ACCOUNTING AND
THE BUSINESS
ENVIRONMENT
UNIVERSITY OF THE PHILIPPINES VISAYAS
TACLOBAN COLLEGE
DIVISION OF MANAGEMENT
BA 99.1 FUNDAMENTALS
OF
ACCOUNTING THEORY AND PRACTICE I
LEARNING OBJECTIVES:
1.
Understand the nature of business and the
role of accounting in business.
2.
Differentiate the branches of accounting.
3.
Describe the users of accounting information
and
why
accounting
information
is
important to them.
4.
Classify the forms of business organization
and the nature of business.
LEARNING OBJECTIVES:
5.
Describe
the
generally
accounting principles.
accepted
6.
Discuss the framework for the preparation of
financial statement.
7.
Describe the accounting equation.
8.
Classify the elements of the financial
statements and their sub-elements.
LEARNING OBJECTIVES:
9.
Illustrate a chart of accounts.
10. Use
the accounting equation to analyze
business transactions.
11. Illustrate
the interrelationship of the basic
financial statements.
ORGANIZATION
5
 An
organization is a social entity that is
structured to accomplish an overall, common
goal or set of goals.
NON-PROFIT
ORGANIZATION
BUSINESS ORGANIZATION
LO1: Understand the nature of business and the role of accounting in business.
GOVERNMENT ORGANIZATION
ORGANIZATION
 An
organization utilizes resources to attain its
objectives.
 Resources,
however, are limited.
LO1: Understand the nature of business and the role of accounting in business.
6
ACCOUNTING
 Accounting
business.
 It
is said to be the language of
is an information system.
 It
is a way to convey information about a
business to users.
LO1: Understand the nature of business and the role of accounting in business.
7
ACCOUNTING
 The
earliest form of accounting can be
traced back to ancient Mesopotamia.
 Its
early development is closely related to
developments in writing, counting, and
money.
 Luco
Pacioli, known as the father of
accounting, first described the system of
double-entry bookkeeping used by Venetian
merchants.
LO1: Understand the nature of business and the role of accounting in business.
8
ACCOUNTING
 The
industrial revolution has necessitated the
need for more advanced accounting
systems, and accounting has evolved to
what it is today.
LO1: Understand the nature of business and the role of accounting in business.
9
ACCOUNTING
 It
is a service activity. Its function is to provide
quantitative information, primarily financial in
nature, about economic entities that is
intended to be useful in making economic
decisions.
American Institute of Certified Public
Accountants
LO1: Understand the nature of business and the role of accounting in business.
10
ACCOUNTING
 The
objective of accounting is to provide
relevant, timely information used in making
decisions about how to allocate scarce
resources.
 Although
accountants place much emphasis
on reporting what has already occurred, this
past information is intended to be useful in
making economic decisions about the future.
LO1: Understand the nature of business and the role of accounting in business.
11
THE ACCOUNTING PROCESS
The accounting process includes
the bookkeeping function.
LO1: Understand the nature of business and the role of accounting in business.
12
THE ACCOUNTING PROCESS
LO1: Understand the nature of business and the role of accounting in business.
13
PRACTICE AREAS OF ACCOUNTING
 Accounting,
being a diverse field, has the
following general practice areas:
1.
Financial Accounting
 This
area of accounting deals with the
recording of business transactions leading to
the preparation of general-purpose financial
statements.
 It
does not pertain to a specific user group.
LO2: Differentiate the branches of accounting.
14
PRACTICE AREAS OF ACCOUNTING
2.
Management Accounting
 The
provision of accounting information for use
by managers in planning and controlling
operations.
 Reports
are not publicly available. They are for
internal uses only.
 Does
not follow any general financial
reporting framework. It is largely dependent
on the information needs of internal users.
LO2: Differentiate the branches of accounting.
15
PRACTICE AREAS OF ACCOUNTING
FINANCIAL vs. MANAMENT ACCOUNTING
LO2: Differentiate the branches of accounting.
16
PRACTICE AREAS OF ACCOUNTING
3.
Government Accounting
 The
practice of accounting within the coffers
of government.
 Any
CPA who holds or is appointed to a
position in government or any GOCC whose
civil service eligibility requires that the holder of
the position be a Certified Public Accountant.
(RA 1080 eligibility)
LO2: Differentiate the branches of accounting.
17
PRACTICE AREAS OF ACCOUNTING
4.
Auditing
 The
work of an auditor starts when the work of
an accountant ends.
 Auditing
is the independent verification of
financial transactions and accounting reports
to check their fairness and reliability.
 After
financial reports are prepared, they
have to be examined to ensure that they do
not present a distorted picture to the general
public.
LO2: Differentiate the branches of accounting.
18
PRACTICE AREAS OF ACCOUNTING
5.
Tax Accounting
 It
is a specialized field in accounting that
involves the preparation of tax returns for the
BIR.
 This
also includes tax planning to ensure the
proper payment of taxes, while at the same
time trying to minimize the amount of taxes
paid.
LO2: Differentiate the branches of accounting.
19
PRACTICE AREAS OF ACCOUNTING
6.
Cost Accounting
 This
involves the accumulation of the costs of
inputs as well as other production costs for
manufacturing entities in order to ensure the
proper reporting of amounts in the financial
statements.
 Relates
to product costing.
LO2: Differentiate the branches of accounting.
20
PRACTICE AREAS OF ACCOUNTING
7.
Academe/Education
 This
involves CPAs in educational institutions
involved in the teaching of accounting,
auditing, management advisory services,
finance, business law, taxation, and other
technically-related subjects.
 In
HEIs (tertiary), this practice area is regulated
by the PRC – Board of Accountancy.
LO2: Differentiate the branches of accounting.
21
PRACTICE AREAS OF ACCOUNTING
8.
Accounting Research
 This
may either refer to practitioners or
academicians.
 Accounting
practitioners take the form of
consultants who are tasked to research on the
effects of economic events and its impacts to
the company.
 Academicians,
on the other hand, research
on all aspects affecting the profession.
LO2: Differentiate the branches of accounting.
22
DECISION MAKERS: THE USERS OF
ACCOUNTING INFORMATION
Stakeholders
 Parties
who have an interest in an entity,
whether direct or indirect.
 They
are generally the users of financial
information.
 They
can be classified as either internal or
external.
LO3: Describe the users of accounting information and why accounting information is important to them.
23
DECISION MAKERS: THE USERS OF
ACCOUNTING INFORMATION
©Intermediate Accounting 19e Stice & Stice
LO3: Describe the users of accounting information and why accounting information is important to them.
24
USERS AND THEIR INFORMATION
NEEDS
Common Questions Asked
User
1. Can we afford to give our
employees a pay raise?
Human Resources
2. Did the company earn a
satisfactory income?
Investors
3. Should any product lines be
eliminated?
Management
4. Is cash sufficient to pay dividends
to stockholders?
Finance
5. What price for our product will
maximize net income?
Marketing
6. Will the company be able to pay
its debts as they become due?
Creditors
LO3: Describe the users of accounting information and why accounting information is important to them.
25
FORMS OF BUSINESS ORGANIZATIONS
1.
Sole Proprietorship

A business that is owned by a single individual
who is usually the manager.

For legal purposes and for tax purposes, the
business and the owner are considered the
same.

The owner absorbs all profits and losses of the
business.
LO4: Classify the forms of business organization and the nature of business.
26
FORMS OF BUSINESS ORGANIZATIONS
1.
Sole Proprietorship

The business owner is personally responsible or
liable for all of the debts and obligations of
the business.

This is the form of business organization
common to small enterprises.
LO4: Classify the forms of business organization and the nature of business.
27
FORMS OF BUSINESS ORGANIZATIONS
2.
Partnership
A
business owned and operated by two or
more natural persons who bind themselves to
contribute money, property, or industry to a
common fund, with the intention of dividing
profits among themselves.
 The
acts of the partners (owners) bind the
partnership (business).
LO4: Classify the forms of business organization and the nature of business.
28
FORMS OF BUSINESS ORGANIZATIONS
3.
Corporation
A
corporation is a separate legal entity
created by operation of law.
 This
business is owned by many individuals
referred to as stockholders/shareholders.
 Ownership
is in the form of shares of stocks.
 This
is the most complex form of business
organization.
LO4: Classify the forms of business organization and the nature of business.
29
FORMS OF BUSINESS ORGANIZATIONS
4.
Cooperatives
A
cooperative is a duly registered association
of persons, with a common bond of interest,
who have voluntarily joined together to
achieve their social, economic, and cultural
needs and aspirations by making equitable
contribution
to
the
capital
required,
patronizing their products and services, and
accepting a fair share of risks and benefits of
the undertaking.
LO4: Classify the forms of business organization and the nature of business.
30
FORMS OF BUSINESS ORGANIZATIONS
4.
Cooperatives
 Cooperatives
enjoy incentives that are
otherwise not available to other forms of
business organizations.
 They
may be formed for the purpose of
lending, housing, utilities provision, among
others.
LO4: Classify the forms of business organization and the nature of business.
31
TYPES OF BUSINESS ACTIVITIES
1.
Service
A
service firm sells services to its customers. In
other words, it sells time.
 It
may also make its facilities available for a
fee.
 Common
types of service businesses include
law firms, accounting firms, physical therapy
offices, painting companies, and automotive
repair shops.
LO4: Classify the forms of business organization and the nature of business.
32
TYPES OF BUSINESS ACTIVITIES
2.
Merchandising
A
merchandising or trading business sells
physical goods or products to its customers.
A
merchandise business may be either a
wholesale business or a retail business.
A
wholesale business is a business that sells
products to other businesses for resale.
LO4: Classify the forms of business organization and the nature of business.
33
TYPES OF BUSINESS ACTIVITIES
2.
Merchandising
A
retail business
is a business that sells
products to the final consumer of the product.
 Common
types of merchandise businesses
include grocery stores, automobile dealers,
and department stores.
LO4: Classify the forms of business organization and the nature of business.
34
TYPES OF BUSINESS ACTIVITIES
3.
Manufacturing

A manufacturing business produces the
physical goods that it sells to its customers.

The common types of manufacturing
businesses include food manufacturers, the
makers
of
clothing,
and
soft
drink
manufacturers.
LO4: Classify the forms of business organization and the nature of business.
35
ACCOUNTING CONCEPTS AND
PRINCIPLES
 The
Philippines generally follows International
Financial Reporting Standards (IFRS).
 The
current accounting standard-setting
body in the Philippines is the Financial
Reporting Standards Council (FRSC).
LO5: Describe the generally accepted accounting principles.
36
ACCOUNTING CONCEPTS AND
PRINCIPLES
Accounting
Standards
Council
(ASC)
Through RA 9298, it was
replaced by
Established in 1981
The bases for recording
business transactions
and preparing financial
statements.
LO5: Describe the generally accepted accounting principles.
Financial Reporting
Standards Council
(FRSC)
Current accounting standardsetting body in the Philippines
Philippine Financial
Reporting
Standards (PFRS)
Philippine
Accounting
Standards (PAS)
37
FUNDAMENTAL CONCEPTS IN
ACCOUNTING
Entity Concept
 The
business enterprise is separate from
owners, managers, and employees who form
part of the firm.
LO5: Describe the generally accepted accounting principles.
38
FUNDAMENTAL CONCEPTS IN
ACCOUNTING
Periodic Reporting
 Meaningful
financial information about an
entity can be provided for periods of time that
are shorter than the life of an entity.
 Usually
equal time periods for purposes of
comparability.
 The
most common reporting period is annual.
 Calendar
Year vs. Fiscal Year
LO5: Describe the generally accepted accounting principles.
39
FUNDAMENTAL CONCEPTS IN
ACCOUNTING
Unit of Measure
 In
order for accounting to present useful
information, it must be able to express
information in a common unit of measure.
LO5: Describe the generally accepted accounting principles.
40
BASIC PRINCIPLES IN ACCOUNTING
Objectivity Principle
 Accounting
records are based on the most
reliable data available for them to be as
useful as possible.
 Reliable
data are those that can be verified.
LO5: Describe the generally accepted accounting principles.
41
BASIC PRINCIPLES IN ACCOUNTING
Historical Cost Principle
 Acquired
assets should be recorded at their
actual ACQUISITION COST and not at what
management thinks they are worth at
reporting date.
LO5: Describe the generally accepted accounting principles.
42
BASIC PRINCIPLES IN ACCOUNTING
Accrual
 The
effects of transactions are recorded as
they occur and not as cash is received or paid
and they are recorded in the period which
they relate to.
LO5: Describe the generally accepted accounting principles.
43
RECOGNITION PRINCIPLE
 To
recognize is to incorporate in the financial
statements an item that meets the ff. criteria
for recognition:
 It
is probable that any future economic
benefit associated with the item will flow
to/from the enterprise!
 The
item has a cost/value that can be
measured with reliability!
PROBABLE & RELIABLY MEASURABLE
LO5: Describe the generally accepted accounting principles.
44
ACCRUAL ACCOUNTING
Cora asks:
45
Manny buys a TV from Sony
Date of purchase: May 3, 2013
Date of payment: May 15, 2013
When will Manny
record the purchase
of the TV from Sony?
Manny
I will record the
purchase on
May 3, 2013.
Even though I paid Sony on May 15, 2013, under the
accrual concept of accounting, I should record my
purchase at the date where the transaction occurred
and not on the date that I paid Sony.
LO5: Describe the generally accepted accounting principles.
BASIC PRINCIPLES IN ACCOUNTING
Adequate Disclosure
 All
relevant information that would affect
user’s understanding of financial information
should be disclosed in the financial
statements.
LO5: Describe the generally accepted accounting principles.
46
BASIC PRINCIPLES IN ACCOUNTING
Materiality
 Materiality
relevance.
is an entity-specific aspect of
 Financial
reporting is only concerned with
information that is significant enough to affect
decisions.
 Materiality
is dependent on the size or nature
of the transaction involved.
LO5: Describe the generally accepted accounting principles.
47
BASIC PRINCIPLES IN ACCOUNTING
Materiality
A
₱100 bribe is MATERIAL while a ₱100 error in
the recording of a building which costs ₱10
million is not.
LO5: Describe the generally accepted accounting principles.
48
BASIC PRINCIPLES IN ACCOUNTING
Consistency Principle
 Accounting
methods should not change from
period to period so as to ensure uniformity and
comparability.
 Changes
are justifiable as long as they are
disclosed in the financial statements.
LO5: Describe the generally accepted accounting principles.
49
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
 Under
the latest version (2010) of the IFRS
Conceptual
Framework
for
Financial
reporting, the fundamental qualitative
characteristics are:
Relevance
Faithful
Representation
LO6: Discuss the framework for the preparation of financial statement.
50
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Relevance
 Relevant
financial information is capable of
making a difference in decisions made by
users.
 The
principal ingredients or relevance are the
predictive
and
confirmatory
roles
of
information.
LO6: Discuss the framework for the preparation of financial statement.
51
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Relevance
 Predictive
Role – information is used as an
input to predict future outcomes.
 Confirmatory
Role – information can confirm
or correct earlier expectations.
LO6: Discuss the framework for the preparation of financial statement.
52
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Faithful Representation
 Financial
information must represent faithfully
what it purports to represent.
 In
determining faithful representation, we
consider
information’s
completeness,
neutrality, and freedom from error.
LO6: Discuss the framework for the preparation of financial statement.
53
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Faithful Representation
 Completeness
be complete.
 Neutrality
– information presented must
– free from any biases.
 Freedom
from error – no errors or omissions in
the performance of processes used to record
financial information. This does not mean that
financial information is perfect.
LO6: Discuss the framework for the preparation of financial statement.
54
ENHANCING QUALITATIVE
CHARACTERISTICS
 Under
the latest version (2010) of the IFRS
Conceptual
Framework
for
Financial
reporting,
the
enhancing
qualitative
characteristics are:
Comparability
Verifiability
Timeliness
Understandability
LO6: Discuss the framework for the preparation of financial statement.
55
ENHANCING QUALITATIVE
CHARACTERISTICS
Comparability
 Information
is more useful if it can be
compared with information about other
entities and with similar information within the
same entity covering another period.
LO6: Discuss the framework for the preparation of financial statement.
56
ENHANCING QUALITATIVE
CHARACTERISTICS
Verifiability
 This
ensures that information represent
faithfully the economic phenomena it purports
to represent.
 Verifiability
means
that
different
knowledgeable and independent observers
could reach consensus (not necessarily
complete agreement) that a particular
depiction is faithful representation.
LO6: Discuss the framework for the preparation of financial statement.
57
ENHANCING QUALITATIVE
CHARACTERISTICS
Timeliness
 Information
must be available to decisionmakers in time to be capable of influencing
their decisions.
LO6: Discuss the framework for the preparation of financial statement.
58
UNDERLYING ASSUMPTION IN
ACCOUNTING
Going Concern
 In
the absence of any proof to the contrary,
an entity will continue its normal operations in
the foreseeable future.
LO6: Discuss the framework for the preparation of financial statement.
59
ACCOUNTING EQUATION
 The
accounting equation is the basic tool of
accounting, measuring the resources of the
business and the claims to those resources.
LO7: Describe the accounting equation.
60
ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
LO7: Describe the accounting equation.
61
ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
The rights of creditors or the
debts of the business.
Creditors’ claims against a
business’ assets
LO7: Describe the accounting equation.
62
ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
The rights of the
owners on a
business’ assets
LO7: Describe the accounting equation.
63
ASSETS
 Assets
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.
LO8: Classify the elements of the financial statements and their sub-elements.
64
ASSETS
65
“controlled by the enterprise”
Control is the ability to obtain the economic
benefits and to restrict others from access.
(ex. Your pen which you may or may not lend
to your seatmate!)
LO8: Classify the elements of the financial statements and their sub-elements.
ASSETS
66
“result of past events”
An event must have happened already before
an asset can arise!
(ex. A pen at NBS is not your asset unless you
have already purchased it!)
LO8: Classify the elements of the financial statements and their sub-elements.
ASSETS
67
“future economic benefits”
In a business, this is the prospective receipt of
cash flow!
(ex. Motorcycle = to deliver pizzas = sale of
pizza = cash receipt)
LO8: Classify the elements of the financial statements and their sub-elements.
LIABILITIES
 Liabilities
are present obligations arising from
past events, the settlement of which is
expected to result in an outflow from the
enterprise of resources embodying economic
benefits.
LO8: Classify the elements of the financial statements and their sub-elements.
68
LIABILITIES
69
“obligations”
May be legal or not.
Something the enterprise owes to others!
LO8: Classify the elements of the financial statements and their sub-elements.
OWNER’S EQUITY
 The
money provided to the business through
an initial investment by the owners or the
retention of profits by the business.
 This
is the residual interest of owners in the
assets of the business after deducting all of its
liabilities.
 Made
up of the owner’s investment,
withdrawal, and net income or net loss for the
period.
LO8: Classify the elements of the financial statements and their sub-elements.
70
OWNER’S EQUITY
Investments
 These
are the assets put into the business by its
owner.
 Increases
owner’s equity.
Withdrawal

These are the assets removed from the business
by the owner.

Decreases owner’s equity.
LO8: Classify the elements of the financial statements and their sub-elements.
71
OWNER’S EQUITY
LO8: Classify the elements of the financial statements and their sub-elements.
72
INCOME
 Income
is an increase in economic benefits
during the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in increases
in equity, other than those relating to
contributions
from
equity
participants
(owners).
LO8: Classify the elements of the financial statements and their sub-elements.
73
INCOME
74
 An
income item may either be a revenue or
a gain.
 Revenues
are income earned (by performing
services or selling goods) by the company in
the usual course of business.
 Gains
are income earned from peripheral
activities outside the usual course of business.
 Revenues
and gains increase owner’s equity.
LO8: Classify the elements of the financial statements and their sub-elements.
EXPENSES
 Expenses
are decreases in economic benefits
during the accounting period in the form of
outflows or depletions of assets or incurrences
of liabilities that result in decreases in equity,
other than those relating to distributions to
equity participants (owners).
LO8: Classify the elements of the financial statements and their sub-elements.
75
EXPENSES
76
 Expenses
are the costs that the company
incurs in carrying on operations in its effort to
earn revenue.
 Expenses
decrease owner’s equity.
LO8: Classify the elements of the financial statements and their sub-elements.
ACCOUNT
 The
accounting equation contains three
parts: assets, liabilities, and equity. Each part
contains accounts.
 An
account is the detailed record of all
increases and decreases that have occurred
in an account during a specific period.
LO8: Classify the elements of the financial statements and their sub-elements.
77
ASSETS
LO8: Classify the elements of the financial statements and their sub-elements.
78
LIABILITIES
LO8: Classify the elements of the financial statements and their sub-elements.
79
OWNER’S EQUITY
LO8: Classify the elements of the financial statements and their sub-elements.
80
CHART OF ACCOUNTS
A
chart of accounts is used to organize a
company’s accounts.
A
company decides on its own chart of
accounts.
LO9: Illustrate a chart of accounts.
81
CHART OF ACCOUNTS
LO9: Illustrate a chart of accounts.
82
BUSINESS TRANSACTIONS
A
transaction warranting recording is any
event that affects the financial position of the
business and can be measured with faithful
representation.
Is this a transaction?
Buying a computer for
the office for P2,000 cash
x Hiring a new employee
LO10: Use the accounting equation to analyze business transactions.
83
OPERATING THE BUSINESS
 To
help better understand the accounting
equation, let us look into how a business
operates.
 To
operate, businesses need to acquire
money or resources and use them to make a
profit.
LO10: Use the accounting equation to analyze business transactions.
84
OPERATING THE BUSINESS
A firm acquires money (an asset) by:
 Borrowing
money from lenders or creditors
(called liabilities).
 Getting
owners to put in their money (called
owners’ equity) in exchange for a percentage
of ownership.
LO10: Use the accounting equation to analyze business transactions.
85
OPERATING THE BUSINESS
Liabilities
Liabilities
Money
used
to
Sources
of
Financing
Owners’
Equity
86
Owners’
Equity
LO10: Use the accounting equation to analyze business transactions.
Purchase
Assets and
Hire
Employees
TRANSACTION ANALYSIS
 Transactions
can be analyzed in 3 steps:
Step 1: Identify the account and account type.
Step 2: Decide if each account increases or
decreases.
Step 3: Determine if the accounting equation is
in balance.
LO10: Use the accounting equation to analyze business transactions.
87
TRANSACTION ANALYSIS
Transaction 1—Owner Contribution
 Sheena
Bright contributes $30,000 cash to start
a new business as a sole proprietorship named
Smart Touch Learning on November 1,2016.
The effect of this transaction on the
accounting equation is:
LO10: Use the accounting equation to analyze business transactions
88
TRANSACTION ANALYSIS
Transaction 2—Purchase of Land for Cash
 Smart
Touch Learning purchases land for an
office location, paying cash of $20,000.
LO10: Use the accounting equation to analyze business transactions.
89
TRANSACTION ANALYSIS
Transaction 3—Purchase of Office Supplies on
Account
 Smart
Touch Learning buys office supplies on
account, which is a liability called Accounts
Payable, agreeing to pay $500 within 30 days.
LO10: Use the accounting equation to analyze business transactions.
90
TRANSACTION ANALYSIS
Transaction 4—Earning of Service Revenue for
Cash
 Smart
Touch Learning earns service revenue
by providing training services for clients. The
business earns $5,500 of revenue and collects
this amount in cash.
LO10: Use the accounting equation to analyze business transactions.
91
TRANSACTION ANALYSIS
Transaction 5—Earning of Service Revenue on
Account
 Smart
Touch Learning performs a service for
clients who do not pay immediately. The
clients promise to pay $3,000 within one
month. This promise is an asset called
accounts receivable.
LO10: Use the accounting equation to analyze business transactions.
92
TRANSACTION ANALYSIS
Transaction 6—Payment of Expenses with Cash
 Smart
Touch Learning pays $3,200 in cash
expenses: $2,000 for office rent and $1,200 for
employee salaries.
LO10: Use the accounting equation to analyze business transactions.
93
TRANSACTION ANALYSIS
Transaction
7—Payment
(Accounts Payable)
 Smart
94
on
Account
Touch Learning pays $300 to the store
from which it purchased office supplies in
Transaction 3.
LO10: Use the accounting equation to analyze business transactions.
TRANSACTION ANALYSIS
Transaction
8—Collection
(Accounts Receivable)
 Smart
95
on
Account
Touch Learning now collects $2,000 from
the client from Transaction 5.
LO10: Use the accounting equation to analyze business transactions.
TRANSACTION ANALYSIS
Transaction 9—Owner Withdrawal of Cash
 Sheena
Bright withdraws $5,000 cash from the
business.
LO10: Use the accounting equation to analyze business transactions.
96
TRANSACTION ANALYSIS
LO10: Use the accounting equation to analyze business transactions.
97
FINANCIAL STATEMENTS
 How
will people use the information provided
in the example presented?
 To
address this important question, we need
financial statements.
 Financial
statements are business documents
that are used to communicate information
needed to make business decisions.
LO11: Illustrate the interrelationship of the basic financial statements.
98
FINANCIAL STATEMENTS
 There
are four basic financial statements,
namely the income statement, balance
sheet, statement of changes in equity, and
the statement of cash flows.
 For
the purpose of this short course, we will
only focus on the income statement, the
statement of changes in equitu, and the
balance sheet.
LO11: Illustrate the interrelationship of the basic financial statements.
99
FINANCIAL STATEMENTS
LO11: Illustrate the interrelationship of the basic financial statements.
100
INCOME STATEMENT
 The
income statement reports the net
income (profit) or net loss of the business for a
specific period.
 The
net income is arrived at by subtracting
expenses from revenues.
LO11: Illustrate the interrelationship of the basic financial statements.
101
INCOME STATEMENT
 If
Revenues = Expenses, there is neither a
profit nor a loss. (BREAKEVEN)
 If
Revenues > Expenses, there is a net
income/profit. This increases owner’s equity.
 If
Expenses > Revenues, there is a net loss. This
decreases owner’s equity.
LO11: Illustrate the interrelationship of the basic financial statements.
102
INCOME STATEMENT
LO11: Illustrate the interrelationship of the basic financial statements.
103
STATEMENT OF CHANGES IN EQUITY
 The
statement of changes equity shows the
changes in capital for a business entity during
a time period, such as a month, quarter, or
year.
 The
net income must first be calculated on
the income statement and then carried to
the statement of owner’s equity.
 This
also includes investments or withdrawals
by owners.
LO11: Illustrate the interrelationship of the basic financial statements.
104
STATEMENT OF CHANGES IN EQUITY
LO11: Illustrate the interrelationship of the basic financial statements.
105
BALANCE SHEET
 The
balance sheet (also called the statement
of financial position) lists a business entity’s
assets, liabilities, and owner’s equity as of a
specific date, usually the end of a month,
quarter, or year.
 The
balance sheet is a snapshot of the entity.
 An
investor or creditor can quickly assess the
overall health of a business by viewing the
balance sheet
LO11: Illustrate the interrelationship of the basic financial statements.
106
BALANCE SHEET
LO11: Illustrate the interrelationship of the basic financial statements.
107
FINANCIAL STATEMENTS PREPARATION
 The
income statement is prepared first.
 Net
income or loss is needed for the statement of
owner’s equity.
 The
statement of owner’s equity is prepared
second.
 The
net income or net loss comes from the
income statement.
 The
balance sheet is prepared last.
 The
balance in Capital
statement of owner’s equity.
LO11: Illustrate the interrelationship of the basic financial statements.
comes
from
the
108
109
THE END