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In module 4, you learned that there are various accounting concepts and ·principles
that guide accountants in carrying out their tasks . In this module, you will understand
and appreciate how these concepts and principles are applied. But before that , you ,must
understand first how an accountant prepares financial statements. Do the foll<?wing
activity.
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.. Assei; , iiabilities, and capital . are the ihree key : •··.. .. Biijfi'}~;
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elements 'of accounting. Asset refers to the goods, .·£
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services, and other resources that the business entity . '! .,,
· , .··Assets, liabilities,· and 1capital ·
acquired. Assets are the properties of the entity that ar~ th~_key ele,ment_s in a?c~u~ting.'
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are expected to be utilized for its benefit. They may be ·The accounting equation m~intains·
tangible (such as cash, stocks, machiQe~y,equipment, the . oalance among these'. k~y
furniture, and land) or intangible (such as trademarks , elements. ,.. , ;
and patent rights). Liabilities are the entity's paY,abl~s L--- · ---- .
to its service, good, ~r resource provid~rs. C~pital refers to the amount of equity of the
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business own~rs. Equity is the resulting amount when the total liabilities are subtracted
from the total. assets. Investments (initial and additional) and income (revenue and gains)
increase the .entity's capifal, .while withdrawals made by the owners as well as the entity's
expenses decrease it. · · 'j J'.
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Capital and ·liabilities can be computed ·by rewriting 'the basic accounting equati.o'n as
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follows: ·· 1
The relationship among these key elements of accounting is reflected on the balance
sheet or statement of financial position. t .• • , 1 :
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Maintai_~ing the,Balari~e·
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The accounting equation is the. guidi~g- principie' 0 f -~ .' . ,. ::.·:. ( ·, ,):
· ·· an accountant · · · h
balance between assets and liabilities plu s capt't a 1 on the bala1 , • in ll!a1nt~1n11,1g
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financial transactions of Mr. A who is st rt. h' nee sheet. Take a look at the
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accountmg procedures are .done to prepar d t.h fi. - . ca e us1ness. Notice how the
. · · ~ e nancial stat .
transact10ns from 21 March to 6 April. · ements for Mr. A's business ·.
. ~ )\6bountancy,Business andM -
' anagement1
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21 ..
, .March I. . Own~r's initial 500 000.00 500 000.00
investm~nt. ' •• ~: f tI • • i ( I I
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Transaction 2:
On 23 March, Mr. A purchased computer units at P200 000.00 ·on account, meaning it
is to be paid to the supplier upon delivery. But he made a do:wn payment of PSO 000.00 on
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that day.
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The same
amount is recorded within parentheses
under L · b ·1· ·
· ta .I 1t1~s. .This means that the accounts payable
of P200 00 . · · !'
· 0.00 ~Iso. decreases by P-50 000.00 on the
same day. , .,, ·-~ - 'Pur~~asing-..o~ce ·equi~ment
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has
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..... ~·- twb-fold effect ~:}ot{
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Transaction 3 : . , , ,, ... , 1,, ~usin~<s~ ~.rg_anizali~n'.s
_1~s.~~t~~ ;
i it increases · ,ts equipment" but ,t.
On 24 March, Mr. A paid Pl O 000.00 for the rent also 'decreases it~
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of the place that he will -occupy for the business. i; ·;.;;
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21 March 1. Owner's initial 500 000.00 .. 1· , .. 1 t.; ' · · , ' ·1 500 000.0Q
investment , 1 I '
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In transaction 3, the cash (asset) decreases because _of an ex_p~ns~-for ~ent. Re~~ ~ be!
that expense decreases the capital; thus, there is a corresponding entry .under : C~pital ?n ,!hf
balance sheet. ·
On 25 March, the computer units that were purchased on March . 23 were delivered.
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Mr. A paid the balance of P150 000.00. l
..Transaction .. ··
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-23 March 2. Purchased ·office ~00 000.00 ,200 000.00 t t I • ~J •
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equipment
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In transaction 4, the cash (asset) decreases because of the payment for the ·balance for
the purchase of the computer units. This also decreases the payables (liabilities) of the
business.
Transactions 5 and 6:
On 26 March, Mr. A paid Pl O000.00 to the computer technician who set up the network
connection for his business operation. ·On the same day, he also paid the Internet service
provider the amount of Pl 5 000 .00 for the Internet connection.
Transaction 7:
On 27 March, Mr. A purchased office supplies amounting to PS 450.00.
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Transactions 5 to 7 follow the same principle that has been discussed previously.
It is now time that you take over in maintaining the balance of records. Fill out t~e
balance sheet below for transactions 5, 6, and 7. ' ·
Date Transaction . As
~_,s(P) = Liabilities(P:) +. .capital (P:)-
26 March I
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27 March ..
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Transaction 8:
·.. . - ,· . _,; ·... .f P:300 ooo.oo 'as loan fro1n aiba~k . . . ~
Transactions 9 toll:
·· On 2 April, .Mr. A's business becomes operational. Three days after he started
operations , he earned the following income: 2 April , P.15 000.00; 3 April, P'l 5 · 540.00;
4 April , 'Pl 7 675.00. ., .
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4 April 11. Cash revenue 17 675.00 17 675.00
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from operations
Transactions 9 to 11 are income for the business and ·they increase its cash income
(asset). As mentioned earlier, income increases capital; thus, entries were also recorded
under Capital.
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...:, What Have I Learned So Far?
·.: :i-_!~~ased on :th e' accn1al c~ncepf of accounting (see ' mociule '4), an acc~untant' n~;~s ·~o··:,;,
record the income when-. t . .! d : . . ~ .. '. .
, .. . . . . 1 Is earne regardless of whether payment 1s already received !"
...Apply this accounting co·ncep t to transaction 12: In this . transaction, there fs 'an acco lirlt ;.,
receivable for Mr · A's b usmess · t h at must b e recor d e d a 1rea d y b ased on the accriia:1
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Transactions 14 to 16:
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On 6 April, Mr. A received the payment for the graphic design services he rendered
the previous day. For this day, his operations revenue is Pl 8 455.00 . But on the same
day, Mr. A made a withdrawal from his investment amounting to P20 000.00 for his
personal use.
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. . Date , ,
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receivable (5 000.00)
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,H ~nows
··r:::,Tr-ahsiicliOn ;tM,t 11,i
e aC~ount receivlt\>J\: }II~ 'c\>ll~~i~ ~~aC~i~~:1~ ¥.t!~T
it~eidf ;The~~rore;' 'this 1~ireas es ·the cash and ·'decreases -the ·accounts receivable .-orthe
· These two accounts are both recorded under Asset . If you correctly answered the
busmess. . . ·
previous _acti~ity, you will find that the balance is still maintained by these rece~t entries.
Fm;ther, _the business operations for the day also increase the ass{?t(cash) and capital of the
busi~ess.
However, there is also a decrease in the business's Big
asset and capital due to the withdrawal from the ·Idea
investment by the owner. Recall the principle on capital
· Withdrawals by owners
mentioned previ_ously. Whil ~. i~come and i1:1vestme~ts l
from'the' in'vestments'
. decrease.
increase capital, withdra wals and expenses decrease
I • the business entity's asset and
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it This is why on the balance sheet , transaction 16 capital.
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d~creases the cash (asset) of the business as well as its
capital. i ·
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Recall the account ing equ ation : A ssets = Liabilities + Capital. On'.the balance she~t
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for transactions 1 to 16, you will notice the equal effect of each transaction on the assets
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and liab ilities plus capital. When done correctly , the ending balance for each transaction
would be equal.
If your answers to What Have I Lear ned So Fa r? are correct , you will have a total asset · ·
of _P827 970.00 , total liabilities of P300 000.00 , and total capital of P527 970.00.
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Mr. A's Computer Cafe
Balance Sheet
For the per iod 21 March to 6 April
· (In Peso Amount ) ·
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. Date
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Transaction I
Assets = Liabilities +
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21 March 1. Owner 's initial 500 000.00 . 500 000.00
. investment ' I
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23 March 2. purchased office 200 000 .00
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200 000.00 ;
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equipment i
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(50 000 .00) (50 000.00)
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on account
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~or:o~~arice
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from purchasing ·· ·.. '
.-.. .' office equipment . •1 !. •• I I l · f:· t, • :!• :i I {
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26 March
' 5. Payment for '
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(10 000.00)
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··(l cf000.00)
.. , network connection l
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6. Payment for I (15 000.00) (, "
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Internet connection I , ' I
supplies
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1 April 8. Loan fro in·a bank 300 000.00 300 000.00
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i April 9. Cash revenue from 15 000.00 15 000.00
operations
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3 April' 10. · Cash revenue from · 15 540.00 15 540.00
operations
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4 April 11. Cash revenue from 17 675.00 • I 17 675.00
operations j I
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16. Withdrawal of (20' 000.00) .. (20 000.00)
- . .. investi:nel!t .
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... . BEYOND \VALLS 5.2 Appl~ It in Real Life
. 17 Fe~ruary · Paid rent worth Pl O 000.00 for the office unit to be used for the
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18 February Purchased three table and chair sets worth P3 000.00 each set . , .;
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21-23 February - Cash revenues from operations for these dates: P:12 000.00, I
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1. What are the difficulties that you encountered in maintaining the balance among
assets, liabilities, and capital on the balanc~ sheet?
2. How can you apply the accounting equation in your everyday life experiences?
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ESSENTIAL LEARNING
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Culminating Output
rr f I Track: Academic
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You and your friends , who happened to be a group of accountants, decided to establish a..
small accounting firm. While you were looking for your first clients , you were able to survey·~
a few small businesses in your local community, namely, a newly opened -bookshop and an
eatery (carinderia), on.the kind of account_ing ser_vices their busines~es require. Your group.
was successful in convincing the business owners to avail of your services . As first task, the ·
managers of both businesses assigned you to help them in the accounting of their financial
transactions by preparing and presenting the cash flow and balance_shee~ fo-r the _last _four
months. You will present to them the financial statements through a PowerPoint presentation
and discuss the implications of the data for their businesses. Your output and performance
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will be evaluated according to the accuracy and validity of data , your ability to answer ·
questions and clarify concerns, and the clarity and comprehensibility of your discussion .
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Assessment Rubric
Total
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I I. Write True on the blank if the statement is correct. If it is false, replace the underlined r I
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word/phrase to make the statement correct. :. ..I
1. According to the Philippine Institute of Certified Public Accountants, 1
accounting is a system that measures business activities, processes I
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given information into reports, and communicates findings to decision I
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makers . I
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____ 2. Only business activities that are of financial character are measured I
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in accounting. . I
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____ 3. The interconnected phases of bookkeeping include recording, I
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classifying, summarizing, interpreting, and
. communicating
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financial I
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information. • I
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____ 4. An accounting entity refers to an organization which makes use of I
resources to achieve its goals and objectives. I
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_____ 5. A nonprofit business entity operates to generate income . .. . .. . I
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7. The statement of changes in equity provides information about a · I
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3 . Thr?ugh a graphic .organizer, explain th~ relationship ··amo·n g fi:dancial, cost, -and
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Busi(less,and f\1anag~ment
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Answerthe following. (5 p~ims ~ach) ; . . . ... ;.:·:,:~}
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J. What is our t . . ' .. . ' ~L . . ii:if' "a : ( '. ' > ''; . . i . 1. ·. ;> •• 'f ff ! ·.!,; ...., ·':.:JI )
. Y ake on small-time retail busmes~es?Should they also pay, tax,es? .· ·J
Justify your answer J
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3. ff you \Vere to put up a business enterprise, what would it be and why? What I
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measures will you take to make sure that everything would go well in your I
business? I
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4. Which would you choose, a high-paying job or a career that you are passionate I
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with but gives you a sma11income? Explain. > r f-.
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i: Going concern assumption i.
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2. Accounting entity concept I
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,: ..3. Monetary unit concept I
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4. Time period or periodicity concept I
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5. Accrual concept
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