STARTING UP A BUSINESS

LECTURE NOTES:

Qualitative Characteristics of Financial Statements:

A. Understandability- requires that technologies be clear, form and presentation orderly and
users have a reasonable knowledge of finance, economics and accounting to be able to
make a good assessment and sound judgment
B. Relevance-prescribes the quality of information that will make a difference and influence
a statement user to make a meaningful decision. The information must have feedback
value and predictive value. It means that the information must give the user information
of the past performance of the business which is useful in projecting what might take
place in the future. To be relevant, the FS must have the ingredient of Timeliness.
Reports must be given promptly or within the period it is needed. Materiality is another
component of relevance. It is based on the nature of the item or its size.
C. Reliability-is the degree of confidence users have on the FS. Faithful Representation and
Substance Over Form requires that information should not mislead users to think that it
is when it is not. Neutrality supports reliability in that information must be free from bias
and manipulation. Prudence requires that the accountant must exercise caution when
using estimates or information that is market by uncertainty.
D. Comparability-helps one identify changes taking place in the entity between two or more
periods

Accounting Concepts and Principles-are broad laws or rules adopted as guides to the
conduct and practice of the profession.

A. Business Entity-assumes that business enterprise is separate and distinct from

the owner or investor
B. Exchange Price or Cost Concept-assets, liabilities, revenues and expenses
should be recorded based on cost. Cost is the amount agreed in an arm’s length
transaction.
C. Going Concern-it is expected that the business will continue to exist indefinitely
D. Accrual- Items are recognized as assets, liabilities, revenues and expenses
based on the period they relate or based on the occurrence of the
transaction/event rather than when cash is received or paid.
E. Objectivity-requires that assets acquired must be verifiable and substantiated by
documents such as invoices, vouchers and official receipts
F. Disclosure-the value of information found in FS may be enhanced to help users
make informed judgment when additional notes or explanation are given
G. Reporting Period-PAS 1 par. 36-37 provides that the basic accounting period is
one year with interim reports prepared for shorter period of time such as montly,
quarterly or semi-annually.
 H. Unit of Measure and Measurement in Terms of Money- since money is the
medium of exchange, it is therefore the most practical unit of measuring financial
data
The Accounting Structure of Business

Assets=Liabilities+ Owner’s Equity

Assets=are economic resources owned by the business. It is a resource obtained from a past
event, the enterprise has control over it and future economic benefits will be received from its
use
Liabilities-are debts of the business. There is a present obligation, which rose from a past event
and settlement of which is expected to result in an outflow of economic resources.

Equity-the residual right or interest of the owner in the entity’s net assets

Effects of Business Transactions in the Accounting Elements:

Sample Problem 1:

Happy and Tour Travel Agency owned by Gomez.

March 1 Gomez opened a tour and travel agency by investing cash of P50,000 and two cars
worth P750,000.
March 3 Borrowed P100,000 from Metrobank for use in her business
March 7 Bought tables and chairs and paid cash of P45,000
March 15 VArious equipment such as electric fan, computer and typewriter were purchased on
account from National Winners for P55,000
March 18 Gomez made a cash withdrawal of P5,000 for personal use
March 20 The account due to National Winner was paid in cash

The following table summarizes the transactions on the accounting equation:

ASSETS LIABILITIE OWNER’S EQUITY

S

Date Cash Cars Equipmen Furniture Accounts Loans Gomez Capital

t Payable Payable

MARCH

1 50000 750000 800000

3 100000 100000

7 -45000 45000

15 55000 55000
 18 -5000 -5000

20 -55000 -55000

Balances 45000 750,000 55,000 45,000 100000 795,000

895,000=895,000