEE
UTILITIES EXPENSE
XXL CAPITAL
CHART OF ACCOUNTS
Assets: sequence is liquidity

• Cash
• Cash equivalent
• Trading securities
• Receivables
• Allowance for doubtful accounts
• Accrued income
• Inventories
• Prepaid expense
PPE / Fixed asset

Building
Accumulated depreciation-Building
Motor Vehicle
Accumulated depreciation – Motor Vehicle
THE ACCOUNTING EQUATION

An accounting equation shows the relationship between assets

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

Owner’s equity or capital is the excess of total assets over total

liabilities. Creditor’s claim has priority over claims of the owner, thus,
owner’s equity is considered residual.
ASSETS – LIABILITIES = OWNER’S EQUITY
 ASSETS = LIABILITIES + OWNER’S
EQUITY
1. ₱ 205,000 ₱ 105,000 ₱100,000
= +
2. ₱ 25,000 ₱30,000
= +
3. ₱ 540,000 ₱ 345,000
= +
4. ₱ 237,500 ₱ 196,000 ₱
= +
5. ₱ 145,000 ₱ 45,000
= +
 ASSETS = LIABILITIES + OWNER’S
EQUITY
1. ₱ 205,000 ₱ 105,000 ₱100,000
= +
2. ₱55,000 ₱ 25,000 ₱30,000
= +
3. ₱ 540,000 ₱ 345,000 ₱195,000
= +
4. ₱ 237,500 ₱ 196,000 ₱41,500
= +
5. ₱190,000 ₱ 145,000 ₱ 45,000
= +
 Effect of transactions on the accounting equation
Transaction ASSETS LIABILITIES EQUITY

Investment of cash Increase Increase

Purchase of asset on cash Increase

decrease
Purchase of asset on account Increase increase

Payment of liability Decrease decrease

Payment of expenses Decrease decrease
Capital withdrawal Decrease decrease
Income earned on cash Increase increase

Income earned on account Increase increase

Collection of receivable Increase
decrease
 Effect of transactions on the accounting equation
EQUITY
Transaction ASSETS LIABILITIES

Initial cash investment Inc inc

Purchase of supplies in Inc ( supplies)

cash Dec ( cash)

Payment of accounts Dec Dec

payable
Collection of accounts Inc (cash)
receivable Dec( receivable)
Payment of employee Dec Dec ( expense)
salaries
Purchase of equipment Inc Inc
on account
 EQUITY
Transaction ASSETS LIABILITIES
Payment of rental Dec Dec ( expense)
expense for use of
office space
Sale of merchandise on Inc Inc ( income)
cash to customers
Capital withdrawal of Dec Dec
owner
Problem 1.
Jerry opened an ice cream store. Given below are the
transactions. That transpired on the first month of operations.
1. Jerry invested ₱350,000 cash
2. Acquired equipment on cash ₱200,000.
3. Purchased supplies on credit ₱50,000
4. Sold ₱25,000 worth of product to a customer on cash.
5. Purchased additional supplies on cash, ₱ 8,500.
6. Sold ₱14,500 worth of product to Client Z on account.
7. Paid partially the liability on transaction #3, ₱40,000
8. Collected partial cash payment from Client Z, ₱10,500
9. Paid electricity expense, ₱4,500
10.Paid employee salaries, ₱8,000.
 Required: Determine the effect of the transaction to the
accounting equation. Use the table below as a guide.
ASSETS = LIABILITIES + EQUITY

Date Cash Accounts Supplies Equipment Accounts J Capital

Receivable Payable
 Problem 1
1. Jerry invested ₱350,000 cash
2. Acquired equipment on cash ₱200,000.
3. Purchased supplies on credit ₱50,000
4. Sold ₱25,000 worth of product to a customer on cash.
5. Purchased additional supplies on cash, ₱ 8,500.
ASSETS = LIABILITIES + EQUITY

Date Cash Accounts Supplies Equipment Accounts J Capital

Receivable Payable
1 350,000 350,000
=
2 (200,000 200,000
)
3 50,000 50,000
4 250,00 250,00
5 (8,500) 8,500
6. Sold ₱14,500 worth of product to Client Z on account.
7. Paid partially the liability on transaction #3, ₱40,000
8. Collected partial cash payment from Client Z, ₱10,500
9. Paid electricity expense, ₱4,500
10.Paid employee salaries, ₱8,000.
ASSETS = LIABILITIES + EQUITY

Date Cash Accounts Supplies Equipment Accounts J Capital

Receivable Payable
1 350,000 350,000
=
2 (200,000) 200,000
3 50,000 50,000
4 25,000 25,000
5 (8,500) 8,500
6 14,500 14,500
7 (40,000) (40,000)
8 10,500 (10,500)
9 (4,500) (4,500)
10 (8,000) (8,000)
Total 124,500 4,000 58,500 200,000 10,000 377,000
Total Asset 387,000 = Total liablitiies 387,000
& equity
Problem 2.

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

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