Week 5

Unit 2: The Basic Accounting Elements

Topics: Basic Accounting Elements
Use of Account Titles
Financial Position
Report Form of Balance Sheet

Learning Outcomes:
1. Explain basic elements of accounting
2. Explain the use of account titles
3. Prepare the financial position

Concept Digest (Discussion)

The Basic Accounting Elements

According to Mejorada, N. (2007), the basic elements of

accounting are assets, liabilities, owner’s equity, revenue,
expenses, and net income. They are also being referred to as the
basic accounting values.
1. Assets – refer to the things of value or rights owned by an
economic entity. Examples are cash, accounts receivable,
note receivable, land, building, and office equipment.
2. Liabilities – refer to the economic obligation of an
economic entity. Examples are accounts payable, notes
payable, taxes payable, and pre-collected income( unearned
income).
3. Owner’s Equity – refers to the interest of the owner in the
economic entity. It is the excess of assets over liabilities
so that it is computed as :
Assets – Liabilities = Owner’s Equity

4. Revenue – refers to the gross inflow of financial resources

arising from profit oriented activities that tend to
increase owner’s equity. Examples are service income, dental
fees, and sales.
5. Expenses – refer to outflow of financial resources arising
from profit oriented activities. These activities tend to
increase owner’s equity. In other words, to realize revenue,
expenses must be incurred. As the saying goes, “money begets
money”. Examples are salaries and wages, light and water
expense, and transportation expense.
6. Net income – refers to the excess of revenue over expense.
Net income is the net addition to owner’s equity arising
 from operations. Thus, it may be said that revenue increases
owner’s equity while expenses reduce it.
Asset, liabilities and owner’s equity are the basic elements
in measuring financial position. Revenue and expenses and net
income are the basic elements in measuring results of operation.

The Use of Account Titles

According to Mejorada, N. (2007), account titles are the

terms used to identify the specific elements of accounting to be
used in the recording process. Appropriate identification is
necessary right at the recording phase because they are to be
brought forward to accounting reports. When wrong accounts are
used, the users of accounting reports are apt to be misled and
consequently, make wrong decisions. Examples of accounts titles
are given below:
1. Assets:
1. Cash – currency (bills or coins), checks, postal money
orders and treasury warrants received by the business.
2. Accounts receivable – amounts collectible from customers
or clients. In general, this account is not supported by
promissory note, notes so that it is often referred to as
arising from sales” on open account”.
3. Merchandise inventory – goods acquired for sale and are
still unsold.
4. Notes receivable – amounts collectible that are covered
by promissory notes.
5. Prepaid expenses – expenses to be incurred yet in the
future but are already paid. Examples are prepaid rent,
prepaid interest, and prepaid insurance.
6. Unused office supplies – supplies that are still not used
as of the end of an accounting period.
7. Advances to employees – cash advances given to employees
either for business expenses to be incurred by them or
for their personal needs.
8. Land – land acquired by the business for its use.
9. Building – structures or edifices acquired for use by the
business.
10. Machinery and equipment – heavy, metallic, and movable
items that are capable of performing certain functions.
Examples are sewing machines, lathe machines, cutting
machines, and tractors.
11. Delivery equipment – wheeled items used in transporting
goods to customer. Examples are vans and trucks, In
 general, vans, trucks and cars are called “transportation
equipment”.
12. Furniture and fixtures – movable items of significant
value and acquired to improve the workable condition of a
place. Examples are tables, chairs, cabinets, electric
fans and air-conditioners.
13. Office Equipment – heavy metallic and movable items in
an office that capable of performing certain functions.
Examples are typewriters, posting machines, fax/ copier,
printer/ scanner machines.
14. IT Equipment – computers
15. Tools – handy, small and usually metallic items used in
performing certain functions such as saws, hammers,
pliers, scissors, screw drivers and jacks.
2. Liabilities
1. Accounts payable – obligations to suppliers for items
bought and not supported by promissory notes. It is
often referred to as arising from purchases “on open
account”.
2. Notes payable – obligations covered by promissory notes.
3. Expenses payable – obligations for expenses already
incurred but not yet paid. Examples are taxes payable,
salaries payable, accrued power and light expense.
3. Owner’s Equity
1. Owner capital – is the accumulated capital of the owner
in the business. If the owner is Jose P. Golez, the
account used is Jose P. Golez, Capital. At the end of the
accounting period, it is adjusted for withdrawals and net
profit.
2. Owner drawing – used for withdrawals made by the owner.
If the owner is Jose P. Golez, the account title is Jose
P. Golez, drawing or Jose P. Golez, Personal.
4. Income (Revenue)
1. Service income – revenue realized by providing
services to customers / clients.
2. Fees income – revenue realized by providing
professional services to clients.
3. Sales – revenue from sale of goods that were previously
acquired for sale.
5. Expenses
1. Advertising expense – incurred in making the public
aware of the goods and services being offered by the
business.
2. Salaries and wages – compensation earned by employees
 for services rendered by hem to the firm.
3. Supplies expense – cost of supplies already used.
4. Light, power and water
5. Telephone expense
6. Rent expense
7. Tools expense
8. Depreciation expense
10. Insurance expense
11. Bad debts

Financial Position

According to Mejorada, N. (2007), financial position refers to

how much financial resources and obligations an economic entity
has and the interest of the owner/s. The basic elements of
accounting is measuring financial position are assets,
liabilities and owner’s equity. In presenting the financial
position of an economic entity, the balance sheet is based on the
following equation.

Assets = Liabilities + Owner’s Equity

Example:
Lydia Cinco had provided you with the following list of
account balance taken from the books of her business, the Cinco
Repair Shop as of December 31, 1998:

Cash P10,000
Accounts Receivable 30,000
Accounts Payable 15,000
Furniture and Fixtures 32,000
Accumulated Depreciation 4,000
Taxes Payable 2,000

You are requested to determine her equity in her business.

Lydia Cinco’s equity is in her business is arrived as follows:

Assets

Cash P10,000
Accounts Receivable 30,000
Furniture and Fixtures P32,000
Less: Accumulated Depreciation 4,000 28,000
Total Assets P68,000
 =======
Liabilities

Accounts Payable P15,000

Taxes Payable 2,000
Total Liabilities P17,000
=======
Owner’s Equity = Assets – Liabilities
= 68,000 – 17,000
= 51,000
======

The balance sheet of the repair shop may be prepared using either
the account form or the report form, as shown in the following
paragraphs.

The Account Form of Balance Sheet: The presentation is done

horizontally with the assets on the left side. Liabilities and
owner’s equity are on the right side.

Cinco Repair Shop

Balance Sheet
As of December 31, 1998

Assets Liabilities & Owner’s Equuity

Cash P10,000 Liabilities:
Accounts Receivable 30,000 Acct. Payable P15,000
Furniture & Fixtures 32,000 Taxes Payable 2,000
Less: Accu. Dep’en 4,000 28,000 Total Liabilities 17,000

Owner’s Equity
L.Cinco, Capital 51,000
Total Assets P68,000 Total Liabilities &
======= Owner’s Equity P68,000
=======
Activities (Formative)
Title: Accounting Elements Drill
Things to do:
1. Determine whether each of the following is an asset,
liability, owner’s equity, revenue, or expense account.
2. Put a check mark on your chosen answer.
Questions:
Asset Liability Capital Revenue Expense
1.Prepaid
expenses
2.Supplies
used
3.Expenses
payable
4.Accounts
payable
5.Cost of
light and
power

Assessment (Summative)
Title: The See-saw
Date of Submission:
Rubric Used: None
Things to do:
1. Give examples of business transactions which will prove
the equality of the following equations.
Questions:
1. Increase in assets = Increase in proprietorship
2. Increase in assets = Increase in liabilities
3. Decrease in assets = Decrease in proprietorship
4. Decrease in assets = Decrease in liabilities
5. Increase in one form of asset = Decrease in another form of
asset.

References:
 Mejorada, N (2007). Bookkeeping. Quezon City, Philippines.
KATHA Publishing Co. Inc.
https://www.thebalancesmb.com/bookkeeping-101-a-beginning-
tutorial-392961