DEPARTMENT OF ACCOUNTANCY

SCHOOL OF BUSINESS AND ACCOUNTANCY

HOLY ANGEL UNIVERSITY

Fundamentals of Accounting
LEANDRO S. SANCHEZ CPA,JD
 CHAPTER 2
FINANCIAL STATEMENTS FOR A SERVICE BUSINESS
AND THE FUNDAMENTAL ACCOUNTING EQUATION
 •Statement of Financial Position

•Statement of Comprehensive Income

Types of
Financial •Statement of Changes in Owner’s Equity
Statements •Statement of Cash Flow
Statement of Financial Position

• Shows financial condition at a given period of time

• Use Real or Permanent Accounts
• Consists of Assets, Liabilities and Equity
• Assets – economic resources owned and controlled by the
company
• Liabilities – debts, obligations and claims against the
company
• Equity – interest of owner in the business/ residual interest
Statement of Financial Position

• Forms of Statement of Financial Position

• Account form
• Report form
• Classification
• Assets are sub-classified as current and non-current assets
• Liabilities are sub-classified as current and non-current
liabilities
Statement of Financial Position

• Assets are listed and presented according to liquidity with the

most liquid followed by lesser liquid

• Liabilities are listed and presented based on their maturity

Accounting Equation

Assets = Liabilities + Equity

• Example:
1. Liabilities = P90,000; Equity = P110,000; Asset=?
2. Asset = P150,000; Liabilities = P60,000; Equity=?
3. Asset = P100,000; Equity = P50,000; Liabilities=?
 •Classification of Assets
Current
Intended for sale or consume in the normal
operating cycle
Primarily for the purpose of being traded
Expected to be realized within 12 mos.
Cash or cash equivalent unless restricted
or used to settle a liability for at least 12
Assets mos.
 •Cash – money in the physical form of currency

•Cash Equivalent – investment securities that are

meant for short-term investing

•Marketable Securities – liquid securities that can

be bought or sold on a public stock exchange
Current assets that can be liquidated to cash quickly

Assets •Trade and Other Receivables – total amount

owing to the business for goods and services sold
 •Interest Receivable – amount of interest earned
but which has not yet been received

•Advances to Employees – cash payment made by

the employer for business expenses that are
anticipated to be incurred

•Accrued Income – income earned but not yet

Current received

Assets •Inventory – goods sold

•Prepaid expenses – expenses paid in advance

 •Classification of Assets
oNon-current
Long-Term Investment – intended to be
held for an extended period of time (more
than 1 year)

Assets Property, Plant and Equipment – tangible

assets that are held by an enterprise for use
in operation
Examples of Property, Plant and Equipment

 Land
 Building
 Equipment
 Furniture and Fixtures
 Intangible Assets
 •Deducted to the related asset account
oAllowance for Bad Debts – losses due to
uncollectible accounts.

oAccumulated Depreciation – expired cost of

property, plant and equipment as a result of
Contra-Asset usage and passage of time.
Accounts
 •Classification of Liabilities
Current
Debts payable within one year
Due within a normal operating cycle
Typically settled using current assets
Non-current
Liabilities Debts that are not expected to paid within
one year
Part of a debt to be paid after one year
 •Trade and Other Payables
Accounts Payable – money owed by business
to suppliers

Notes Payable – written agreement in which

the business agrees to pay the creditor
Current Loans Payable – amounts that have been
Liabilities borrowed by the business and still owes
 •Trade and Other Payables
Utilities Payable – amounts owed to utility
companies

Unearned Revenues – money received by

business for a service that has yet to be
Current provided

Liabilities Accrued Liabilities – expenses that have not

yet been paid or recorded but are incurred
 •Non-Current Liabilities
Mortgage Payable – liability of a property
owner to pay a loan secured by a property

Bonds Payable – promise to pay a series of

payments over time and a fixed amount at
maturity proof by a bond

Non-Current Loans Payable* – non-current part of the

Liabilities liability

Notes Payable* – non-current part of the

liability
 Owner’s Equity
•Value of an ownership interest in a
business
•Amount of capital contributed by the
owners
•Difference between Assets and Liabilities
 •Capital – amount contributed by owners

•Drawings – money withdrawn from a business

•Income Summary – temporary account to which all

Owner’s income and expense accounts are transferred

Equity
Statement of Comprehensive Income

• Financial performance
• Use Nominal or Temporary Accounts
• Forms of Income Statement
Natural Form – used by service type
Functional Form – used by merchandising
• Expense are listed and presented as to the highest value to the lowest
value
 •Service Income
•Salaries or Wages expense
•Utilities expense
•Supplies expense
•Insurance expense
•Depreciation expense
Accounts •Uncollectible Accounts expense/Doubtful Accounts
expense/Bad Debts expense
used •Interest expense
Statement of Cash Flows

• Cash receipts and cash disbursements

• Classified according to activities
• Operating – normal operations
• Investing – investments (PPE, Securities, Bonds etc.)
• Financing – cash flow from or to owners and creditors