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ACCOUNTING

STRUCTURE OF THE
BUSINESS

Decoding what the


numbers mean…

Preliminary Period Ms. Joanne R. Balgemino - Puno


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Basic Accounting Equation

ASSET = LIABILITIES + CAPITAL


(Debit) (Credit ) (Credit)
P300,000 = P100,000 + P200,000

The Basic Accounting Equation is represented formally


in the major accounting reports….
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The 4 Major Accounting Financial Reports


• Performance Statement (Income Statement) –
reports the result of operation
• Statement of Equity (Capital Statement) –
reports the status of the owners’ investment
• Statement of Financial Position (Balance sheet)
– reports the firm’s financial position
• Cash flow statement – reports the summary of
all cash in and cash out of the firm.
PERFORMANCE
STATEMENT/
INCOME STATEMENT
I. The Income Statement or
Performance Statement
• This is a statement showing the result of
operation of an enterprise;
• Such result may either be a net income or
loss.
• The two main types of income are:
• Revenue – for sale of services
• Sales – for sale of goods or properties
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For Sale of Services:


Revenue………….……………….P120,000
Less: Operating Expenses……. 100,000
Net Income (Loss)………………. 20,000

For Sale of Goods or Properties:


Net Sales…….……………………P120,000
Less: Cost of Sales………..……. 80,000
Gross Profit…………………………..40,000
Less: Operating Expenses……….. 25,000
Net Income…………………............ 15,000
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What is Income (Credit)?


• Represent increases in economic benefits
• During the accounting period
• In the form of inflows (increase in asset or decrease in
liabilities)
• That result in increase in equity.
• Other than those resulting from contributions of equity
from investors.
• It includes:
• Revenue – income from ordinary activities or regular business
operation. This is also known as “operating income”
• Gains – may or may not arise ordinary activities. This is also
known as “other income”.
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What are Expenses (Debit)


• These represent decreases in economic benefits
• During the accounting period
• In the form of outflows (ex. depletions of assets or
incurrence of liabilities)
• Resulting in decreases in equity.
• Losses – other items that meet the definition of
expenses which may or may not arise in the course of
ordinary activities of the firm.
• Cost of Sales – amount by which an asset was bought.
• Operating Expenses – expenses arising from ordinary
course of trade or business activities
Kinds of Operating Expenses
Selling Expenses General &
Incurred in storing, Administrative Expenses
promoting, packaging Consist of expenses
and delivering the needed in the general
merchandise. administration of the
Ex. Freight out, Sales Salaries, office.
Advertising Expense, Sales Ex. Bad Debts, Office Supplies
Commission, Depreciation of Expense, Office Salaries, Utilities
Store equipment and Expense and Depreciation of
furniture, Store Supplies office equipment and furniture
expense
Expenses
• Utilities Expense (Heat, Light, Water and Telephone)
• Salaries Expense
• Wages Expense
• Supplies Expense or Supplies Used
• Office Supplies Expense
• Store Supplies Expense
• Kitchen Supplies Expense
• Factory Supplies Expense
• Depreciation Expense
• Bad Debts
• Doubtful Accounts or
• Uncollectible Accounts
• Rent Expense
• Repairs and Maintenance
• Gasoline and Oil
EQUITY STATEMENT
It is also known as "net assets," since it is equivalent
to the total assets of a company minus its liabilities
II. The Statement of Equity/Capital Statement
Puno Enterprises
Statement of Owner’s Equity
For the year ended December 31, 2014
Puno, Capital – beg P500,000
Add (deduct): Net Income (Net Loss) 120,000
Total 620,000
Less: Puno, Drawings (20,000)
(Puno, Personal; or Puno, Withdrawals)
Balance 600,000
Add: Additional Investment 500,000
Total 1,100,000
Less: Permanent Withdrawals (200,000)
Puno, Capital - end P 900,000
STATEMENT OF
FINANCIAL POSITION
BALANCE SHEET
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III. Balance Sheet/Statement of


Financial Position
• A financial statement that summarizes a
company's assets, liabilities and owner’s
equity at a specific point in time.
• The balance sheet adheres to the following
formula:
• Assets = Liabilities + Owner’s Equity
• The net asset approach formula:
• Assets – Liabilities = Equity (Net Assets)
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• Assets (Debit) – 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. It is further classified into
• Current Assets (Short Term)
• Property, Plant and Equipment (Fixed or
Long Term Assets)
• Intangible Assets
Assets are subdivided according to the order of
Liquidity, or the ease with which they can be
converted into cash.
• Cash
(1) Current Assets - • Accounts Receivable
those which can be (Allowance for Bad Debts)
converted to cash in • Notes Receivable
one year or less; or • Interest Receivable
those which can be • Marketable Securities

consumed within one • Merchandise Inventories


• Prepaid Expenses
year or within the
• Prepaid Insurance
normal operating cycle • Prepaid Rent/Rent Deposit
whichever is shorter. • Office Supplies or Supplies On
Hand or Supplies Inventory
(2) Property, Plant
• Land
and Equipment • Building
(PPE) or Non- • Furniture and Fixtures
current or long-term • Equipment
assets – these are • Store Equipment
• Delivery Equipment
assets which are
• Office Equipment
expected to be used or • Vehicles/Automobiles
consumed beyond one • Machinery
year • Computer (equipment)
• These are also called • Tools
“Fixed Assets” or (Accumulated Depreciation)
immovable assets
(3) Intangible Assets - are the • Shares of Stocks
long-term resources of an • Royalties
entity, but have no physical • Patents
existence. They derive their • Franchise
value from intellectual or legal • Copyright
rights, and from the value they • Trademarks
add to the other assets. • Brand Logos
• Goodwill
In contrast to tangible assets, intangible • Intellectual
assets cannot be destroyed by fire, hurricane,
or other accidents or disasters and can help Property Rights
build back destroyed tangible assets.
However, they normally cannot be used as
• Software
collateral to raise loans, and some intangible Applications
assets (goodwill, for example) can be
destroyed by carelessness, or as a side effect
of the failure of a business.
Liabilities
• Generally, these are debts of the business
owing to outside parties; These may either be
(1) short term or current; and (2) long term or
non current.
• Specifically
• These are present obligations;
• Which arose from past events;
• The settlement of which is expected to
be made in the future;
• In the form of an outflow of resources.
• Current • Current portion of long-term
debt
liabilities are • Accounts Payable
considered • Interest payable
• Notes Payable (current portion)
liabilities of the • Accrued Expenses
business that are • Rent Payable
• Taxes Payable
to be settled in • Salaries Payable
cash within the • Wages Payable
• Interest Payable
fiscal year or the • Unearned Income or Deferred
operating cycle, Income (Customer
prepayments)
whichever period • Dividends payable (less than
is longer. one year)
• Non-Current or Long Term Liabilities
• Those that require settlement or due beyond one
year or beyond the normal operating cycle
• Normally interest bearing liabilities

• Notes Payable (payable more than 1 year)


• Mortgage Payable
• Loans Payable
• Bonds Payable
• Pension fund liability
• Deferred Tax Liability
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• Equity/Capital (Credit)– is the


residual interest in the assets
of the enterprise after deducting
all its liabilities.
The Relationship of the Financial Reports

Income Statement Balance Sheet


Capital Statement
Sales/Revenue Assets =
Beginning capital
- Operating Expenses Liabilities
+ Add’l investment
NET INCOME + Ending Capital
(LOSS) + Net Income or
(- Net Loss)
-Withdrawals
= Ending Capital
Effects of transactions on each account
Assets Liabilities Capital
10 5 5
Increase Same Increase
15 5 10
Decrease Same Decrease
9 5 4
Same Increase Decrease
10 7 3
Same Decrease Increase
10 3 7
Matching Principle
Matching Principle states that no income or
revenue is earned without specific sacrifice
(expense) made by the business.
• Revenue Recognition (Realization) – recognizes
revenue when it is earned;
• Expense Recognition (Matching Principle) –
expenses are recognized in association with the
earnings of specific income items within a specific
period of time.
THE RULES OF DEBIT
AND CREDIT
T-Account

Debit (DR) Credit (CR)


Debere Credere
The Left Side of an The Right Side of an
Account Account

Each side represents either an increase or


decrease to an account
Normal Balance
• Assets – debit
• Liabilities – credit
• Capital – credit
• Income/Revenue – credit
• Operating Expense – debit
• The normal balance of the account has a positive
(increasing) effect to the account;
• While the opposite balance decreases the account
Rules of Accounts Normal Increase Decrease
Balance
Asset Debit Debit Credit

Liabilities Credit Credit Debit

Capital Credit Credit Debit


Additional Investment Credit
Permanent Drawings Debit
Revenue (Income) Credit Credit Debit

Expense (Cost) Debit Debit Credit

Drawings (withdrawals) Debit Debit Credit


Relationship of Major Accounts
Revenue Expenses Drawings Capital
Increase 0 0 Increase

Decreas 0 0 Decrease
e
0 Increase 0 Decrease

0 Decrease 0 Increase

0 0 Increase Decrease
Relationship of Major Accounts
Asset Liability Capital
Increase 0 Increase

Decrease 0 Decrease

0 Increase Decrease

0 Decrease Increase

Increase Increase 0

Decrease Decrease 0
Effects of transaction to Capital
Revenue Expenses Net Income and
Capital
10 5 5
Increase Same Increase
15 5 10
Decrease Same Decrease
9 5 4
Same Increase Decrease
10 7 3
Same Decrease Increase
10 3 7
Tapos na po…..

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