Liabilities Are Classified Into Current and Non-Current.: SUBJECT Fundamental of Accounting

Unit INTRODUCTION
Module Ledger and its Description of Account titles Page|1

SUBJECT Fundamental of Accounting Units: 6.0
INFORMATION SHEET PR-3.1.1

“TOPIC: Ledger and its Description of Account titles & Accounting Elements - Liabilities”
Liabilities are classified into current and non-current.
Current liabilities are those debts or obligations reasonably expected to be liquidated in the normal
course of the enterprise’s operating cycle or paid within a period of one year by the use of current
assets or the creation of other current liabilities. The following are examples of current liabilities:
1. Accounts payable to trade creditors for purchase of goods or services on credit supported by the
oral or implied promise of the business. Note Payable is a liability supported by a promissory
note issued by the business to the creditor.
2. Loan payable is a liability to pay a bank or a financing institution for amount of money borrowed
by the business.
3. Utilities payable – is a liability to pay water, telephone, electricity received from the company
that provides it.
4. Other Payables – this includes Interest Payable which represents additional charge and
obligation to pay for interest – bearing promissory notes issued by the business and Salaries
payable which represents obligations to pay employees for services received from them and
Taxes payable which are obligations due to the government for sales, earnings, gain and value of
property owned/sold by the business.
Noncurrent liabilities are long term liabilities or obligations which are payable longer than one year
such:
1. Notes Payable which is issued to the creditor and evidenced by a promissory note.
2. Mortgage Payable which is an obligation secured by the real property of the business.
3. Bond Payable which is a long term promise usually from five to ten or twenty years supported
by a formal contract containing the face value of the bond, the interest rate, the interest
payment date and the maturity date.
References:
• Zenaida Vera Cruz Manuel 21ST Century Accounting Process Basic concepts and procedures, International Edition.
2011
• Flocer Lao Ong, Fundamentals of Accountancy, Business and Management 1, C & E Publishing , Inc. 2016
Unit INTRODUCTION

“TOPIC: The Basic Accounting Equation”
The accounting Equation
The assets, liabilities and owner’s equity are always expressed in an equation:
Asset = Liabilities + Owner’s Equity
To Illustrate: assume Cherry Solvina invested P 2,000,000 in a laundry shop. The accounting equation
will show:
Asset = Owner's Equity

Cash 2,000,000 Soriano, Capital 2,000,000
The above equation means that the business has assets in cash amounting to P 2,000,000 and that
Soriano has a right over it. To illustrate further assume Soriano purchase a machine worth 50,000 on
account. The accounting equation will change:
Asset = Liabilities + Owner's Equity
The
Cash 2,000,000 Accounts Payable 50,000 Soriano, Capital 2,000,000
accounting equation could be stated another way to emphasize the residual interest over the owner
over the assets of the business.
Assets – Liabilities = Owner’s Equity
Illustrative Problem:
Bubble tea for life situated at Dau, Mabalacat City started its operation on January 10, 2020. The
owner Aina Doctolero, invested cash of P 20,000, and equipment of P 48,000. The following are the
additional transactions for January.
Jan 5. Bought Furniture and fixtures worth P 6,000 on account.

7. Bought a chiller worth P 20,000. Terms: 50% down, and balance on account.
8. Hired a helper on commission basis, based on 10% of sales, to clean the chiller.
10. An emergency prompted Ms. Aina to withdraw P 1, 500 cash for personal use.
15. Bought supplies costing P 3,000 and paid cash.
20. The account of January 5 is due. Ms. Aina paid this from her personal cash.
30. The account of January 7 is due. Issued a 60 – day promissory note for this.
The illustrated problem simply show the accounting process to start up a business. Once the business is
ready to operate, revenues will be earned and expenses will be incurred resulting in either net profit or
net loss. Please see the complete illustration of the problem:
References:
2011
Unit INTRODUCTION
82, 500 = 10,000 + 72,500
The effects of owner’s investment/withdrawal and cash acquisition of assets on the assets and owner’s
equity:
Transaction Assets Liabilities Owner’s Equity Analysis
1. Owner Invested Asset Capital Increases Cash increases because
cash in the business Increase owner invests cash in the
business increases as
represented by an increase
in capital
2. Owner invests Asset Capital Increases Asset increases because
furniture Increase owner invests furniture in
the business which is an
asset. Owner’s interest in
the business increases
because of the investment
as represented by an
increase in capital.
3. Owner withdraws Asset Capital decreases Assets decrease because
cash for personal Decrease owner withdraws cash which
use is an asset. Owner’s interest
in the business decreases
because of the withdrawal
as represented by a
decrease in capital.
4. Owner purchases Asset Supplies increases because
supplies using cash increase/ of the purchase but cash
decrease decreases because of the
payment. Since both are
assets, one asset increases
while another asset
correspondingly decreases.
References:
2011
Unit INTRODUCTION
5.Owner gets cash Asset Cash increases because of

refund for returning increase/ the refund but supplies
damaged supplies Decrease decreases because of the
bought on cash return. Since both are
while another asset
correspondingly decreases
7. Owner purchases Asset Furniture increases because
furniture using cash increase/ of the purchase but cash
Decrease decreases because of the
payment. Since both are
while another asset
correspondingly decreases.
8. Owner makes Asset Capital Increase Asset increase because
additional cash Increase owner invests additional
investment. cash in the business which is
an asset. Owner’s interest in
the business increases
because of the investment
as represented by an
increase in capital.
9. Owner withdraws Asset Capital decreases Assets decrease because
supplies for personal decrease owner withdraws supplies
use from business which is an
asset. Owner’s interest in
the business decreases
because of the withdrawal
which is represented by a
decrease in capital.
Activity 1: Write the account title based on the effect given the transaction
Transaction Increase Decrease No Effect

1. Cash investment of owner
2. Non-cash investment of the owner
(supplies)
3. Cash withdrawal of the owner
4. Non-cash withdrawal of the owner
(supplies)
5. Purchase of supplies
References:
2011
Unit INTRODUCTION

The effects of income earned and payment of expenses on the assets and owner’s equity:
Transaction Assets Liabilities Owner’s Equity Analysis
Rendered services Assets Capital increases Assets increases because
for cash increase owner collected cash as a
result of services rendered.
Owner’s equity increases
because the business earned
income for services
rendered.
Rendered service on Assets Capital increases Assets increases because of
credit increases account collectible from the
customer which is an asset
as a result of services
rendered. Likewise, owner’s
equity increases because of
income earned from service
rendered.
Paid utilities Asset Capital decreases Asset decreases because
decreases owner pays cash for the
utilities bill. Owner’s equity
decreases because of the
utilities bill as it is an
expense which decreases
capital.
Activity 2: Fill out the blanks of the effects depending on the transaction given. Write INC for increase,
DEC for decrease, NC no change. The first one is provided to you as an example:
Transaction Assets Liabilities Owner’s Equity
1. Owner invests cash INC NC INC
2. Owner invests equipment
3. Renders services for cash
4. Render services on credit
5. Collects account in transaction #4
6. Purchase supplies on credit
7. Return defective supplies
8. Pays the supplies bought on account or credit
9. Borrows cash issuing a note
10. Purchase land using cash
11. Pays utilities expense for the month
12. Pays the note in full in transaction # 9
References:
2011
Unit INTRODUCTION

“TOPIC: Rule of Debit and Credit”
Journalizing the transactions
Journalizing is the process of recording a transaction in the journal after it has been recognized
and measured.
In journalizing transactions, the double-entry system is used. In this case, two or more accounts
are affected by each transaction. It follow that for every debit, a corresponding credit is made. The total
debits should equal total credits for every transaction. In this way, the equality of the accounting
equation is maintained.
Rules of Debit and Credit
You debit to show: You credit to show:

1. Increase in assets 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in owner’s equity 3. Increase in owner’s equity
- Owner’s withdrawal - Initial investment
- Expenses - Additional investment
- Revenue/income
THE ANALYSIS OF A TRANSACTION
Following the steps involved in analyzing transactions:
1. From the business document, determine the kind of transaction or exchange made.
2. Analyze the transaction to determine the accounts affected. They can either affect the assets,
liabilities, owner’s equity, revenue, or expense account.
3. Determine the effect of the transaction on the accounts affected. The transaction can either
increase or decrease the accounts.
4. Apply the rules of debit and credit to identify whether the accounts affected should be debited
or credited to show the corresponding increase or decrease.
ILLUSTRATIVE PROBLEMS:
The following are transactions for ACCT world gallery for the month of May. They will be recorded using
the double-entry system. To analyze each transaction, the following shall be used to show the effect on
the accounts as follows: A (for asset), L (for liability), or OE (Owner’s Equity). The effects on owner’s
equity is sub classified as follows: OE:R (Revenue) and OE:E (Expenses).
Initial Investment
References:
2011
Unit INTRODUCTION
May 2 Love Tan loves to draws posters of colorful sceneries. Sometimes the display them in
her office. To her surprise, many people loves her drawings and place orders to her of
their choices. Thus Love decided to open ACCT world gallery. Love invested P 300,000
in this endeavor.
Analysis Assets increase. Owner’s equity increased.
Rules Debit increased in assets. Credit increases in owner’s equity.
Entry Increase in assets is recorded by a debit to cash. Increase in owner’s equity is recorded
by a credit to Tan, capital.
Debit Credit
Cash (A) 300,000
Tan, Capital (OE) 300,000
Initial Investment
Issuance of Note for Cash

May 3 Love Tan issued a promissory note for a P 100,000 loan from Allay Bank. The note
carries a 12% interest per annum. The interest and the principal are payable after one
year.
Analysis Assets increase. Liabilities increased.
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to cash. Increase in liabilities is recorded by a
credit to notes payable.
Debit Credit
Cash (A) 100,000
Notes Payable (L) 100,000
Issuing a promissory note
Acquisition of Office Equipment for Cash
May 5 Ms. Tan acquired office equipment to be used for the office paying P 180,000 in cash
Analysis Assets increase. Another asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to office equipment. Decreases in assets is
recorded by a credit to cash.
Debit Credit
Office Equipment (A) 180,000
Cash (A) 180,000
Issuing a promissory note
Acquisition of Furniture paying down payment and the balance on account.
May 5 Ms. Tan acquired furniture from Torn’s costing P 40,000, paying P 12,000 and the
balance at the end of the month. (Note: A compound entry is needed in this transaction
Rules Debit increases in assets. Credit decreases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to furniture and fixture. Decrease in assets is
recorded by a credit to cash. Increase in liabilities is recorded by a credit to accounts
payable.
Debit Credit
Furniture and Fixtures (A) 40,000
References:
2011
Unit INTRODUCTION
Cash (A) 12,000

Accounts Payable (L) 28,000
Bought furniture by paying cash
and the balance on account

Advance payment of rental
May 6 Love Tan rented office space and paid two months rent in advance. All costing P 18,000.
Entry Increase in assets is recorded by a debit to prepaid rent. Decreases in assets is recorded
by a credit cash.
Debit Credit
Prepaid rent (A) 18,000
Cash (A) 18,000
Paid two months rent in advance
Payment of insurance premiums
May 7 Love Tan paid Australia Insurance Co. P 10,800 for one year insurance of the gallery.
Entry Increase in assets is recorded by a debit to prepaid insurance. Decreases in assets is
recorded by a credit cash.
Debit Credit
Prepaid insurance (A) 10,800
Cash (A) 10,800
Paid two months rent in advance
Events not affecting the accounting equation (no journal entry)

May 7 Hired a part-time student helper with P 4,000 monthly salary. The student helper
started working on the following day.
There is no entry necessary at this point as the hiring of the student helper has no effect on the assets,
liabilities, and owner’s equity.
May 8 Called National Book Store and ordered art supplies worth P 7,200.
There is no entry necessary at this point as the ordering of the art supplies has no effect on the assets,
liabilities, and owner’s equity. No delivery of the supplies has been made, thereby no liability arises.
References:
2011
Unit INTRODUCTION
Payment of Art supplies on account

May 8 The P 7,200 worth of art supplies ordered from National Book Store were delivered on
account.
Analysis Assets increase. Liabilities increased.
Rules Debit increases in assets. Credit increase in liabilities.
Entry Increase in assets is recorded by a debit to art supplies. Increase in liabilities is recorded
by a credit to accounts payable.
Debit Credit
Art Supplies (A) 7,200
Purchased art supplies on account

Income earned on account
May 11 An oil painting of a Falls and an acrylic painting of M, was delivered to Mr. Ku To. Ms.
Love Tan billed Mr. Ku To P 120,000 for the painting delivered.
Analysis Assets increased. Owner’s equity increased.
Rules Debit increases in assets. Credit increase in owner’s equity.
Entry Increase in assets is recorded by a debit to accounts receivable. Increase in owner’s
equity is recorded by a credit to painting revenue.
Debit Credit
Accounts Receivable (A) 120,000
Painting revenue (OE:R) 120,000
Falls painting on account
Partial settlement of Accounts payable
May 12 Ms. Tan paid National Book Store P 3,000 of the amount owned.
Analysis Assets decrease. Liabilities decreased.
Rules Debit decrease in liability. Credit decrease in assets.
Entry Decrease in liabilities is recorded by a debit to accounts payable. Decrease in assets is
recorded by a credit to cash
Debit Credit
Cash (A) 3,000
Partial payment of account - NBS
Partial settlement of Accounts Receivable
May 15 Ms. Tan received P 50,000 from Mr. Ku To as partial payment for the painting delivered
last May 11.
Analysis Assets increased. Another asset decreased.
Rules Debit increase in assets. Credit decrease in assets.
Entry Increase in assets is recoded by a debit to cash. Decrease in assets is recorded by a
credit to accounts receivable.
Debit Credit
Cash (A) 50,000
References:
2011
Unit INTRODUCTION
Module Ledger and its Description of Account titles P a g e | 10
Accounts Receivable (A) 50,000

Partial payment – Mr. Ku To
Cash withdrawal by owner for personal use

May 18 Ms. Tan withdrew P 18,000 for personal use.
Analysis Assets decreased. Owner’s equity decreased.
Rules Debit decreases in owner’s equity. Credit decreases in assets.
Entry Decreases in owner’s equity is recoded by a debit to Tan, drawing. Decrease in assets is
recorded by a credit to cash.
Debit Credit
Owner’s Equity (OE) 18,000
Cash (A) 18,000
Withdrew cash for personal use
Collection of Unearned Income

May 20 Ms. Tan received P 80,000 cash for a contract to paint a sunset.
Analysis Assets increased. Liabilities increased.
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to cash. Increase in liabilities is recorded by a
credit to unearned painting revenue.
Debit Credit
Cash (A) 80,000
Unearned painting revenue (L) 80,000
Received cash for painting services to be rendered
Cash collection from income earned
May 23 Ms. Tan received cash from Ms. Uto San, P 90,000, for a charcoal poster of sunset.
Analysis Assets increased. Owner’s equity increased.
Rules Debit increases in assets. Credit increases in owner’s equity.
Entry Increase in assets is recorded by a debit to cash. Increase in owner’s equity is recorded
by a credit to painting revenue.
Debit Credit
Cash (A) 90,000
Painting revenue (OE:R) 90,000
Received cash for a charcoal painting
Payment of Salaries
May 25 Ms. Tan paid helper’s salary for the month, P 4,000
Analysis Asset decreased, Owner’s equity decreased.
Rules Debit decreases in owner’s equity. Credit decreases in assets.
References:
2011
Unit INTRODUCTION
Entry Decrease in owner’s equity is recoded by a debit to salaries expense. Decrease in assets
is recoded by a credit to cash.
Debit Credit
Salaries Expense (OE: E) 4,000
Cash (A) 4,000
Paid helper’s salary for the month
Payment of Expenses Incurred/Consumed
May 25 Ms. Tan paid water bill of P 540 for the month.
Analysis Asset decreased. Owner’s equity decreased.
Rules Debit decrease in owner’s equity. Credit decreases in assets.
Entry Decrease in owner’s equity is recoded by a debit to utilities expense. Decrease in assets
in recoded by a credit to cash.
Debit Credit
Utilities Expense (OE: E) 540
Cash (A) 540
Paid water bill for the month
Unpaid expenses already consumed/ Incurred (Accrued Expenses)

May 25 Ms. Tan received bill from Meralco amounting to P 4,500.
Analysis Liabilities increased. Owner’s equity decreased.
Rules Debit decreases in owner’s equity. Credit increases in liabilities.
Entry Decrease in owner’s equity is recorded by a debit to utilities expense. Increase in
liabilities is recorded by a credit to utilities payable.
Debit Credit
Utilities Expense (OE: E) 4,500
Utilities payable. (L) 4,500
Received bill from Meralco for the month
If paid
Debit Credit
Utilities payable. (A) 4,500
Cash. (A) 4,500
Paid water bill for the month
Activity 3:
Using the illustrative problem’s journal entry. Create and transfer the accounts in its individual ledger.
Use pencil footing to compute for the balances of each account.
Activity 4:
Indicate the effect of each transaction on each account. Put “+” if the account has increased or “-“if the
account has decreased. Put the amount of increase or decrease for each account. Please use the format
below
References:
2011
Unit INTRODUCTION
Assets Liabilities Owner’s equity

Transactions Cash Accounts Notes Office Accounts Loan Kumot, Capital
Receivable Receivable equipment Payable Payable
1. Mr. Kumot invested P 650,000 cash.

2. Purchase office equipment P 10,000.
3. Rendered services to Mr. Stop on account, P 10,000.
4. Cash services to clients. P 22,000.
5. Bought additional worth of office equipment on account.
6. Received a note from Mr. Go for account.
7. Partial payment of P 12,000 for the office equipment bought in #5.
8. Paid electric bill to Meralcom P 1,800
9. Mr. Go settled 40% of the note.
10. Kumot made an additional investment of P 75,000.
11. Paid for the office equipment in full.
12. Mr. Go settled the note in full.
13. Kumot withdrew P 45,000 cash.
References:
2011

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Unit INTRODUCTION

Module Ledger and its Description of Account titles Page|1

INFORMATION SHEET PR-3.1.1

Liabilities are classified into current and non-current.

INFORMATION SHEET PR-3.2.1

The accounting Equation

Asset = Liabilities + Owner’s Equity

Asset = Owner's Equity

Assets – Liabilities = Owner’s Equity

Jan 5. Bought Furniture and fixtures worth P 6,000 on account.

INFORMATION SHEET PR-3.2.1

82, 500 = 10,000 + 72,500

5.Owner gets cash Asset Cash increases because of

Transaction Increase Decrease No Effect

INFORMATION SHEET PR-3.2.3

INFORMATION SHEET PR-3.3.1

Rules of Debit and Credit

You debit to show: You credit to show:

THE ANALYSIS OF A TRANSACTION

Following the steps involved in analyzing transactions:

Issuance of Note for Cash

Cash (A) 12,000

INFORMATION SHEET PR-3.3.3

Events not affecting the accounting equation (no journal entry)

Payment of Art supplies on account

INFORMATION SHEET PR-3.3.4

Accounts Receivable (A) 50,000

Cash withdrawal by owner for personal use

Collection of Unearned Income

INFORMATION SHEET PR-3.3.6

Unpaid expenses already consumed/ Incurred (Accrued Expenses)

Assets Liabilities Owner’s equity

1. Mr. Kumot invested P 650,000 cash.

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