BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
Module 5: Elements of Financial Statements
Overview
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This module presents the elements of financial statements. This lesson will
help you understand each financial information profoundly and use that
understanding for better analysis and decision-making.
Learning Outcomes
After studying this lesson, you should be able to:
1. enumerate and define the elements of financial statements;
2. differentiate real from nominal accounts;
3. distinguish the classification of accounts as to current and non-
current; and
4. differentiate adjunct from contra account.
Let Us Explore
A financial statement is a formal record of a company's financial activity.
These plans give a current landscape of your small business and forecast the
future vision and goals of the business.
Financial statements are a vital part of a business plan to help your
business attract an investor or obtain bank loans.
The main elements of financial statements are as follows:
• Assets. These are items of economic benefit that are expected to yield
benefits in future periods (Skousen et al., 2018). Examples are cash, cash
in bank, accounts receivable, inventory, supplies, prepaid rent, machinery
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BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
and equipment, furniture and fixtures, buildings, land, patent, copyright,
secret process, and brand name.
Exercise #1
Identify a business and list down at least five assets you have identified.
1. ______________________________________________
2. ______________________________________________
3. ______________________________________________
4. ______________________________________________
5. ______________________________________________
Assets are classified into current or non-current
Current assets are assets that are expected to be converted to cash within
a year. Cash is always classified as a current asset. Other items that are
expected to be converted into cash or used up within one year (or the
operating cycle, whichever is longer) are classified current.
Non-current assets are considered long-term, where their full value won't
be recognized until at least a year. They are the items that are not intended
for sale and are expected to be used for more than a year
Exercise # 2
Based on your answer in Exercise # 1, classify whether the asset you have
identified is current or non-current.
1. ________________________________ ___________________
2. ________________________________ ___________________
3. ________________________________ ___________________
4. ________________________________ ___________________
5. ________________________________ ___________________
An asset can also be classified as tangible or intangible.
Tangible assets are the main type of assets that companies use to produce
their product and service.
Intangible assets are non-physical assets that have a monetary value since
they represent potential revenue. Intangible assets include patents,
copyrights, and a company's brand.
This material has been prepared and communicated to you by or on behalf of
Palawan State University - Narra for educational purposes only.
DO NOT REPRODUCE OR COMMUNICATE.
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BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
• Liabilities. These are legally binding obligations payable to another entity
or individual (Reeves et al., 2019). Examples are accounts payable, notes
payable, mortgage payable, unearned revenues, and taxes payable.
Exercise # 3
Using the business you have identified earlier, list down three liabilities.
1. _______________________________________
2. _______________________________________
3. _______________________________________
Liabilities can either be current or non-current also.
Current liabilities (short-term liabilities) are liabilities that are due and
payable within one year.
Non-current liabilities (long-term liabilities) are liabilities that are due after
a year or more. Contingent liabilities are liabilities that may or may not
arise, depending on a particular event.
Exercise # 4
Based on your answer, in Exercise # 3, identify whether the liability is
current or non-current.
1. _______________________________ ______________
2. _______________________________ ______________
3. _______________________________ ______________
• Equity. This is the amount invested in a business by its owners, plus any
remaining retained earnings (Reeves et al., 2019).
The sole proprietorship has one equity account (owner's capital), a
partnership has as many equity accounts as the number of partners
(partner's capital). In contrast, a corporation has a specific number of
stocks, and the equity depends on the number of stocks purchased by a
stockholder.
All assets, liabilities, and equity account are called REAL ACCOUNTS
because their balances are carried over to become the beginning balances
This material has been prepared and communicated to you by or on behalf of
Palawan State University - Narra for educational purposes only.
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Prepared by Darwin O. Aniar, MA, FIM PSU – Narra| 3/7
BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
of the next accounting period. Real accounts are also referred to as
permanent accounts.
• Revenue. This is an increase in assets or decrease in liabilities caused by
providing services or products to customers (Skousen et al., 2018).
Revenues can be in the form of the sale of merchandise or payment for the
provision of services. Examples of revenue accounts include Sales (for
manufacturing and merchandising businesses), Service Revenues (for
service business), Fees Earned (for professional services), Interest Revenue
(for financial services).
Exercise # 5
Based on the earlier business you have chosen, what do you think is their
account for revenue?
_______________________________________________________
• Expenses. This is the reduction in the value of an asset as it is used to
generate revenue (Skousen et al., 2018). Examples are transportation
expenses, salaries expense, interest expense, communication expense,
rent expense, and utility expense.
Exercise # 6
What do you think are the expenses account of the business you have
identified? List down three.
1. _________________________________
2. _________________________________
3. _________________________________
Adjunct and Contra Accounts
Adjunct accounts are intended to provide additional detail to accounting
figures and increase the overall transparency of financial reporting (Kieso
et al., 2019).
The most common example of an adjunct account is the unamortized bond
premium account, used when a business sells bonds at a premium. The
unamortized bond premium and the bond liability, when combined,
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Palawan State University - Narra for educational purposes only.
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BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
represent the actual liability of the bond issuer. Adjunct accounts are
rarely used in smaller businesses that deal with relatively simple business
transactions.
Contra account is a general ledger account with a balance opposite of the
normal balance for that account classification (Kieso et al., 2019).
Typical contra-accounts examples include bad debts, accumulated
depreciation, accumulated impairment losses, sales discounts, sales
returns, etc. As evident from the table below, each contra account has a
parent account whose normal balance is often exactly opposite of the
normal balance of the relevant contra account.
Let Us Wrap Up
Assets, liabilities, and equity are explained in the illustration below:
Source: assets-liabilities-equity.png (1999×993)
(investoracademy.org)Retrieved November 27, 2021
These three elements are called real accounts (Balance Sheet Accounts).
Assets can be classified as current or non-current. Liabilities are also grouped
as current or non-current. Assets can further be broken down as tangible and
intangible.
Revenue is those items that increase the business's value, while expenses
reduce the company's value. They are both classified as nominal accounts
(Income Statement Account).
This material has been prepared and communicated to you by or on behalf of
Palawan State University - Narra for educational purposes only.
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BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
Certain accounts have a particular classification. These are the adjunct
accounts that increase the value of the related account and the contra account,
which decreases the value of the related account.
Let Us Assess
Please write your answer on a separate answer sheet uploaded in the Google
Classroom under "ASSESSMENT #5". For Scoring, refer to the rubrics attached
with Assessment # 5.
Based on the discussions above and your readings, work on the following:
1. Enumerate the five elements of a financial statement and define each
using your own words.
2. Identify whether the items listed are real or nominal. Write R if it is real
and N if it is nominal. Use CAPITAL letter.
Cash ___________
Unearned Revenue ___________
Taxes Payable ___________
Prepaid Rent ___________
Rent Expense ___________
Merchandise Inventory ___________
Land ___________
Sales ___________
Loans Payable ___________
Accounts Receivable ___________
This material has been prepared and communicated to you by or on behalf of
Palawan State University - Narra for educational purposes only.
DO NOT REPRODUCE OR COMMUNICATE.
Prepared by Darwin O. Aniar, MA, FIM PSU – Narra| 6/7
BA 2001 Accounting for Non-Accountants
1st Semester, AY 2021-2022
November 29-December 3, 2021
3. Identify whether the accounts listed are assets, liability, equity, income,
or revenue. Identify further whether it is current or non-current. Leave it
blank if it has no classification as to current or non-current.
ACCOUNT (ASSET, LIAB, EQUITY (CURRENT,
REVENUE, EXPENSE) NON-CURRENT)
Cash in Bank _____________ ____________
Interest Income _____________ ____________
Salaries Expense _____________ ____________
Unearned Revenue _____________ ____________
Prepaid Rent _____________ ____________
CJ Capital _____________ ____________
Buildings _____________ ____________
Supplies Expense _____________ ____________
Office Supplies _____________ ____________
Taxes Payable _____________ ____________
4. Using your understanding of the discussion, what is the role of adjunct
and contra account in the financial statements.
References
Kieso, Donald E., Kimmel, Paul D., Weygandt, Jerry J. (2019).
ACCOUNTING PRINCIPLES 13E, USA, Wiley Publishing
Reeves, John D., Hall, James M., & Taylor, Stephen J., (2019).
ACCOUNTING 9E, USA, Prentice Hall Publishing
Skousen, F., Stice C., & Stice R. (2018) INTERMEDIATE ACCOUNTING 18E,
USA, Thomson Publishing
This material has been prepared and communicated to you by or on behalf of
Palawan State University - Narra for educational purposes only.
DO NOT REPRODUCE OR COMMUNICATE.
Prepared by Darwin O. Aniar, MA, FIM PSU – Narra| 7/7
