MODULE 2

ELEMENT OF FINANCIAL STATEMENT AND ACCOUNT TITLES USED

The elements that are directly related to measurement of Financial Condition in

the balance sheet are Assets, Liabilities and Owner Equity while the elements that
are directly related to measurement of Performance in the income statement are
income and expenses. These accounting elements are given account names or
account titles.

Account titles are identification or brief description of items that fall to the same
kind class or natural.

BALANCE SHEET ACCOUNTS

(PERMANENT ACCOUNTS)

ASSETS: are define as “resources controlled by the enterprise as a result of past

transaction or events and from which future economic benefits are expected to
flow the enterprise”. In layman’s language, assets denote things of value that are
owned and use by the enterprise in its operation. Examples are cash, building, land,
machinery, furniture, fixtures, equipment, tools, etc. It also includes inventories,
prepaid expenses and a debt collectible by the enterprise from a costumer which
we termed as a “Receivable”.

The following are the essential characteristics of an assets:

a. The assets is controlled by enterprise;

b. The assets is a result of a past transaction or event
c. The assets provides future economic benefit;
d. The cost of the assets can be reliably measure.

PAS No. 1 Assets are classified into two, namely current assets and non-current
assets.

CURRENT ASSETS - refer to all assets that are expected to be realized, sold or
consumed within the enterprise’s normal operating cycle. Operating cycle is the
interval of time from the date of acquisition of merchandise inventor; sell the
inventory to customers and the ultimate collection of cash from the sale.

FINANCIAL STATEMENTS – MODULE 2 1

CASH - the account title to describe money, either in paper or in coins and money
substitute like check, postal money orders, bank drafts and treasury warrants.
When cash is within the premise of business, the account title is Cash on Hand and
Cash in Bank if deposited in the bank.

PETTY CASH FUND -the account title for money placed and set aside for petty or
small expenses. This exists when business used the imprest system of keeping cash.

NOTES RECIEVABLE -this is a promissory note that is received by the business from
the customer arising from rendering of services, sale of merchandise, etc.

ACCOUTS RECEIVABLE - the Account title for amounts collectible arising services
rendered to a customer or client on credit or sale of goods to customers on
accounts. This constitutes an oral or verbal promise to pay by a customer or client.

ALLOWANCES FOR BAD DEBTS - this is an asset offset or a contract-assets account.

It provides for possible losses from uncollected accounts. Although this is not
actually an asset, it is classified as such because it is shown as a deduction from the
Accounts Receivable which is a Current Asset Account.

ACCRUED INCOME - the amount income earned but not yet collected.

ADVANCE TO EMPLOYEES - the account title for amounts collectible from

employees for allowing them to make cash advances which are deductible against
or wages.

INVENTORIES - Per PAS No. 4, these are assets which are (1) held for sale in the
ordinary course of business;(2) in the process of production for such sale; or (3) in
the form of materials or supplies to be consumed in the production process or in
the rendering of services.

PREPAYMENTS - account title for expenses that are paid in advance but are not
yet incurred or have not yet expired such as Prepaid Rental, Prepaid Insurance,
Prepaid Interest, Prepaid Advertising, etc.

UNUSED SUPPLIES - an account title for cost of stationary and other supplies
purchased for use but are left on hand and still unused. The account title should be
specified as to Unused Office Supplies if intended for the office, Unused Shop
Supplies if intended for the shop, etc.
FINANCIAL STATEMENTS – MODULE 2 2
These accounts are normally arranged according to liquidity (ready conversion to
cash) in the Balance Sheet.

To summarize the discussion on Current Assets

Current Assets :

Cash xxx
Petty Cash Fund xxx
Note Receivable xxx
Account Receivable xxx
Less : Allowances for bad debts xxx xxx
Accrued Income xxx
Advances to employees xxx
Merchandise Inventory xxx
Prepayments xxx
Unused supplies xxx

NON-CURRENT ASSETS - “all other assets not classified as current should be

classified as non-current assets”.

PROPERTY AND EQUIPMENT - the International Accounting Standards No.16

defines property and equipment as “tangible assets which are held by an enterprise
for use in production or supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used during more than one
period”, such as:

LAND - an account title for the site where the building used as officer or store is
constructed.

BUILDING - account title for a finished construction owned by the business

operations and transactions took place.

EQUIPMENT - includes calculators, typewrites, adding machines, computers, steel

filling cabinets and the like. If these are used in the office, the account title is Office
Equipment and if used in the store, Store Equipment. Trucks, jeeps, vans,
automobiles and other kinds of motor vehicles are used exclusively for delivering
goods; the account title is Delivery Equipment.

FINANCIAL STATEMENTS – MODULE 2 3

FURNITURE & FIXTURES - includes chairs, tables, counters, display cases and the
like. If these are used in the office, the account title is Office furniture & Fixtures
and if these are used in the store, the account title is STORE FURNITURE &
FIXTURES.

ACCUMULATED DEPRECIATION - this is an assets offset or contra-assets account.

This is called a Valuations Account which is shown as a deduction from property
and equipment.

INTANGIBLE ASSETS

Per PAS No.38, These are identifiable non-monetary assets without physical
existence. Examples are patents, copyright, franchise, trademarks, etc.

1) Patent - gives the holders the sole right to make, use or sell his invention during
the period the patent remain in force. Patents rights can be obtained The patent
holder may license others to make use of his invention for new products, a new
substitute for existing products, as well as new production or marketing
techniques. The patent holders may license other to make use of his invention in
return for payment of royalties fees.

2) Copyright - gives the holder the monopoly on the exploitation of a literary or

artistic work for a certain period subject to renewal. Give the holder the exclusive
rights to :

a) Print, reprint, publish, copy, distribute, and sell a work

b) Make any translation or other version or extracts or arrangement or adaptation
of work
c) Dramatize a work if it be a non-dramatic work, to convert a work into a non-
dramatic work if it be a drama
d) Publicly perform or represent a work in any manner or by any whatever for profit
or otherwise
e) Produce or reproduce a work or any manner or by any method whatever for
profit or otherwise. If not reproduced in copies for sale, to sell manuscripts or any
records whatever of a work

f) Make any other use or disposition of the work consistent with the laws of the
land

FINANCIAL STATEMENTS – MODULE 2 4

3) Franchise - is an exclusive rights granted by the franchise to the franchisor for
the operation of a public utility service, or the selling or distribution of a product in
a specific area.

a ) Public Utility franchise - are those granted by the government like those for
electricity, water services, transportation and etc.
b) Business format franchise - which involves the exploitation of goods and
services. It includes the preparation of the blue print of a successful way of carrying
on a business in all its aspects. It includes food chain, beauty parlor, food cart, spa,
etc. and other become hallmarks of the development of the business format
franchising in the Philippines and other countries.
4) Trademarks/Trade name - Distinctive design, graphics, logo, symbols, words, or
any combination thereof that uniquely identifies a firm and/or its goods or services,
guarantees the item's genuineness, and gives it owner the legal rights to prevent
the trademark's unauthorized use. A trademark must be (1) distinctive instead of
descriptive, (2) affixed to the item sold, and (3) registered with the appropriate
authority to obtain legal ownership and protection rights.

Trademarks – is a type of intellectual property consisting of a recognizable sign,

design, or expression which identifies products or services

Trade name – is the name a business uses to identify itself

5) Goodwill - the established reputation of a business regarded as a quantifiable

asset.

The assets that are classified as Property & Equipment or Fixed Assets are called
Depreciable Assets and are subject to Depreciation except “ Land ”.

Land is not subject to depreciation because it is expected to be useful to the

business enterprise for an indefinite period of time.

To summarize the Non – Current Assets

Land xxx
FINANCIAL STATEMENTS – MODULE 2 5
Equipment xxx
Less : Accumulated Depreciation xxx xxx
Machinery xxx
Less : Accumulated Depreciation xxx xxx
Furnitures & Fixtures xxx
Less : Accumulated Depreciation xxx xxx
Intangibles xxx xxx

LIABILITIES

Are defined as “present obligation of an enterprise arising from past transactions

or events the settlement of which expected to result in an outflow from the
enterprises of resources embodying economics benefits”. In layman’s language,
liabilities denote financial obligations of the business to its creditors. It presents the
claims of the creditors over the assets of the enterprises.

The following are essential characteristics of a liability:

a. The liability is the present obligation of a Particular Enterprise. This means

that the enterprise liability must be identified;
b. The liability arises from Past Transaction or Events. This means that the
liability is not recognized until it is Incurred;
c. The settlement of the liability requires on outflow of resources embodying
economic benefits. This means that the obligation of the enterprise is to
transfer cash and non-cash resources or provide services at some future
time.

Per PAS No. 1, liabilities are classified only two namely; current liabilities and non-
current liabilities.

CURRENT LIABILITIES

Are financial obligations of the enterprises which are (a) expected to be settled in
the normal course of the operating cycle; (b) due to be settled within one year from
the balance sheets date.

ACCOUNT PAYABLE

FINANCIAL STATEMENTS – MODULE 2 6

 An account title for a financial obligation of an enterprises that constitute
an oral or verbal promise today.

NOTES PAYABLE (short-term)

Same as Account Payable in the nature but only the obligation is evidence by a
promissory notes. The enterprise is the one who issued the note.

ACCRUED PAYABLES

These are expenses incurred by the enterprise but are not yet paid. This normally
occurs when the accounting period ended, such as rent, salaries, interest, taxes
payable, etc.

PRE-COLLECTED or UNEARNED INCOME

This is an account little for an income collective or received in advance and is not
yet considered as earned.

To summarize the Current Liabilities

Account Payable xxx

Note Payable – Short Term xxx
Accrued Payable xxx
Pre – collected or Unearned Income xxx

NON-CURRENT LIABILITIES

Are financial long term obligations of the enterprises which are due and payable
for more than one year. This usually occurs in a corporate form of business
organization. A financial obligation of the enterprises which requires a fixed or
tangible property for more than year.

NOTES PAYABLE (long term)

Same nature with that of Notes Payable (short term) but only, this requires
payment for more than a year.

MORTGAGE PAYABLE
FINANCIAL STATEMENTS – MODULE 2 7
A financial obligation of the enterprises which requires a fixed or tangible property
to be pledged as a collateral to ensure payment

To summarize the Non Current Liabilities

Note Payable – Long term xxx

Mortgage Payable xxx

OWNER EQUITY OR CAPITAL

Is the residual interest in the assets of the enterprises after deducting all its
liabilities. It is expressed in the equation as ASSETS less LIABILITIES equal OWNER’s
EQUITY or CAPITAL. It is increased when there is Profit or additional contributions
by the owner and decreased when there is LOSS or withdrawal by the owner. In
layman’s language, Owner’s Equity or Capital is the amount of money or value of
property put by the proprietor into the Business to start with the operation which
is referred to as “ Initial Investment” or “Initial Capital”. Capital is synonymous to
“Proprietorship”, “Proprietary Interest” or ‘Networt’.

The owners capital be given a title by indicating the name, with the world capital
written after the name which is separated by a “comma”. Thus , if the owner’s
name is Robert Jaworski the title for his capital account is:

WITHDRAWAL

The owner’s withdrawal is likewise indicated by the use of the owner’s name with
the word Drawing or Personal written after the name which is separated by
comma. Thus, if the owner Robert Jaworski who made withdrawal, the title for his
drawing account is:

“ROBERT JAWORSKI, PERSONAL” or “ROBERT JAWORSKI, Drawing”

To summarize the capital the formula is given below

FINANCIAL STATEMENTS – MODULE 2 8

Formula for Statement of changes in owner`s equity ( Net Income )

Capital, Beginning xxx

Add : Net Income xxx
Additional Investment xxx xxx
Total xxx
Less : Withdrawal/Drawing xxx
Capital end xxx

Formula for Statement of changes in owner`s equity ( Net Loss )

Capital, Beginning xxx

Add: Additional Investment xxx
Total xxx
Less : Net loss xxx
Withdrawal/Drawing xxx
Capital end xxx

INCOME & EXPENSE SUMMARY

This is a temporary account created at the end of the accounting period where
Income and Expenses are temporarily closed to this account.

INCOME STATEMENT ACCOUNT

(Temporary Accounts)

REVENUE and EXPENSES

These are the temporary accounts of Owner’s Equity and are also the
components of an Income Statement, a financial statement which directly relates
to the measurement of performance (previously termed as a result of operation)
of an enterprise at the of a given period of time.

INCOME and REVENUE

PAS NNo.28 defines revenue as the “gross inflow of economic benefits during the
period arising in the course of ordinary activities of an enterprise when those
inflows result in increasing in equity, other than those relating to contributions
from owners”. Examples are proceeds from services rendered by a servicing firm,

FINANCIAL STATEMENTS – MODULE 2 9

income from use by other entities of the resources sale of merchandise by a trading
firm, income rent income, interest income etc. events that do not form part of
ordinary course of the business operation.

Examples:

SALES

In general this represent revenue derived from the sale of merchandise.

SERVICES INCOME

In general this is account title use for all types of income derived from rendering
of services. Something the account title use in Service Revenue. Other specific
income account title use are.

PROFESSIONAL INCOME

The account title generally used by professionals for income earned from the
practice of their profession or may be specified as Accounting or Auditing Fees
Income for Accountants, Legal Fees Income for Lawyers, Dental Fees Income for
Dentist, Medical Fees Income for Doctors, etc.

RENTAL INCOME

For income earned on buildings, space or other properties owned and rented out
by the business as the main line of its activity.

INTEREST INCOME

For income receiver by the business arising from an amount of money borrowed
by a customer and is usually covered by a promissory note. This typical in a lending
institution.

MISCELLANEOUS INCOME

For income earned by the business which is not the main line of its activity and
could not be clearly classified.

FINANCIAL STATEMENTS – MODULE 2 10

To summarize the Income/Sales/Revenue

Income/Sales/Revenue xxx
Service Income xxx
Professional Income xxx
Rental Income xxx
Interest Income xxx
Miscellaneous Income xxx

EXPENSES

Are the “gross outflow of economic benefits during the period arising in the course
of ordinary activities of an enterprise when those outflow result in Decrease in
Equity other than those relating to distribution to owners”.

Examples are salaries expense, rent expense, stationary and supplies expense, bad
debts, depreciation, taxes and licenses, etc. LOSSES represent decreases in assets
or increase in liabilities arising from that activities or events that are outside the
ordinary course of business operation. Example are the loss from sale of property
and equipment, loss due to theft or pilferage, etc.

PROFIT (Loss)

The excess of revenues over expenses is called “profit”, if experiences exceed the
revenue it’s called a ‘LOSS’.

COST OF SALES or COST OF GOODS - cost to produce and sell the goods.

INTEREST EXPENSES

An experience incurred from borrowed money. This is separately shown as a

deduction from Operating Income before arriving at net income.

RENT EXPENSES

For the amount paid or incurred for use of property, usually premises.

REPAIRS and MAINTAINANCE

FINANCIAL STATEMENTS – MODULE 2 11

For expenses incurred in repairing or servicing the buildings, machinery, vehicles,
equipment, etc., which are owned by the business.

STATIONARY and OFFICE SUPPLIES EXPENSES

The stationary, envelopes, clips, fastener, etc. used in the office will bear the
account title as Office Supplies; if use in the store, Store Supplies or another title
may be used to describe the kind of supplies used.

SALARIES EXPENSES

For compensation given to employees of a business. It may be specified as Office

Salaries, Salesmen’s Salaries, etc.

BAD DEBTS EXPENSES

For the anticipated loss that the business may incur arising from uncollectible
accounts

DEPRECIATION EXPENSE

For the portion of the cost of property and equipment or fixed assets that has
expired based on rational and systematic allocation procedure.

AMORTIZATION EXPENSE

The expired or expense portion of an intangible assets.

TAXES and LICENSES

For the amount paid for business permits, licenses and other government dues
except the Income Tax paid which is not allowable by law as a deduction.

INSURANCE EXPENSE

Account title for the expired portion of the insurance premium paid.

UTILITIES EXPENSE

The account title for telephone light and water bills. Also included are gasoline,
lubricants and oil.

FINANCIAL STATEMENTS – MODULE 2 12

MISCELLANEOUS EXPENSE

Any amount paid as expense which is not significant enough to warrant a particular
classification.

To summarize the Expenses accounts

Interest Expense xxx

Rent Expense xxx
Repairs & Maintenance xxx
Stationery & Office Supplies used/Expense xxx
Salaries Expense xxx
Bad Debts Expense xxx
Depreciation Expense xxx
Amortization Expense xxx
Taxes & Licenses xxx
Insurance Expense xxx
Utilities Expense xxx
Miscellaneous Expense xxx

FINANCIAL STATEMENTS – MODULE 2 13