ABM 1
Fundamentals of Accounting, Business and
Management
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Message
Hey, What’s up? Welcome Aboard! Welcome to Entrep Air. It’s Acct, your Captain
and buddy in this Fundamentals of Accounting, Business and Management Course with
a flight number ABM 1. In this course, expect to have a hard time analyzing
transactions, making fun of rewriting long journal entries and making sad faces on
different non balancing figures. Expect to have a long journey in this course, hence,
prepare a lot of coffees and chocolates, take a lot of dose of patience, ask your psyche
doctor to prescribe a lot of pain killers on head aches and ask your mother to check you
from time to time. Just kidding!
Kidding aside, this course requires constant determination and perseverance. Expect
that the flight crews (instructors) as well as the whole team will guide you by providing
different accounting instructions to make this journey memorable, simplified and
achievable.
This Accountancy, Business and Management (ABM 1) Course Pack is composed of
Eight (8) modules all in all intended to guide you learn the basics in accounting and its
application in business. This course pack will help you to familiarize the business
transactions of the different types of business as well as assist you to the preparation of
different financial statements to be use beneficially in actual practice. The last part
contains different relatable transactions made purposely to prepare you to the business
planning course on your entrepreneurial journey of this program.
Now, are you ready to take the flight with us? If yes, please fasten your seat belt, seat
back and enjoy the rest of the flight!
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What’s inside in this Coursepack?
Module 1
-
INTRODUCTION TO ACCOUNTING
LESSONS
Module 2
1.
2.
3.
4.
5.
6.
7.
8.
Definition and Importance of Accounting in Business
Keeping Business Records
Forms of Business, Capital Structure and Nature
Users of Financial Statements
Generally Accepted Accounting Principles and Assumptions
The Financial Statements
Elements of Financial Statements and Accounting Equation
Commonly Used Account Titles
-
ACCOUNTING CYCLE Part 1
LESSONS
Module 3
1.
2.
3.
4.
Analysis of Transactions and rules of Debit and Credit
Journalizing Transactions
Posting to the Ledger and Trial Balance
Adjusting Journal Entries and Worksheet
-
ACCOUNTING CYCLE Part 2
LESSONS
1.
2.
3.
4.
5.
Financial Statements (Sole Proprietorship and Partnership)
Statement of Financial Performance
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Closing Entries, Post Closing Trial Balance and Reversing
-
ACCOUNTING FOR SERVICE CONCERN
Entries
Module 4
LESSONS
Module 5
1.
2.
3.
Nature of Service Oriented Business
Transactions Relating Service Concern
Financial Statement Presentation
-
ACCOUNTING FOR MERCHANDISING BUSINESS
LESSONS
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Module 6
1.
2.
3.
Nature of Merchandising Business
Transactions Relating Merchandising Concern
Financial Statement Presentation
-
ACCOUNTING FOR MANUFACTURING BUSINESS
LESSONS
Module 7
1.
2.
3.
Nature of Manufacturing Business
Transactions Relating Service Concern
Financial Statement Presentation
-
FINANCIAL STATEMENT ANALYSIS
LESSONS
1.
2.
3.
4.
5.
4.
Module 8
PLANNING
Financial Statement Tools in Decision Making Process
Methods used in Financial Statement Analysis
Percentage
Trend Analysis
Horizontal Analysis
Ratio Analysis
FINANCIAL ASPECT APPLICATION FOR BUSINESS
LESSONS (Procedural Approach)
1.
2.
3.
4.
Start-Up Cost
Computation for Unsatisfied Demand and Production Capacity
Sales Forecasting
Statement of Financial Performance, Statement of Financial
Position, Statement of Changes in Equity and Statement of
Cash Flows
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Course Specification
Course Title
Course Description
Fundamentals of Accounting, Business and
Management (ABM 1)
This is an introductory course in accounting, business,
and management data analysis that will develop
students’ appreciation of accounting as a language of
business and an understanding of basic accounting
concepts and principles that will help them analyze
business transactions.
Units / Credit Equivalent
3 units
Course Outcomes
In this course, the learners should be able to:
a. Demonstrate appreciation of the relevance and
application of accounting as the language of business
in the economy and events to personal experiences.
b. Solve problems following the accounting cycle of
the basic types of business in accordance to accounting
concepts, principles and standards.
c. Distinguish and Interpret basic financial statements
on different industries.
d. Create a quasi-financial aspect that can be applied
for business planning.
Course Pack Structure
Module
1
Intended Learning Outcomes
At the end of the module, the
learners are expected to:
Lessons
Writer
Definition and Importance
a. Define accounting and explain of Accounting in Business
its roles in business and
management.
Keeping Business Records
b. Understand the importance of
keeping business records.
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c. Discuss accounting standards,
GAAP,
and
accounting
assumptions.
d. Know and familiarize the
different format of basic
Financial Statements.
e. Learn and describe the basic
and
expanded
accounting
equation.
f. Determine and distinguish the
different forms of business
activities
of
business
organizations.
g. Know the different users of
financial information.
h. Learn the various account titles
that are used in business.
i. Acquire knowledge on the
various forms of business
organizations and their capital
structure.
j. Know and identify the nature of
business
2
3
At the end of the module, the
learners are expected to:
a. Determine, identify and
analyze business transactions
concerning application of debit
and credit rules.
b. Acquire knowledge on
accounting equation and
recording transactions.
c. Familiarize the proper use of a
ledger under the manual
accounting systems and develop
skills in posting process.
d. Prepare a trial balance and
determine errors in the trial
balance.
e. Understand the purpose and
types of adjusting entries.
f. Learn and understand how the
worksheet becomes a tool in
preparing financial statements.
At the end of the lessons, the
learners are expected to:
a. Understand the relationships
among the financial statements.
Forms of Business, their
Capital Structure and
Nature
Users of Financial
Statements
Generally Accepted
Accounting Principles and
Assumptions
The Financial Statements
Elements of Financial
Statements and
Accounting Equation
Commonly Use Account
Titles
1. Analysis of
Transactions and rules of
Debit and Credit
2. Journalizing
Transactions
3. Posting to the Ledger
and Trial Balance
4. Adjusting Journal
Entries and Worksheet
Financial Statements
1. Statement of Financial
Performance
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b. Prepare the Income Statement.
c. Prepare the Balance Sheet.
d. Prepare the Statement of
Changes in Equity.
e. Prepare the Statement of Cash
Flows.
f. Discuss the relationship
among financial statements.
g. Know the reason why there is
a need to close the books of
accounts.
h. Prepare a post-closing trial
balance and reversing entries.
4
5
6
a. Discuss the activities in a
service concern-type business
b. Differentiate products services
from production and trading.
c. Enumerate examples of a
service type industry.
d. Discuss transactions in a
service concern-type of business
and how is it accounted for.
e. To complete a whole cycle of
accounting in service type
industry.
2. Statement of Financial
Position
3. Statement of Changes
in Equity and
4. Statement of Cash
Flows
5. Closing Entries, Post
Closing Trial Balance and
Reversing Entries
1. Nature of Service
Oriented Business
2. Transactions Relating
Service Concern
3. Financial Statement
Presentation
1.
Nature of
a. Discuss the activities in a Merchandising Business
2.
Transactions
trading concern-type business
b. Differentiate products from Relating Merchandising
Concern
production and trading.
Financial
c. Enumerate examples of a 3.
Statement
Presentation
trading business.
d. Present how the transactions
are accounted for in the trading
concern
e. Present sample financial
statements.
a. Discuss the definition of three
type of inventory, manufacturing
cost, direct labor and factory
overhead.
1.
Nature of
Manufacturing Business
2.
Transactions
Relating Service Concern
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7
b. Present journalizing process
from the purchase of Raw
Materials to the Application of
Payroll and Other Production
Expenses
c. Discuss the activities in a
Manufacturing
concern-type
business
d. Define the Three Types of
Inventory.
d. Discuss the journalizing
process from the purchase of Raw
Materials to the Application of
Payroll and Other Production
Expenses
e. Discuss the trial balance of
manufacturing business and how
is it accounted for.
f. Present the Manufacturing
Financial Statements
a. Appreciate the significance of
financial statement analysis.
b. Prepare and interpret financial
statement in comparative and
common-size form.
c. Compute, analyze and interpret
financial ratios in terms of
liquidity,
solvency,
and
profitability.
8
a. Prepare financial statement in
business planning.
b. Determine the significance of
preparing financial statement
3.
Financial
Statement Presentation
1.
Financial
Statement Tools in
Decision Making Process
and Methods used in
Financial Statement
Analysis
2.
Percentage and
Trend Analysis
3.
Ratio Analysis
1.
Start-Up Cost
2.
Computation for
Unsatisfied Demand and
Production Capacity
3.
Sales Forecast
4.
Statement of
Financial Performance,
Statement of Financial
Position, Statement of
Changes in Equity and
Statement of Cash Flows
5.
Financial
Statement Analysis
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MODULE 1
ACCOUNTING AND BUSINESS
Getting to Know the Module
Mabuhay! This is Buss, the head flight attendant of this Flight ABM 1
of Entrep Air. We would like to welcome you in this flight. This flight is a continental
flight with Eight Countries to visit. There are many activities being prepared for you to
have a more memorable experience. For our first major destination, we are heading to
accounting and business concepts. In this destination, we will learn who accounting is,
it’s importance, application, business concepts, classifications and business
management application as to business decisions. Don’t forget to note the important
points of this destination as this will help you to understand more of the course. Have
Fun! Enjoy the Flight rest of the flight.
What will you learn?
At the end of this module, learner will be able to:
a. Define accounting and explain its roles in business;
b. Understand the importance of keeping business records;
c. Discuss accounting standards, GAAP, and accounting assumptions;
d. Know and familiarize the different format of basic Financial Statements;
e. Learn and describe the basic and expanded accounting equation;
f. Determine and distinguish the different forms of business activities of
business organizations;
g. Know the different users of financial information;
h. Learn the various account titles that are used in business;
i. Acquire knowledge on the various forms of business organizations and their
capital structure;
j. Know and identify the nature of business.
What’s inside this module?
1. Definition and Importance of Accounting in Business
2. Keeping Business Records
3. Forms of Business, Capital Structure and Nature
4. Users of Financial Statements
5. Generally Accepted Accounting Principles and Assumptions
6. The Financial Statements
7. Elements of Financial Statements and Accounting Equation
8. Commonly Use Account Titles
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LESSON 1: DEFINITION AND IMPORTANCE OF ACCOUNTING
TO BUSINESS
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Define accounting and explain its business roles.
TIME FRAME
This lesson is expected to be done with a thirty minutes timeframe.
WHAT IS THIS LESSON ABOUT?
Madyaw! This is Buss, your flight attendant of this flight. For our first
destination, we are heading to the introduction of accounting, business and
management. This place has so many adventurous spots of which can certainly amaze
you. You will be dealing with accounting definition and its importance to business.
Expect your tour to be done within an hour and don’t forget to visit the places with
exciting activities. Enjoy!
Let’s do this!
Activity 1:
Think of at least five jobs or professions that you are familiar with. Write the job title on
the first column and then the relevance of the job to the decision making of an entity on
the second column.
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Activity 2:
Arrange the circle to complete the definition of the word in the box. In completing this,
don’t forget to put period in the end and commas if necessary. Prepare a separate sheet
of paper in making this.
In a significant manner and in
terms of money, transactions,
and events which are
In part at least, of
financial character
Accounting
It is an Art of
recording, classifying
and summarizing
Interpreting the
results thereof
and
Let us think!
a. What are the jobs you can usually think that involves decision making?
b. In your personal experiences, what are the ativities that requires you to make
decision? Can you state one?
c. Accountants, Managers and business-owners, how do you think these
professionals need the working knowledge to make decisions?
d. Base on the definition you have constructed, how can we apply accounting to
our daily activities? In your own opinion, how can you apply accounting in your
daily life?
e. As future entrepreneur, why there is a need to study accounting?
Let Us Learn!
Why do we need to study accounting?
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In all walks of life, be it professional or non-professional are living in the era of
accountability. Accounting is an overlooked career and yet is a skill that is used
regularly in daily life. Some of us typically viewed accounting as an essential part of
the business world only, but we tend to deny the fact that we’re most likely performing
some type of accounting task in the real world even if we’re not doing business. In
everyday dealing in life, we tend to make decisions. A decision just like coping-up with
our budgets in basic necessities, our daily allowance, education for our children,
monthly rentals, salaries of helpers, monthly bills, making sure the charges are correct,
planning for your future, and many other instances. Well, these are just some of the
reasons why we need to study accounting.
Who should practice accounting?
Doctors, Engineers, lawyers, teachers and every profession and job that requires
decision making in one form or another practices accounting. Every measurement of
activities, processing of information into reports and communicating these results to
decision makers is a product of accounting.
Accounting is relevant in all walks of life that is very essential not just in the world of
business. Accounting is a system that measures business activities, processes that
information into reports and communicates the results to decision makers.
Business and Accounting
In a smaller scope, the activities we do in simple business transactions are manageable.
We can simply determine the business transactions we do. But, as the business grows,
transactions are becoming complex. No business could operate very long without
knowing how much it was earning and how much it was spending. So, we need the
application of accounting in order for the business to function optimally to determine if
it stands financially or is the business making profit.
Let’s do it!
Accounting is said to have universal in existence and any professions need the working
knowledge of accouting in order to practice their profession.
What to do?
Make a Short Story relating to your childhood dream of what you want to become when
you grow up. Relate how that profession will embody accounting. Write it in an A4
bondpaper with a minimum of 400 words.
Arrival
Hooray! Congratulations! You have completed the first destination in your
continental tour. Please mark your map as 1/8 accomplished. More exciting places
and activities to go.
LESSON 2: KEEPING BUSINESS RECORDS
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LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Understand the importance of keeping business records.
TIME FRAME
This lesson is expected to be done within an hour.
WHAT IS THIS LESSON ABOUT?
Mabuhay! This is Cash, one of your cabin crew. Hope you all have a great
morning. In our second destination, we will be amazed by how important keeping
records in business. In this destination, we could acknowledge the importance of
relating your diaries to accounting. Enjoy!
Let’s do this!
Activity: Making my diary!
On a blank sheet of paper, list down all your activities that happen last day. Write it
chronologically with details such as the time and the event.
Let us Think!
1. What do you think the reason why there is a need to list down all the
activities that occur day to day? Is it easy to recall all the activities?
2. What about listing down all the activities that happened in a month?
Can you still chronologically record it? Why not?
Let Us Learn!
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Keeping business transactions is like a high school days activity of writing down your
day to day experience through a diary. If you could still remember, a diary is a book
consisting the events that usually happen throughout the day. Same as to accounting,
we are making a diary not for ourselves but for the business. We should keep a diary
for the business to record all the activities for the day and even for a year. The diary in
business is so called “books of accounts”.
Considering the day to day transactions of the business, it is very difficult for us to rely
on our memory to recall all those transactions that the business entered into. What has
been recorded into the books of accounts are the data of which will be transformed into
a report form called “financial statements”.
(Financial Statements will be discussed lately)
Let’s make this!
Essay:
Answer the following questions and write your answers in a short bond paper.
1. Why does business transactions need to be recorded?
2. How will recorded transactions help in making business decisions?
3. What do you think may happen with business decision making if
transactions and events are not properly recorded?
Arrival
Congratulations! That’s a quick tour, right? Hope you enjoyed this destination because
more great lessons are waiting ahead. You can mark now your map as 2/8
accomplished.
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LESSON 3: FORMS OF BUSINESS ORGANIZATION, THEIR CAPITAL
STRUCTURE AND NATURE OF BUSINESS
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Know and differentiate the various forms of business
organization and their capital structure.
TIME FRAME
This lesson is expected to be done within an hour.
WHAT IS THIS LESSON ABOUT?
Hello! It’s Accounts Receivable, one of your cabin crews. We’re glad
that you continuously patronizing our Airline services. Our destination for today
is the forms of business organization. This destination will give you hint on
what form of business organization to pursue in the near future. Expect to have
a little bit of shaky ride due to not so good weather condition. Goodluck!
Let’s do this!
Activity 1
List down at least five business entities nearby. Make sure you list down it from micro
scale operation up to large scale operation if possible.
Ask for a help by your relatives or nearest friend to help you answer the following
questions.
1. Who owns the business?
2. How many business owners and employees does the company have?
3. What are their usual coverage of operation? Is it barangay wide, municipal wide,
provincial, regional, national or international?
Activity 2
Cite at least five jobs/activities that your relatives or friends are engaged into. With the
list you created, identify what company they are employed and the activities their jobs
were related to.
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Example: Driver – NASA Tours Inc. – Touring Services
1.
2.
3.
4.
5.
Let us think!
1. How much do you think it needs to start up the same business?
2. From your listed entities, which do you think has the much-complicated operations?
3. Why does business owners engage into business with business partners?
4. Why does some business ownership owns solely by a single person?
Let us learn!
FORMS OF
STRUCTURE
BUSINESS
ORGANIZATION
AND
THEIR
CAPITAL
Sole Proprietorship – this is the simplest form of business organization where
capital is owned and provided by one person called “proprietor” who may
manage the business by himself or hire another person to do so.
Partnership – the capital of business is owned or provided by two or more
person call “Partners” who should set forth agreements among themselves
which include among others, the investments of each partner, how profit and
loss is to be divided and settlement to be made upon death or withdrawal of a
partner as embodied in the “Articles of Co-Partnership” they have executed.
Corporation – this is the biggest and the most complicated form of business
organization. This is organized by at least five but not more than fifteen persons
called “Incorporators”.
Every form of business organization has different structure. Sole proprietor is a simpler
form that the owner or the proprietor decides solely for the business. This form of
business is usually a service type and retail establishments. In case the business gets
bankrupt, accounting considers sole proprietorship and the proprietor as one, which
means that the separate entity assumption ceases and consider that the business and the
owner are as one.
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Partnership on the other hand is a group of persons usually two or more contributing
their resources such as money, property or industry to a common fund and dividing the
return to themselves. Unlike sole proprietorship, accounting considers partnership as a
separate organization that separates each partner with their personal affairs.
Corporation is a separate legal entity with an artificial being created by the operation
of the law, having the rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence. It is the most complicated form
of business ownership since its operation is also complex. Its capital is divided into
units called shares with a designated value called as par value. Corporation enjoys
unlimited life because the shares can be transferred without dissolving the corporation.
Capital Structure
Sole Proprietorship (Owner’s Equity)
Owner’s Equity, Beg.
Profit
Total
Less: Withdrawal
Owner’s Equity, End
Partnership (Partner’s Equity)
Add:
Partner’s Equity, Beg.
Add: Partner’s Share in Profit
Total
Less: Partner’s, Drawing
Partner’s Equity, End
Partner A
PXXX
XX
PXXX
(XX)
PXXX
P XXX
XXX
XXX
XXX
XXX
Partner B
PXXX
XX
PXXX
(XX)
PXXX
Corporation (Shareholder’s Equity)
Retained Earnings, Beg.
PXXX
Add: Profit
XX
Total
PXXX
Less: Dividends declared and paid (XX)
Retained Earnings, End
PXXX
(Retained Earnings end will be used to compute for the Shareholder’s Equity End.)
Contributed Capital
Share Capital
Ordinary Shares
PXXX
Add: Retained Earnings
XX
Shareholder’s Equity, End
PXXX
Note: Discussions of capital structure is at latter part of this module.
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NATURE OF BUSINESS
Service Concern – the business derived its income from services rendered to
clients in case of professional services, like that of Accountants, Lawyers,
Doctors, Dentists, etc., or to customers in the case of non-professional services,
like that of a hotel where room rental is the main line of their business, laundry
shop, car repair services, janitorial services, etc.,
This type of business usually involves selling people’s time and expertise in a
certain field.
Merchandising Concern – the business is engaged in buying of goods or
commodities or any form of finished products and sells them at a profit.
Other term used for this type of business is trading. Its activity is commonly
term as buy and sell. The trader usually buys a product or commodity and make
it available for sale to their customers.
Manufacturing Concern – the business is engaged in buying of raw materials
and supplies to be processed or manufactured, converting them into finished
products for sale at a profit, like that of a furniture shop, manufacturers of cars
and home appliances, etc.
Agri-business – the business is engaged in planting of crops and sells its
products either in raw or finished form at a profit.
Hybrid Companies - are those involved in more than one type of activity which
are manufacturing, merchandising and service.
Let’s make this!
Identifying the Nature of Business
Identify and classify the following business base on their nature whether it is a
Service Concern, Trading or Merchandising, Manufacturing or Agri-Business.
Repair Shop –
Airline Business –
Bookstore –
Sari-sari Store –
Barber Shop –
Pineapple Processing Plant –
Gasoline Stations –
Shoe Factory –
Candy Shop –
Banana Plantation Arrival
You’re a fast learner! Congratulations once again. We’re glad you’re having fun with
your tour. You can now mark your map as 3/8 accomplished.
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and activities/discussions that are more appropriate to the learners in distance learning.
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LESSON 4: USERS OF FINANCIAL STATEMENTS
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Identify and distinguish the different users of financial
information.
TIME FRAME
This lesson is expected to be done within 30 minutes.
WHAT IS THIS LESSON ABOUT?
Hello! It’s Prepaid Rent, one of your guides in this tour. This destination talks
about the users of financial information and how they use this financial information to
create business decisions. Have fun!
Let’s do this!
Identify which among the following could use the financial statement externally and
internally.
Investors, employees, lenders, suppliers, creditors, customers, government and their
agencies
From the list of users of financial statement, put into right column the internal users of
financial statement and of the other column the external users.
Internal User
External User
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Let us Think!
1. How will the financial information aids the government and its agencies?
2. How will this financial information be helpful to business managers?
Let Us Learn!
USERS OF FINANCIAL STATEMENT
Investors – they need information to help them determine whether they should
buy, hold or sell.
Employees – employees are interested in information about the stability and
profitability of the enterprise.
Lenders – lenders are interested in information which enables them to
determine whether their loans and interest thereon will be paid when due.
Suppliers and other trade creditors – these users are interested in information
which enables them to determine whether amounts owing to them will be paid
on maturity.
Customers – customers have an interest in information about the continuance
of an enterprise especially when they have a long-term involvement with or are
dependent on the enterprise.
Government and their agencies – these users require information to regulate
the activities of the enterprise, determined taxation policies and as a basis for
national income and similar statistics.
Let’s make this!
Identify five users of financial information in your locality and discuss how
these users utilize these information.
1.
2.
3.
4.
5.
Arrival
Good Job! You are doing your best with destination’s activities. That’s a good sign of
learning. We’ll, hope you enjoy this lesson because more great lessons are waiting
ahead. Please mark your map now as 4/8 accomplished.
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and activities/discussions that are more appropriate to the learners in distance learning.
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LESSON 5: GAAP AND BASIC ACCOUNTING ASSUMPTIONS
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Discuss and understand accounting standards, GAAP, and accounting
assumptions.
TIME FRAME
This lesson is expected to be done within 30 minutes.
WHAT IS THIS LESSON ABOUT?
Hello! It’s Supplies, welcome to entrep air. For your next destination,
you will be dealing with Generally Accepted Accounting Principles and accounting
assumptions. Have Fun!
Let’s do this!
From the words on the box, match the words with its equivalent definition from the
other box on the right. Prepare a separate sheet for your answer.
Adequate Disclosure Principle
Consistency Principle
Matching Principle
Materiality Principle
Objectivity Principle
Cost Principle
Entity concept
Periodicity Concept
-
Relevant information be disclosed
Significant enough to affect evaluation and
decision
- Base on the most reliable data
- Should use same and/or consistent method
- Recorded at original or acquisition cost
- Recognized when they are earned and incurred
Let us Think!
- Stands apart the individual and the business
- Uses Peso as the unit of measure
- Subdividing into equal time periods
Stable Monetary Unit Concept
Let us Think!
1. Why there is a need to embrace with these principles? In what instance
these principles could give impact?
2. How would these accounting assumptions affect the practice of accounting?
3. What may be the importance in embracing these assumptions?
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Let Us Learn!
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
-
are uniform set of accounting rules, procedures, practices and standards that
are followed in preparing the reports-financial statements.
1. Cost principle – the asset should be recorded at the original or acquisition cost.
Cost principle states that the asset acquired should be recorded on the actual cost
during the time of purchase.
2. Objectivity principle- requires that accounting records should be based on
reliable and verifiable data as evidence of transactions.
As stated above, the data to be recorded should be based from the most accurate
and reliable information. As to reliability of the data, it must be confirmable by an
independent observer. Ideally, these accounting records are based on information
that flows from activities documented by objective evidence. This principles appeal
to eject the whims and opinions that sometimes lead to confusion and disputes.
3. Materiality principle- this principle dictates practicability to rule over theory in
determining the valuation of an item.
Financial reporting is only concerned with information that is significant
enough to affect evaluations and decisions. Materiality principle is about
deciding the materiality of an item or the aggregate depending on the nature and
size of the item under evaluation. Thus, accounting standard can be ignored if
the net impact of doing so has a small impact on the financial statement s that
the user of the statements would not be misled.
4. Matching principle- revenue should be recognized when earned and
corresponding expense should be recognized when incurred during the same
period as revenue is earned.
This principle states two concepts, the revenue recognition principle and the
expense recognition principle. The former requires that the revenue should be
recognized when goods are delivered or services are rendered or performed.
While the latter requires that expenses should be recognized when goods and
services are used up to produce a revenue and not when entity pays for the goods
and services.
5. Consistency principle- this principle requires that accounting methods and
procedures should be applied on a uniform basis from period to period to
achieve comparability in the financial statements.
6. Adequate disclosure principle- this principle requires that all relevant
information on financial statements should be free from any material
misstatement; that if there is any changes on assessment and understanding,
proper disclosure should be made.
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Fundamental concepts
Entity Concept – An accounting entity is an organization or a section of an
organization that stands apart from the organizations and individuals as a separate
economic entity.
Periodicity concept – This concept allows the users to obtain timely information to
serve as a basis on making decisions about future activities.
Stable monetary unit concept – Philippine peso is a reasonable unit of measure and
that its purchasing power is relatively stable.
Let’s make this!
1. When a P200 waste basket with an estimated life of 1 year was charge to expense at
the time of purchase, this is an application of?
2. A person who borrows money from a bank to start with a business and treats his
borrowings as capital rather than liability is under what concept?
Create at least two scenarios where there is an application of the principles stated above.
Scenario 1:
Scenario 2:
Arrival
Hooray! Congratulations once again. You are doing great with your activities. Hope
you enjoyed this destination because more great destinations are waiting ahead. You
can now put a stamp in your map as 5/8 completed.
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and activities/discussions that are more appropriate to the learners in distance learning.
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LESSON 6: THE FINANCIAL STATEMENTS
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Know and familiarize the format of basic Financial Statements.
TIME FRAME
This lesson is expected to be done within 2 hours.
WHAT IS THIS LESSON ABOUT?
Welcome to your sixth destination! It’s Inventory, your cabin support
in this flight. This destination introduces the end product of accounting which are the
financial statements. Don’t hesitate to ask for help to better understand the lesson.
Thank you!
Let’s do this!
Encircle the combination of the letters to form a word relating to financial statement.
W
U
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B
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Let us Think!
1. Why there is a need to prepare financial statements?
2. How can these financial statements aid the management in making business
decision?
3. What makes financial statements useful? What is its significance?
Let Us Learn!
FINANCIAL STATEMENTS
- are structured representation of the financial position and financial performance of an entity.
Remember that the objective of financial statements is to provide information about the
financial condition and operating results of an enterprise that is vital in making sound economic
decisions.
In addition, financial statements are the end product of accounting.
Types of Financial Statements
1. Statement of Financial Position or Balance Sheet
2. Statement of Comprehensive Income (Statement of Financial Performance) or Income
Statement
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes, comprising a summary of significant accounting policies and other exploratory
information.
What comprises a statement of financial position?
Balance sheet or statement of financial position or statement of financial condition – is a
statement which shows the financial condition of the business as of a given date. It shows the
assets, liabilities and owner’s equity which are called “accounting values”.
“In other words, balance sheet is like a person’s body condition. This statement will determine
what the business’ condition is. Through this statement, we can determine that the business is in
healthy or bad condition. Just like hearing the news “the business is severely disrupted and is
forced to explore alternative solutions to recover from the waterloo caused by the CoVid-19
pandemic” If we are trying to look at the condition of a certain company in that scenario, this
could probably be having an unpaid and increasing debt, unutilized assets or worst a near to
business closure scenario.
Component of a Balance Sheet
Assets- are things of value or rights that are owned and used by the business in the
conduct of its operations such as cash, cash and cash equivalents, merchandise inventory,
supplies inventory, prepaid expenses, accounts collectible by the business which we termed
“receivable”, furniture and fixtures, machinery and equipment, building, land etc.
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Liabilities- are debts or financial obligations of the business that are payable in cash or
in some kind of assets such as accounts payable, notes payable, salaries payable, mortgage
payable, etc.
Owner’s equity- this refers to money or value of property put by the proprietor into the
business to start with which refers to “initial investment”.
Below shows a sample of a statement of financial position of a service industry with simple
operation.
Metro Mars Delivery
Statement of Financial Position
As of December 2020
Asset
Cash
Inventory
Fixed Asset
Less: Accumulated Depreciation
Total Asset
146,950.00
5,040.00
18,474.00
(3,252.21)
167,211.79
Liabilities and Equity
Liabilities
C, Maringkay Capital, beg
Net Income
C, Maringkay Capital, end
Total Liabilities and Equity
0
41,842.00
125,369.79
167,211.79
167,211.79
What comprises a statement of financial Performance?
Income Statement or Statement of Comprehensive Income (Statement of Financial
Performance)
- It is a statement which shows the results of the operation of the business for a given
period.
Income statement shows how the business work. It summarizes the revenue and the expenses
over a period of time. We can determine that the operation of the business is doing well if the
statement reflects an expected return or more than what the expected return.
When will the business makes profit?
If the revenues earned are bigger than the expenses incurred, there is a “profit”. While if the
expenses incurred is bigger than the revenues earned, there is a “loss”.
Below shows a sample of a statement of financial performance of a Hybrid industry.
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Beshy Mars
Income Statement
For the year ended 202X
489,863.00
Sales
Less:
Cost to Produce
Raw Materials Inventory, Beg.
Add: Raw Materials Purchases
Total
Goods
Available for sale
Less: Raw Materials Inventory,
end
Cost to produce
Gross Profit Less:
138,848.00
138,848.00
5,040.00
133,808.00
356,055.00
Operating Expenses
Salaries and Wages
Rent
Depreciation
Utilities
Selling Expense
Taxes and Licenses
Store Supplies
Miscellaneous
Marketing Expense
181,440
12,000.00
3,252.21
11,520.00
15,968.00
5,000.00
465.00
1, 000
1,040.00
TOTAL EXPENSE
230,685.21
Net Income
125,369.79
What comprises a statement of Changes in Equity?
Statement of Changes in Equity or Statement of retained Earnings or Statement of
Owner’s Equity
-is a statement that summarizes the changes in equity for a given period of time.
This statement shows the details of reserves of the company. It reflects the reconciliation
of the beginning and ending balances of an entity’s equity within a given period. The General
structure in calculating the equity end of a simple entity is that the owner’s equity beginning is
increased by the profit earned for period and decreased by the owner’s withdrawal.
Below shows a sample of a statement of financial performance of a merchandising industry.
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Marsinamak Distributors
Statement of Changes in Equity
For the Year Ended 202X
S. Pelingon, Capital Beginning
Add: Profit
Total
Less: Drawings
S. Pelingon, Capital End
P 400,000.00
25,000.00
425,000.00
20,000.00
405,000.00
What comprises a Statement of Cash Flows?
This statement provides information about cash inflows (Receipts) and cash outflows (payments)
of an entity for a given period of time which are being into three activities.
Operating activities- the inflows and outflows of cash from the normal operating activities of
the business.
Investing activities- the inflows and outflows of cash from the sale or purchase of assets other
than inventory
Financing Activities- the inflows and outflows of cash from the owners and creditors of the
enterprise.
There are two ways to present the statement of cash flows. It can be presented using a direct or
indirect method.
In this instance, the illustration shown below uses an indirect method.
Mars Food Express
Statement of Cash Flows
For the Year Ended 202X
Cash Balance, beg
0
Cash Receipts
Cash Sales
L.D. Relationship, Capital
Total Cash Available for use
489,863.00
41,842.00
531,705.00
Cash Outlay
Purchase of Fixed Asset
Purchase of Raw
Materials
Salaries and Wages
Rent
Utilities
18,474.00
138,848.00
181,440.00
12,000.00
11,520.00
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Selling Expense
Taxes and Licenses
Store Supplies
Miscellaneous
Marketing Expense
Cash Balance, end
15,968.00
5,000.00
465.00
1,000.00
1,040.00
146,950.00
Let’s make this!
Look for a Financial Statement of a company. Secure a copy of it by downloading or
photocopying it. You may download it through Securities and Exchange Commission
Website or if you don’t have internet access, you may look for a copy in different books
or business magazines.
What to do?
List down the type of financial statements and observe its content. In a separate sheet
of paper, List down your observation on each financial statement, its use and how it
differs from each other.
Arrival
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because more great destinations are waiting to discover ahead. You can now put a
mark in your map as 6/8 completed.
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LESSON 7: ELEMENTS OF FINANCIAL STATEMENT AND ACCOUNTING
EQUATION
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Learn and describe the basic and expanded accounting equation.
TIME FRAME
This lesson is expected to be done with four-hour mark.
WHAT IS THIS LESSON ABOUT?
Hello! Welcome to your seventh destination. Today you will deal
about the Basic accounting equation. This is destination is an important matter in
basic accounting. Don’t forget to take down notes on this. Good luck!
Let’s do this!
Let us say, A=B+C,
Given: B=3 , C=2
Find, A = ?
What if,
Asset = Liabilities + Owner’s Equity
or
A=L+OE
Liabilities = ?,
Owner’s Equity = ?
Let us Think!
1. Why there should be a balance in Assets as to Liabilities and Owner’s Equity?
2. If Asset increases, what will happen to Liabilities and Owner’s Equity?
3. If there is an increase in Liabilities, what will happen to Assets?
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Let Us Learn!
Elements of Financial Statements
The elements of financial statement are directly related to measurement of
financial condition in the balance sheet are Assets, Liabilities and Owner’s Equity
while the elements that are directly related to measurement of performance in the
income statement are Income and Expenses.
Balance Sheet or Statement of Financial Position or Statement of Financial
Condition – is a statement which shows the financial condition of the business as of a
given date. It shows the assets, liabilities and owner’s equity which are called
“accounting values”.
Assets- are things of value or rights that are owned and used by the business in
the conduct of its operations such as cash, cash and cash equivalents, merchandise
inventory, supplies inventory, prepaid expenses, accounts collectible by the business
which we termed “receivable”, furniture and fixtures, machinery and equipment,
building, land etc.
Liabilities- are debts or financial obligations of the business that are payable in
cash or in some kind of assets such as accounts payable, notes payable, salaries payable,
mortgage payable, etc.
Owner’s equity- this refers to money or value of property put by the proprietor
into the business to start with which refers to “initial investment”.
Income Statement or Statement of Financial Performance – is a statement which
shows the “results of operation” of the business for a given period of time.
The elements directly related to the measurement of performance in the income
statement are the income and expense.
Revenue – Expenses = Profit or Loss
The business makes “profit” if the revenue earned is bigger than the expenses incurred.
“Loss” if the expenses incurred is bigger than the income earned during the period.
THE ACCOUNTING EQUATION
ASSETS
=
LIABILITIES
+
A
=
L
+
OWNER’S EQUITY
OE
EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + Owner’s equity(+revenue-expenses)
The balance sheet holds the basis of the accounting equation:
1. Locate the company’s total assets on the balance sheet for the period.
2. Total all liabilities, which should be a separate listing on the balance sheet.
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3. Locate total equity and add the number to total liabilities.
4. Total assets will equal the sum of liabilities and total equity.
Let us illustrate!
From the basic accounting equation above, let us consider this balance sheet.
Assets= P170,000
Liabilities= P120,000
Owner’s Equity= P50,000
If we calculate the right side of the accounting equation, we arrive at liabilities plus
owner’s equity (P120,000 + P50,000 = P170,000) which matches the value of the
assets.
Let’s make this!
Two students were discussing and arguing about the use and significance of the
equation A = L + OE. They later agreed and came up with the same understanding as
follows:
1. That the equation A=L+OE is understood to mean that the Assets should always
equal the Liabilities plus Owner’s Equity.
Give your comments.
Fill in the amount of the missing element of financial position and financial
performance.
Assets
=
Liabilities
+
Owner’s Equity
a.
760,000
360,000
?
b.
860,000
?
592,000
c.
?
108,000
760,000
d.
626,600
376,240
?
e.
?
800,000
(100,000)
f. Jimmy Bundoc recording company has an asset of P600,000 and owner’s equity of
P400,000.
g. Agot Isidro acting studio has liabilities of P147,000 and owner’s equity of P235,500.
Elements of Financial Performance
h. An advertising agency has expenses of P163,000 and profit of P42,000.
i. A medical practitioner has income of P737,000 and profit of P168,000.
j. A consultant has income of P362,000 and loss of P20,000.
Arrival
You’re a fast learner! Congratulations once again. You are done with lesson seven.
Hope you enjoyed this lesson because more great lessons are waiting ahead. 7/8
completed. You’re a step closer to accomplish your first continent tour.
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LESSON 8: COMMONLY USE ACCOUNT TITLES
LEARNING OUTCOMES
At the end of the lesson, the learners will be able to:
Know the different elements of a financial statements and account titles.
Determine the account titles to be used in every transaction for journalizing.
TIME FRAME
This lesson is expected to be done within 2 hours.
WHAT IS THIS LESSON ABOUT?
Hello! Welcome to your last destination of your first continent tour. In
this destination, you will know the different account titles. Try to familiarize these
account titles and you will certainly appreciate this accounting tour. Enjoy!
Let’s do this!
Identify from the list of words below the account titles use for the statement of financial
position (balance sheet) and statement of financial performance (income statement)
Land, Sales, Cash, Rent Expense, Cost of Sales, Assets, Accounts Payable, Supplies
Expense, Supplies, Accounts Receivable, Petty Cash Fund, Gross Profit, Depreciation
Expense
Balance Sheet
Income Statement
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Let us Think!
1. How will the accounts could affect the financial statement as a whole?
2. Why there is a need to identify these accounts according to its classification?
Let Us Learn!
Account titles- are identifications or brief description of items that fall to the same
kind, class or nature.
The following are the commonly used Account Titles
ASSETS - Classified into two: Current Assets and Non-Current Assets
Current assets – refers to all assets that are expected to be realized, sold or consumed
within the enterprise’s normal operating cycle.
Cash- the account title to describe money, either in paper or in coins and
money substitutes like check, postal money orders, bank drafts and treasury warrants.
(Cash on Hand, Cash in Bank)
Petty cash fund- the account title for money placed and set aside for
petty or small expense.
Cash equivalents- short term and highly liquid instruments that are
readily convertible into cash and they present insignificant risk of changes in values
because of changes in interest rates.
Notes receivable- this is a promissory note that is received by the
business from the customer arising from rendering of services, sale of merchandise, etc.
Accounts receivable- the account title for amounts collectible arising
services rendered to a customer or client on credit or sale of goods to customers on
account.
Estimated uncollectible accounts – this is an asset offset or a contra
asset account to accounts receivable.
Accrued income- the amount of income earned but not yet collected.
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Advances to employees – the account title for amounts collected from
employees allowing them to make cash advances which are deductible against their
salaries or wages.
Inventories – these are assets which are held for sale in the ordinary
course of business; in the process of production for such sale; or in the form of materials
or supplies to be consumed in the production process or in the rendering of services.
Prepaid expenses- this 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 – account title for cost of stationery and other supplies
purchased for use but are left on hand and still unused.
Non-Current Assets- these are all other assets not classified as current should be
classified as non-current assets.
Property Plant and Equipment – are 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.
1. Land – account title for the site where the building used as
office or store is constructed.
2. Building – account title for finished construction owned by
the business where operations and transactions took place.
3. Machinery and equipment- includes calculators,
typewriters, adding machines, computers, steel filing
cabinets and the like.
4. Furniture and fixtures- includes chairs, tables, counters,
display cases and the like.
5. Accumulated depreciation- this is an asset offset or contraasset account.
6. Intangible assets- these are identifiable non-monetary assets
without physical existence.
Liabilities
Current liabilities- are financial obligations of the enterprise which are
expected to be settled in the normal operating cycle; due to be settled within one year
from the balance sheet date.
Accounts payable- a financial obligation of an enterprise that constitutes an
oral or verbal promise to pay.
Notes payable- an account payable in nature but only the obligation is
evidenced by a promissory note.
Accrued expenses- these are expenses incurred by the enterprise but are not yet
paid.
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Unearned income- this is an account title for an income collected or received
on advance and is not yet considered as “earned”.
Non-current liabilities- are financial long-term obligations of the enterprise
which are due and payable for more than one year. This usually occurs in a corporate
form of business organization.
Notes-payable (long-term) – same nature with the notes payable short-term
but only, requires the payment for more than a year.
Mortgage payable- a financial obligation of the enterprise which requires a
fixed or tangible property to be pledged as a collateral to ensure payment.
Owner’s Equity or Capital – is the residual interest in the assets of the enterprise after
deducting all its liabilities. It is increased when there is profit or additional contribution
by the owner.
Withdrawal- indicated by the use of the owner’s name with the word drawing
or personal written after the name which is separated by a comma.
Income and 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 or REVENUE
Sales-refers to the account title for merchandise sold either in cash or on account
Sales return and Allowances-this is a reduction from sales account for goods that were
sold but were returned by the buyer for bad order or not conforming with the order.
Sales Discounts-refers to discounts given to buyers for early payment of merchandised
purchased on account or payment within the discount terms.
Service Income-In general, this is the account title used for all types of income derived
from rendering of service.
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 dentists, Medical Fees Income for Doctors, etc.
Rental income-for incomed earned n buildings, space or other properties owned and
rented out by the business as the main line of its activity.
Interest Income-for income received by the business arising from an amount of money
borrowed by the customer and is usually covered by a promissory note.
Miscellaneous Income-for incomed earned by the business which is not the main line
of its activity and could not clearly classified.
COST
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Cost of Sales or Cost Good Sold-refers to cost to produce and sell the merchandise
(under the inventory system).
Freight-In – refers to transportation cost incurred in buying goods.
Purchases-the account title for “merchandise” purchased under the periodic inventory
system.
Purchase Returns and Allowances-refers to cost of merchandise that were purchased
but returned to the suppliers for bad order or does not conform with the specifications
(Periodic perpetual inventory System).
Purchase Discounts- refers to discount availed for early payment of merchandise
purchased.
EXPENSES
Freight-out – refers to transportation cost of merchandise sold.
Supplies Expenses-this represents cost of supplies that were used and consumed that
bears specific titles as office supplies expense, store supplies expense, shop supplies
expense, etc.
Rent Expense- for the paid or incurred for use of property, usually premises.
Repairs and Maintenance -for expenses incurred in repairing or servicing the
buildings, machineries, vehicles, equipment, etc., which are owned by the business.
Salaries Expense- for the compensation given to employees of a business.
Uncollectible Accounts- for the anticipated loss that 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.
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 of 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.
Miscellaneous Expense- any amount paid as expense which is not significant enough
to warrant a particular classification.
Let’s make this!
Classifying Accounting Values
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and activities/discussions that are more appropriate to the learners in distance learning.
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Classify the following account titles as to Assets, Liabilities and Owner’s Equity.
1. Cash in Bank
____________
2. Unearned Retainer Income ____________
3. Cash on Hand
____________
4. Insurance Expense
5. Petty Cash Fund
____________
____________
6. Commission Income
____________
7. Repairs and Maintenance ____________
8. Unused office supplies
____________
9. Advances to Employees ____________
10. Accounts Payable
____________
11. Notes Payable
____________
12. Interest Income
____________
13. Office Supplies Expense ____________
14. Interest Expense
15. Land
____________
____________
Arrival
Captain Acct: “Seat belt sign is off. You can now safely remove your seat belts”. Thank
you for choosing Entrep Air your airline of choice. The next continental tour will be
the exciting ones. It’s the core of accounting activities. Expect to be amazed by its
different unique destinations. Have a great day ahead!
Module Summary
Module one talks about the introduction of accounting, business and management. We
discussed the definition of accounting and its importance to business of which we were
convinced about the need to study and practice accounting. We also discussed the
importance of keeping business records, the forms of business ownership with their
capital structure as well as the nature of business that you might pursue in the future. In
the middle part, the Generally Accepted Accounting Principles and accounting
assumptions were introduced, its relevance was also discussed. Lastly, the financial
statements were introduced as well as the basic accounting equation and commonly
used account titles.
Please feel free to add/suggest some contents you think could effectively maximize the time,
and activities/discussions that are more appropriate to the learners in distance learning.
Thank you for the actionable feedback! Much appreciated.