Information Sheet

Information sheet 1.
1 – 1
DEFINITION OF FUNCTION OF ACCOUNTING AND BOOKKEEPING
Learning Objective:
After reading this information sheet, you must be able to:
1. Define accounting and bookkeeping
2. Differentiate accounting and bookkeeping
3. Understand the importance of accounting to business
4. Comprehend the basic and fundamental concepts of accounting
On a day-to-day basis, bookkeeping and accounting is present in our lives,

from paying of our bills, receiving our salary, purchase of groceries. As we go
through this content, you will be able to understand how accounting and
bookkeeping is present in our lives and how it affects us.
Bookkeeping and Accounting

Bookkeeping – it is the consistent recording, storing, and retrieving of daily
financial transactions for a company, non – profit, individual and other forms of
business. Of these responsibilities, perhaps the most important is maintaining the
general ledger. In short, bookkeeping can be summed up as the recording of
financial data – a process that is largely systematic.
Accounting – it is a subjective process. At its core, accounting is a high –
level processes that takes financial information and produces financial models based
on that data. In other words, accounting takes the information from bookkeeper’s
records and uses it to reveal the bigger financial picture.
BOOKKEEPING ACCOUNTING
Recording and categorizing financial Preparing adjusting entries
transactions
Posting debits and credits Preparing financial statements
Producing and sending invoices and Completing income tax returns
receipts
Maintaining and balancing subsidiaries, Financial analysis, Strategy, and advice
general ledgers, and historical accounts
Completing payroll Taxation strategy and planning
Objective is recordkeeping Objective is financial forecasting
Date Developed: Nov. Document No.

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Bookkeeping Date Revised:
NCIII Developed by: Page 1 of 38
ROY VICTOR F. Revision # 000
SUMUGAT
It’s clear that bookkeepers are primarily responsible for identifying, measuring,
and recording financial transactions. On the other hand, accountants are focused on
summarizing, interpreting, and communicating financial transactions. While these
roles are very different, the two are highly interconnected. Without the meticulous
records kept by bookkeepers, accountant could not produce their analytical
evaluation and interpretations. In return, bookkeepers depend on the accountants to
provide them with a clear idea of what information must be logged and the proper
structure of keeping records.
Generally Accepted Accounting Principles (GAAP)
GAAP generally represents a collection of broad concepts and detailed practices
that represent best accounting practices as it is accepted at a given time. Companies
reporting according to GAAP provides a measure of uniformity so that those auditing
or examining financial statements have a foundation from which to compare
performance to a specific period or company.
Criteria for General Acceptance of an Accounting Principle

1. Relevance - this means that a principle should result in information that is
meaningful and useful to the decision-makers.
2. Objectivity - a principle should be objective in the sense that information
derived is not influenced by any personal bias or judgment by
anyone.
3. Feasibility - this pertains to the extent of the implementation of a principle
without undue cost or complexity.
Basic Principles in Accounting
1. Objectivity Principle - this states that the financial statements of any

organization should be based on factual evidence. The intention
behind this principle is that management and accountants should
keep from producing biased financial statements.
2. Historical Cost - this is a measure of the value used in accounting wherein an
asset is recorded at its actual cost rather than what the management
thinks it is worth at the time of reporting.

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3. Revenue Recognition - under accrual accounting, this a principle which states
that an entity should only record revenue when it has been earned,
not when related cash or payment is collected.
4. Expense Recognition - under accrual accounting, this states that an expense
should be recognized by the entity when has incurred it regardless of
when it has been paid.
5. Adequate Disclosure - this states that all relevant or essential information
should be included in the financial statements. It should be able to
provide needed information to different users to understand the
entity’s financial situation.
6. Materiality - this expresses that can report financial statements with
information that is significant enough to affect evaluations and
decisions. It serves as a threshold or cutoff point after which a certain
financial information becomes relevant to the decisions of the users
of information. Materiality is generally relative to an entity’s size or
particular circumstances. A million worth of assets could be material
to a small convenience store but not for a multi-national corporation.
7. Consistency Principle - this refers to the use of similar accounting methods
from period to period to achieve comparability. However, changes
are permitted if they are justified and disclosed in the financial
statements.

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Self – check 1.1 – 1
TRUE OR FALSE
Instruction: Read each statement carefully, write true if the statement is correct and
false if it is incorrect.
1. Accounting is the consistent recording, storing and retrieving of

daily financial transactions.
2. Bookkeeping involves recording and categorizing financial
transactions
3. Accounting is a high – level processes that takes financial
information and produces financial models based on that data.
4. Accounting involves preparing financial statements.
5. Bookkeepers are primarily responsible for identifying, measuring,

and recording financial transactions.

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Answer key 1.1 – 1
1. False
2. True
3. True
4. True
5. True

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Information sheet 1.1 – 2
TYPES OF BUSINESS ORGANIZATION
Learning Objective:
1. Define different types of Business Organization
2. Differentiate each types of Business
There are different types of business operating in the Philippines or

specifically in Region 12, from small scale business to large scale business. We will
know about the ownership type of this business in this topic.
Types of Business Organization

Sole Proprietorship - owned by only one person. It is easy to set up and least
costly among all forms of ownership. The owner makes all the decisions for the
business but carries unlimited liability which means creditors of the business venture
may go after the former’s personal assets if they cannot pay them.
Partnership - owned by two or more individuals who contribute resources into
the entity with the intention of dividing the profits among themselves. Partners
generally share the risks involved in running the business as well as making
decisions.
Corporation - a business organized under operation of law and has a separate
legal entity from its owners. Ownership in a corporation is usually represented by
shares of stock and are called shareholders. Shareholders usually have limited
liability but may have little influence in making business decisions.
Differences

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SOLE
BASIS PROPRIETORSHI PARTNERSHIP CORPORATION
P
Registration is
Minimum legal Registration is compulsory,
Formation formalities, easiest optional, easy lengthy and
formation formation expensive
formation process
Members Single owner 2 or More 5 or More
Capital Large financial
Limited finance Limited but more
Contribution resources
Unlimited and
Liability Unlimited Limited
Joint
Partners takes Separation
Owner takes all
Control and decision, consent between
decisions, quick
Management of all partners is ownership and
decision making
needed management
Unstable, business More stable but Stable because of
Continuity and owner affected by status separate legal
regarded as one of partners status
Advantage and Disadvantage

Sole Proprietorship Partnership Corporation
ADVANTAGES
Owner receives all More expertise and Limited liability protects
profits managerial skills owners from losing more
available than they invest
Low organizational cost Relatively low Can achieve large size
organizational costs. due to marketability of
stock (Ownership)
Income taxed as Income taxed as Receives certain tax
personal income of personal income of advantages
proprietor partners
Independence Fundraising ability is Greater access to
enhanced by more financial resources allows
owners growth
Secrecy Can attract employees
with specialized skills.
Ease of Dissolution Ownership is readily
transferable.
Long life of firm (not
affected by death of
owners)
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Sole Proprietorship Partnership Corporation
DISADVANTAGES
Owner receives all Owners have unlimited Double taxation because
losses. liability; may have to both corporate profits and
cover debts of other, less dividends paid to owners
financially sound are taxed, although the
partners. dividends are taxed at a
reduced rate.
Owner has unlimited Dissolves or must More expensive and
liability; total wealth can reorganize when partner complex to form.
be taken to satisfy dies.
business debts.
Limited fundraising Difficult to liquidate or Subject to more
ability can inhibit growth. terminate. government regulation.
Proprietor may have Potential for conflicts Financial reporting
limited skills and between partners. requirements make
management expertise. operations public.
Few long-range Difficult to achieve large
opportunities and – scale operations.
benefits for employees.
Lacks continuity when
owner dies.

FILL IN THE BLANK
Instruction: Complete the table below by providing what is asked.
Differences between types of business
SOLE
BASIS PROPRIETORSHI PARTNERSHIP CORPORATION
P
Formation 1. 2. 3.
Members 4. 5. 6.

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Capital
7. 8. 9.
Contribution
Liability 10. 11. 12.
Control and
13. 14. 15.
Management
Continuity 16. 17. 18.

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1. Minimum legal formalities, easiest formation
2. Registration is optional, easy formation
3. Registration is compulsory, lengthy and expensive formation process
4. Single owner
5. 2 or More
6. 5 or More
7. Limited finance
8. Limited but more
9. Large financial resources
10. Unlimited
11. Unlimited and Joint
12. Limited
13. Owner takes all decisions, quick decision making
14. Partners takes decision, consent of all partners is needed
15. Separation between ownership and management
16. Unstable, business and owner regarded as one
17. More stable but affected by status of partners
18. Stable because of separate legal status

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TYPES OF BUSINESS ACTIVITIES
Learning Objective:
1. Identify different types of Business Activities
2. Differentiate each type of Busines Activities
Do you even wonder what type of activities you company is engage, and how
it is earning? In this topic, you will be able learning deeply different type of business
activities.
Types of Business
1. Service - a business which provides products with no physical form or simply
intangible. Examples of service business are accounting firm, law
firm, or professionals and experts who offer advices, counseling,
labor, and similar products.
2. Merchandising or Trading - buying and selling of products without changing its
form. Typically, merchandising is buying tangible products at
wholesale price and selling them at retail price. Examples of this are
grocery stores, convenience stores, rice distributors, and other
resellers.
3. Manufacturing - this type of business buys products with the intention of using
them as raw materials to create or produce another product. In
manufacturing, there is transformation of the products or raw
materials purchased.

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4. Raw Materials - refers to growing or extracting raw materials. This is the
buying of blocks of land and using them to provide raw materials
such as farming, mining, and oil.
5. Infrastructure - pertains to selling of the utilization of an infrastructure.
6. Financial - a type of business which accepts cash from depositors which
allows the latter to gain interest. Financial institutions use the money
deposited by clients to provide loans to borrowers and charging them
with fees and a higher interest rate than the interest earned by the
depositors.
7. Insurance - this is the pooling of premiums paid by customers to meet the
claims of the few. Insurance companies invest the money paid by
customers to pay for the losses experienced by a few customers.
Note: There are also hybrid businesses which combine more than one type of
business. For example, a restaurant cooks ingredients in making a meal
(manufacturing), sells cold bottles of beverage (merchandising), and also attends to
customer orders and needs (service).
Activities in Business Organizations

1. Financing Activities - these involve long-term liabilities, owner’s capital or equity, and
borrowings to gain resources so businesses can produce goods and
services sold to the market. Simply put, these activities focus on how the
business raises capital and pays back its investors.
2. Investing Activities - these refer to the purchase and sale of long-term assets and
other business investments. These activities give insight into the total
investment gains and losses of a company.
3. Operating Activities - these are the functions of a business directly related to
providing goods and services to the market. These are the core business
activities such as manufacturing, distributing, marketing, and selling a
product or service. Operating activities generally provide majority of a
company’s cash flow and largely determine whether the business is
profitable.

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Matching type
Instruction: Read the statement/word in column A and match it with column B, write
your answer in the space provided.
ANSWER COLUMN A COLUMN B
business which provides

1 Financing Activities A products with no physical form
or simply intangible
buying and selling of products
2 Investing Activities B
without changing its form.
this type of business buys
products with the intention of
3 Operating Activities C using them as raw materials to
create or produce another
product.
refers to growing or extracting
4 Service D
raw materials.
this is the pooling of premiums
5 Merchandising or Trading E paid by customers to meet the
claims of the few.
these refer to the purchase and
6 Manufacturing F sale of long-term assets and
other business investments.
these are the functions of a
business directly related to
7 Raw Materials G
providing goods and services to
the market.
pertains to selling of the
8 Infrastructure H
utilization of an infrastructure.
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these involve long-term
liabilities, owner’s capital or
equity, and borrowings to gain
9 Financial I
resources so businesses can
produce goods and services
sold to the market.
a type of business which
1 accepts cash from depositors
Insurance J
0 which allows the latter to gain
interest.

1 I 6 C
2 F 7 D
3 G 8 H
4 A 9 J
5 B 10 E

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BASIC ACCOUNTING EQUATION
Learning Objective:
1. Have knowledge of the elements of financial statements
2. Describe the account using simple T – Account title and its uses.
3. Learn comprehensively the accounting equation.
4. Understand how the double-entry system works and its application
to the accounting equation.
5. Know and familiarize debit and credit and the corresponding rules
as applied to the balance sheet and income statement accounts.
We have already discussed the overview of accounting and bookkeeping as

well as its importance in business. In this chapter, we will dig deeper as to how this
process and being done.
Stages of Data Processing
Input Process Output

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The illustration above shows that a raw data (input) is processed to become a
useful accounting information (output). Each transaction entered into the accounting
system should be supported by source documents like invoices, deposit slips,
checks, and time cards and memos. These documents will serve as evidence that a
certain transaction actually transpired. It is also worthy to note that source
documents must be legitimate and verified to help users of information gain
confidence in reporting the financial information processed from it. The computer,
with the use of an accounting software processes these inputs. However, in this
chapter the manual system of journalizing, posting, preparing the trial balance, and
updating the accounts will be discussed to fully understand how a raw data becomes
information.
Elements of Financial Statement

Element Definition
Financial Position
(Balance Sheet)
a. Asset A present economic resource controlled by the
entity as a result of past events. An economic
resource is a right that has the potential to produce
economic benefits. There are three (3) aspects that
must be remembered with the definition of assets -
control, rights, potential to produce and economic
b. Liability benefits.
A present obligation of the entity to transfer an

economic resource as a result of past events. For a
liability to exist, three criteria must ALL be satisfied:
a. The entity has an obligation;
b. The obligation is to transfer an economic
resource; and
c. Equity c. The obligation is a present obligation that
exists as a result of past events.
Equity is the residual interest in assets of the

enterprise after deducting all its liabilities. These
are the claims against the entity that do not meet
the definition of a liability. It pertains to the capital of
the owner in the business.
Financial
Performance
(Income Statement) This is an increase in assets or decrease in
a. Income liabilities that result in an increase in equity, other
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than those relating to contributions by holders of
equity claims.
b. Expenses This is a decrease in assets or increase in liabilities

that result in a decrease in equity, other than those
relating to contributions by holders of equity claims.
The Account
Each of the element in the financial statements have separate accounts. This
serves as a summary device in accounting where a detailed record of the increases,
decreases, and balances of each element. The simplest form of the account is
known as the “T” account because it is similar to the letter “T”. The T account has
three (3) parts as shown below:
Account Title
Left side or Right side

Debit Side or Credit
Side
The Accounting Equation

In accounting, it important to note that financial statements show how the
business is performing. They are the final products of the accounting process. The
most basic tool to understand accounting is the accounting equation using the
elements of the financial position or balance sheet. The accounting equation is as
shown below:
Assets = Liabilities + Equity

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Note that assets must ALWAYS be equal to liabilities and equity. Assets are on
the left side of the equation opposite to the liabilities and owner’s equity. This
explains why increases and decreases in assets are recorded in the opposite
manner or what is called the “mirror image” as liabilities and owner’s equity are
recorded. It also explains why liabilities and owner’s equity follow the same rules of
debit and credit.
The logic behind debiting and crediting is actually related to the accounting
equation. Transactions may require additions to both sides, the left and right sides,
or subtractions from both sides, or an addition and subtraction on the same side but
in all cases, both sides of the equation must always be EQUAL.
The Double-Entry System

The foundation of our knowledge in accounting lies in our understanding of the
double-entry system. Accounting is based on the double-entry system which means
recording the dual effects of a business transaction. A debit (Dr.) side entry must
always have a corresponding credit (Cr.) side entry. The double-entry system is
anchored on the notion that for every business transaction, there must be one or
more accounts debited and one or more accounts credited. Just like the accounting
equation, the left or debit side must be equal to the right or credit side.
Rules of Debit and Credit
The account type determines how increases or decreases in it are recorded. The
rules of debit and credit are as follows:
Balance Sheet Accounts

a. Increases in assets are recorded as debits (left side of the account)
b. Decreases in assets are recorded as credits (right side of the account)
c. Increases in liabilities and owner’s equity are recorded as credits (right
side of the account)
d. Decreases in liabilities and owner’s equity are recorded as debits (left
side of the account)
Income Statement Accounts

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a. Increases in income are recorded as credits (right side of the account)
b. Decreases in income are recorded as debits (left side of the account)
c. Increases in expenses are recorded as debits (left side of the account)
d. Decreases in expenses are recorded as credits (right side of the
account)
Note: The rules of debit and credit for income and expense accounts are
based on their relationship to the owner’s equity account. Income increases
owner’s equity while expenses decreases it. Thus, income are recorded as
credits while expenses are recorded as debits.
To further illustrate the rules of debit and credit, look at the T account shown below:
Balance Sheet Accounts
Assets Liabilities and Owner’s Equity
Debit (+) Credit (-) Debit (-) Credit (+)

Increases Decreases Decreases Increases
Normal Normal
Balance Balance
Income Statement Account
Expenses (Debit for decreases in Income (Credit for increases in

Owner’s Equity Owner’s Equity)
Debit (+) Credit (-) Debit (-) Credit (+)

Increases Decreases Decreases Increases
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Normal Normal
Balance Balance
Normal Balance of an Account
Normal balance pertains to the side of an account where the increase is

recorded - debit or credit. Asset, owner’s withdrawal, and expense accounts normally
have DEBIT balances while liability, owner’s equity, and income accounts normally
have CREDIT balances. To summarize:
Account Category Increases Normal

Balance
Dr Cr Dr Cr
Assets ✓ ✓
Liabilities ✓ ✓
Owner’s Equity:
Owner’s Capital ✓ ✓
Capital Withdrawals ✓ ✓
Income ✓
Expenses ✓ ✓ ✓
Accounting Events and Transactions

An accounting event is an economic occurrence which causes change in an
entity’s assets, liabilities, and/or equity. Meanwhile, a transaction is a particular kind
of event that involves the transfer of something of value between two entities.
Types and Effects of Transactions

It is important to understand in the long-run a classification approach that
discusses the effects of accounting events. To summarize:
a. Source of Assets (SA) - an asset account increases and a corresponding
claims (liabilities or owner’s equity) account increases.
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b. Exchange of Assets (EA) - one asset account decreases and another asset
account decreases.
c. Use of Assets (UA) - an asset account decreases and a corresponding
claims (liabilities or owner’s equity) account decreases.
d. Exchange of Claims (EC) - one claims (liabilities and owner’s equity)
account increases and another claims (liabilities and owner’s
equity) account decreases.
The four (4) types of transactions may further be expanded into nine (9) types of
effects, as follows:
a. Increase in Assets = Increase in Liabilities (SA)
b. Increase in Assets = Increase in Owner’s Equity (SA)
c. Increase in one Asset = Decrease in one Asset (EA)
d. Decrease in Asset = Decrease in Liabilities (UA)
e. Decrease in Asset = Decrease in Owner’s Equity (UA)
f. Increase in Liabilities = Decrease in Owner’s Equity (EC)
g. Increase in Owner’s Equity = Decrease in Liabilities (EC)
h. Increase in one Liability = Decrease in one Liability (EC)
i. Increase in one Owner’s Equity = Decrease in another Owner’s Equtiy (EC)
Typical Account Titles Used
Statement of Financial Position (Balance Sheet)
Assets - classified into current and non-current
Current Assets
Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall classify
assets as current when:

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a. It expects to realize the asset, or intends to sell or consume it, in its
normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. It expects to realize the asset within twelve months after the reporting
period; or
d. The asset is cash or a cash equivalent (per PAS No. 7), unless the asset
is restricted from being exchanged or used to settle liability for at least
twelve months after the reporting period.
Operating cycle is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents. When an entity’s normal operating cycle
is not clearly identifiable, it is assumed to be twelve months.
Typical account titles under current assets are:

Cash - any medium of exchange that a bank will accept for deposit at face
value. Includes coins, currency, checks, money orders, bank deposits,
and drafts.
Cash Equivalents - per PAS 7, these are short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
Notes Receivable - a written pledge that the customer will pay the business
entity a fixed amount of money on a certain date
Accounts Receivable - these are claims against customers arising from sales
of goods or services on credit. Thus type of receivable has less
security compared to a promissory note.
Inventories - per PAS 2, these are assets which are: a) held for sale in the
ordinary course of business; b) in the process of production for such
sale; or c) in the form of materials or supplies to be consumed in the
production process or in rendering services.
Prepaid Expenses - these are expenses paid for by the business entity in
advance. It is an asset because the business avoids having to pay
cash in the future for a specific expense. Common examples of prepaid
expenses are insurance and rent.
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Non-current Assets
All other assets that do not fall under the definition of current assets should be
classified as non-current assets (residual definition).
Property, Plant, and Equipment - per PAS 16, these are tangible assets that
are held by an enterprise for use in the production or supply of goods
or services, or for rental to others, or for administrative purposes and
which are expected to be used during more than one period.
Accumulated Depreciation - this is a contra asset account that contains the
sum of the periodic depreciated charges. This is deducted from the
cost of the related asset to obtain the net book value.
Intangible Assets - per PAS 38, these are identifiable, nonmonetary assets
without physical substance held for use in the production or supply of
goods and services, for rental to others, or for administrative purposes.
Liabilities - classified into current and non-current

Current Liabilities
Per revised PAS 1, an entity shall classify a liability as current when:
a. It expects to settle the liability in its normal operating cycle;
b. It holds the liability primarily for the purpose of trading;
c. The liability is due to be settled within twelve months after the reporting period;
or
d. The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
Typical account titles used in current liabilities are:

Accounts Payable - this account represents the reverse relationship with
accounts receivable. It pertains to the liability of the business entity to
pay goods and services purchased on credit.
Notes Payable - is similar to the note receivable but in a reverse sense. In the
case of a note payable, the entity is the maker of the note promising to
pay the other party on a certain future date.
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Accrued Liabilities - these are amounts owed by the entity to others for unpaid
expenses. Common examples are salaries payable, utilities payable,
interest payable, and tax payable.
Unearned Revenues - these are advance payments by customers availing the
goods or services of an entity. Under the liability method, this account
is considered a liability since the entity has yet to render of deliver the
service or goods. It becomes income only when the goods are
delivered or the services are performed.
Current portion of Long-term Debt - this refers to the portion of mortgage
notes, bonds, and other long-term liabilities to be pain within one year
from the balance sheet date.
Non-current Liabilities
All other liabilities that do not fall under the definition of current liabilities should
be classified as non-current liabilities.
Mortgage Payable - this account records long-term debt of an entity wherein

the entity has pledged certain assets as security to the creditor. In the
event that the debt payments are not made, the creditor can go after
the mortgaged property to settle the claim.
Bonds Payable - this is usually how business entities obtain substantial amount
of money to finance the acquisition of equipment or other assets
needed by the entity. This substantial amount of money is obtained by
issuing bonds. A contract between the issuer of bonds and the lender
will specify the terms of repayment and interest to be charged.
Owner’s Equity
Capital - this account is used to record the original and additional investments of
the owner/s of the business
Withdrawals - when the business owner/s withdraws cash or other assets from
the business, it is reflected and recorded in this account rather than
directly reducing the owner’s equity account
Income Summary - this is a temporary account used at the end of the
accounting period to close income and expenses

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Statement of Financial Performance (Income Statement)
Income
Service Income - revenues earned by performing services for a customer or

client
Sales - revenues earned through sale of merchandise such
Expenses
Cost of Sales - this is incurred when purchasing or producing products sold to

customers during the period; also called cost of goods sold
Salaries or Wages Expense - all payments as a result of an employer-
employee relationship such as salaries or wages, 13 th month pay, cost
of living allowances, etc.
Telecommunications, Electricity, Fuel, and Water Expense - these are
related to the use of utilities to conduct operations of the business
Rent Expense - expense for office space, warehouse, equipment, and other
asset rentals
Supplies Expense - supplies used in the conduct of daily business
Insurance Expense - portion of premiums paid during the accounting period
which has expired
Depreciation Expense - portion of the cost of a tangible asset allocated or
charged as expense during the accounting period. This is recorded to
increase the accumulated depreciation account.
Uncollectible Accounts Expense - this is an amount of receivables estimated
to be doubtful and charged as expense during the period
Interest Expense - relating to use of borrowed funds

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TRUE OR FALSE
Instruction: Read each statement carefully and write true if the statement is correct
and false if the statement is incorrect. Write your answer in the space provided
before the number.
1. An asset is one of the elements of a Statement of Financial Performance.
2. A business entity should record an asset even though its economic benefits
is highly unlikely.
3. The owner of the business should have control and right over its assets.
4. A liability is a present obligation of the entity to transfer an economic

resource as a result of past events.
5. A present obligation exists as a result of past events even if the entity has
not yet obtained economic benefits or taken an action and as a
consequence, the entity will or may have to transfer an economic resource
that it would not otherwise have had to transfer.

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6. In a sole proprietorship, there is only one owner’s equity because there is
only one owner.
7. In a partnership, the owner’s equity account is as many as the partners.
8. In a corporation, stockholder’s equity consists of share capital, retained

earnings, and reserves representing appropriations of retained earnings
among others.
9. Income decreases equity and increases assets.
10. Expenses decreases assets but has no effect on liability.
11. The basic summary device of accounting is called the account.
12. The formula to solve for the liabilities is owner’s equity less current assets.
13. The formula to solve for owner’s equity is assets less non-current liabilities.
14. In the rules of debit and credit, increases in assets are on the left or debit
side of the T-account.
15. Generally, when a business owner invests cash to their business, there is
a corresponding increase in assets and owner’s equity.
FILL – IN THE BLANKS
Instruction: Compute for the missing item, write your answer the blank space
provided.
Assets Liabilities Owner’s Equity

500,000 350,000 ?
1,050,000 ? 785,000
? 220,100 (70,520)
600,000 233,500 ?
? 50,000 130,000

16,2020
Issued by:
SUMUGAT
Answer Key 1.1 – 4
1. F 6. T 11. T
2. F 7. T 12. F
3. T 8. T 13. F
4. T 9. F 14. T
5. F 10. F 15. T
Assets Liabilities Owner’s Equity

1. 500,000 350,000 150,000.00
2. 1,050,000 265,000 785,000
3. 149,580 220,100 (70,520)
4. 600,000 233,500 366,500
5. 180,000 50,000 130,000

16,2020
Issued by:
SUMUGAT
BASIC FINANCIAL STATEMENT
Learning Objective:
1. Define each financial statement
2. Understand the importance of financial statements
3. Comprehend how the financial statements are interrelated.
After the end of accounting cycle, you can now prepare financial statements in
accordance with the standard. In this chapter we will be able to have an overview on
what reports are being prepared and understand the relevance of each report.
Complete Set of Financial Statements

The essence of financial statements aside from being the final product of
accounting, is to allow various financial information users to measure the
performance of the business as well as make relevant and timely decisions based on
the information obtained.

16,2020
Issued by:
SUMUGAT
Per revised PAS No. 1, the following are what comprise a complete set of
financial statements:
a. Statement of financial position as at the end of the period;
b. Statement of financial performance for the period;
c. Statement of changes in equity for the period;
d. A statement of cash flows for the period;
e. Notes to financial statements, comprising a summary of significant
accounting policies and other explanatory information; and
f. Statement of financial position as at the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial
statements or when it reclassifies items in its financial statements.
Preparing the Financial Statements

After completing the worksheet, it will be easier to prepare the financial
statements since the account balances have already been extended to the
appropriate columns. The information necessary to prepare the income statement,
statement of changes in equity, and balance sheet are available in the worksheet.
New Romantics Events will be used to illustrate this topic.
Statement of Financial Performance

There are two (2) ways to prepare the statement of financial performance of
income statement:
1. In a single statement of comprehensive income, or
2. In two statements - a statement displaying components of profit or loss
(separate income statement) and a second statement beginning with profit
or loss and displaying components of other comprehensive income (OCI)
However, the 2018 Conceptual Framework does not specify whether the
statement of financial performance include(s) a single statement or two statements.
Income statement shows the performance of the business for a period of time,
particularly its profitability which will let the users to assess potential changes or
make economic decisions.

16,2020
Issued by:
SUMUGAT
The illustration below presents New Romantics Events statement of financial
performance.
New Romantics Events

Income Statement
For the Month Ended January 31, 2020
Revenue
Service Revenue P 79,500
Expenses
Salaries Expense P 10,350
Supplies Expense 4,000
Rent Expense 5,000
Insurance Expense 1,600
Utilities Expense 5,750
Depreciation Expense - Service Vehicle 1,500
Depreciation Expense - Office Furniture 750
Interest Expense 4,125
Total 33,075
Profit 46,425

16,2020
Issued by:
SUMUGAT
Statement of Changes in Equity
The statement of changes in equity shows the changes in the owner’s
investment to the business. Usually, in the case of a sole proprietorship, increases in
owner’s equity result from additional investments by the owner and profit for the
period while decreases may result from withdrawals of the owner and loss for the
period. It is also important to note that the beginning balance and additional
investments can be determined from the ledger of the business. The profit or loss
figure can be determined directly from the income statement columns while
withdrawals from the balance sheet columns in the worksheet.

Statement of Changes in Equity
Dela Cruz, Capital, 1/1/2020 P 200,000

Add: Additional Investments by Dela Cruz P -
Profit 46,425 46,425
Total 246,425
Less: Withdrawals 16,000

Dela Cruz, Capital, 1/31/2020 230,425
Statement of Financial Position

This is also called the balance sheet and is used by decision-makers to evaluate
the business’ liquidity and solvency, financial flexibility, and ability to generate profits.
Liquidity measures how quickly the company can convert its assets to cash to settle
obligations when they are due. Financial flexibility deals with the company’s ability to
take effective actions to alter the amounts and timings of cash flows in case an

16,2020
Issued by:
SUMUGAT
unexpected opportunity or needs arise. Solvency refers to the availability of cash to
meet long-term financial obligations of the company.
The balance sheet can be presented either the report format or account format.
The former simply lists the assets, followed by the liabilities, and owner’s equity in
vertical sequence. The latter lists the assets on the left and the liabilities and owner’s
equity on the right. Both balance sheet formats are acceptable.
PAS 1 does not also prescribe the order in which an entity presents items in the
balance sheet. What is required is the current and non-current distinction for assets
and liabilities. Liabilities and equity can be presented current liabilities then non-
current liabilities then equity, or vice versa.
When presentation based on liquidity provides accounting information that is
reliable and more relevant to decision-makers, then an entity shall present all its
assets and liabilities in order of liquidity.

Balance Sheet
January 31, 2020

16,2020
Issued by:
SUMUGAT
Assets
Current Assets
Cash P 162,800
Accounts Receivable 16,000
Supplies 13,000
Prepaid Rent 5,000
Prepaid Insurance 17,600
Total Current Assets P 214,400
Property and Equipment (Net)

Service Vehicle P 300,000
Accumulated Depreciation - Service Vehicle 1,500 298,500
Office Furniture 45,000
Accumulated Depreciation - Office Furniture 750 44,250 342,750
Total Assets 557,150
Liabilities
Current Liabilities
Notes Payable P 275,000
Accounts Payable 37,000
Salaries Payable 1,350
Utilities Payable 1,750
Interest Payable 4,125
Unearned Service Revenues 7,500
Total Current Liabilities P 326,725
Owner's Equity
Dela Cruz, Capital, 1/31/2020 230,425
Total Liabilities and Owner's Equity 557,150
Statement of Cash Flows

The statement of cash flows presents information about the movement of cash
during the period which includes cash receipts and cash payments of an entity. If is a
formal statement that classifies cash receipts (inflows) and cash payments (outflows)
into operating, investing, and financing activities. This also shows the net increase of
decrease in cash during a certain period and the cash balance at the end of the
period. This statement also helps in projecting the future net cash flow of the entity.
Operating Activities
This type of activities generally involves providing services, and producing
and delivering goods. Cash flow from operating activities are generally the cash
effects of transactions and other events relevant to the determination of profit or
loss during the period. This cash flow can be presented using either direct or
indirect method.
In computing operating activities using the direct method, the entity’s net
cash is obtained by adding the individual operating cash inflows and then
subtracting the individual operating cash outflows.
16,2020
Issued by:
SUMUGAT
The indirect method is used to compute the net cash of operating activities
by adjusting profit with income and expense items not resulting from cash
transactions. First, profit will be increased by expenses and charges that are
non-cash in nature (ex. Depreciation). Second, profit will also be decreased by
increases in current assets and decreases in current liabilities involved in
computing profit but did not actually affect the cash balance. Lastly, decreases in
current assets and increases in current liabilities are added to the profit. This will
ultimately lead to the net cash flows of operating activities.
Refer to the formula below:
Profit P xx
Adjustments:
Non-Cash Expenses (ex. Depreciation) xx
Increases in current assets (xx)
Decreases in current assets xx
Increases in current liabilities (xx)
Decreases in current liabilities xx
Cash Flows from Operating Activities xx
Investing Activities
This type of activities includes obtaining loans, disposing of investments in
debt or equity securities, and acquiring property and equipment.
Cash inflows may include receipts from sale of property and equipment,
investments in debt or equity securities, and collections on notes receivable.
Cash outflows may include payments to purchase property and equipment, debt
or equity securities, and loans generally in the form of notes receivable.
Financing Activities
Financing Activities include acquiring resources from owners and creditors.
Cash inflows may include receipts from investments by owners and issuance of
notes payable. Cash outflows may be from payments to owners in the form of
withdrawals and settlement of notes payable.
For illustration, the New Romantics Events will be used.

16,2020
Issued by:
SUMUGAT
Statement of Cash Flows
Cash Flows from Operating Activities:

Cash received from clients 71,000
Payments to suppliers (10,000)
Payments to employees (9,000)
Payments for office rent (10,000)
Payments for insurance (19,200)
Payments for utilities (4,000)
Net Cash Flow from Operating Activities 18,800
Cash Flows from Investing Activities:

Payments to acquire service vehicle (300,000)
Payments to acquire office furniture (15,000)
Net Cash Flow from Investing Activities (315,000)
Cash Flows from Financing Activities:

Cash from investments by owner 200,000
Cash from borrowings 275,000
Withdrawals by owner (16,000)
Net Cash Flow from Financing Activities 459,000
Net Increase (Decrease) in Cash 162,800
Cash balance, beginning -
Cash balance, ending 162,800
Note: The ending cash balance in the cash flow statement should be the same with
the amount of cash in the balance sheet.
TRUE OR FALSE

16,2020
Issued by:
SUMUGAT
Instruction: Write T if the statement is correct and F if it is wrong on the space
provided before the number.
1. The balance sheet is also known as the statement of financial

performance.
2. Financial performance may also be referred to as income statement.
3. The statement of changes in equity shows the relationship of the income
statement to the balance sheet by presenting the owner’s capital account
changed during the accounting period.
4. The statement of changes in equity shows the withdrawal during the
period.
5. Acquisition of land and building is an example of an investing activity.
6. Purchase of property is a financial activity.
7. Paying taxes to the government is a financing activity.
8. The account salaries payable appears on the income statement.
9. The account salaries expense appears on the income statement.
10. Buying and manufacturing goods are operating activities.
11. Withdrawals made during the period are investing activities.
12. The statement of cash flows presents significant events related to
operating, investing, and financing of a business.

16,2020
Issued by:
SUMUGAT
1. T 7. T
2. T 8. F
3. T 9. T
4. T 10. T
5. T 11. F
6. F 12. T

16,2020
Issued by:
SUMUGAT

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Information sheet 1.

On a day-to-day basis, bookkeeping and accounting is present in our lives,

Bookkeeping and Accounting

Date Developed: Nov. Document No.

Criteria for General Acceptance of an Accounting Principle

Basic Principles in Accounting

1. Objectivity Principle - this states that the financial statements of any

Date Developed: Nov. Document No.

Date Developed: Nov. Document No.

1. Accounting is the consistent recording, storing and retrieving of

4. Accounting involves preparing financial statements.

5. Bookkeepers are primarily responsible for identifying, measuring,

Date Developed: Nov. Document No.

Date Developed: Nov. Document No.

There are different types of business operating in the Philippines or

Types of Business Organization

Date Developed: Nov. Document No.

Advantage and Disadvantage

Self – check 1.1 – 2

Date Developed: Nov. Document No.

Liability 10. 11. 12.

Continuity 16. 17. 18.

Date Developed: Nov. Document No.

Date Developed: Nov. Document No.

Date Developed: Nov. Document No.

Activities in Business Organizations

Date Developed: Nov. Document No.

ANSWER COLUMN A COLUMN B

business which provides

Answer key 1.1 – 3

Date Developed: Nov. Document No.

We have already discussed the overview of accounting and bookkeeping as

Stages of Data Processing

Input Process Output

Date Developed: Nov. Document No.

Elements of Financial Statement

A present obligation of the entity to transfer an

Equity is the residual interest in assets of the

b. Expenses This is a decrease in assets or increase in liabilities

Left side or Right side

The Accounting Equation

Assets = Liabilities + Equity

Date Developed: Nov. Document No.

The Double-Entry System

Balance Sheet Accounts

Date Developed: Nov. Document No.

Balance Sheet Accounts

Assets Liabilities and Owner’s Equity

Debit (+) Credit (-) Debit (-) Credit (+)

Income Statement Account

Expenses (Debit for decreases in Income (Credit for increases in

Debit (+) Credit (-) Debit (-) Credit (+)

Normal Balance of an Account

Normal balance pertains to the side of an account where the increase is

Account Category Increases Normal

Accounting Events and Transactions

Types and Effects of Transactions

Typical Account Titles Used

Statement of Financial Position (Balance Sheet)

Assets - classified into current and non-current

Date Developed: Nov. Document No.

Typical account titles under current assets are: