THE FINANCIAL STATEMENTS

ELEMENTS OF THE FINANCIAL STATEMENTS

Assets Liabilities Equity

Revenues Expenses
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ELEMENTS OF THE FINANCIAL STATEMENTS

Examples of Assets
ASSETS
➢ Cash on Hand
➢ Cash in Bank
The official definition of assets are ➢ Accounts Receivable
defined by IASB’s Framework for ➢ Supplies
preparation and presentation ➢ Prepaid Expenses
of financial statements are the ➢ Merchandise Inventory
resources control by the entity as the ➢ Office Equipment
result of past events and from which ➢ Furniture and Fixtures
the future economic benefits are ➢ Vehicles
expected to flow the entity. ➢ Building
➢ Land
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ASSETS

CURRENT ASSETS NONCURRENT ASSETS

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CURRENT ASSETS

Classify as current assets when it is:

1. Expected to be realized in, or is intended for sale or consumption in the entity’s normal operating cycle;
2. Held primarily for the purpose of being traded;
3. Expected to be realized within twelve months of the balance sheet date; or
4. Cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least
twelve months after the balance sheet date.

Examples of current assets are as follows:

1. Cash includes coins, currencies, checks, bank deposits, and other cash items readily available for use in the
operations of the business.
2. Cash equivalents are short-term investments that are readily convertible to known amounts of cash which
are subject to an insignificant risk to changes in value.
3. Marketable securities are stocks and bonds purchased by the enterprise and are to be held only for a
short span of time or duration. They are usually purchased when a business has excess cash.
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CURRENT ASSETS

4. Trade and other receivables include the amounts collectible from any of the following
❑ Accounts Receivable – amount collectible from the customer to whom sales have been made or
services have been rendered on account or credit
❑ Notes Receivable – promissory note issued by the client or the customer in exchange for services or
goods received as evidence of his/her obligation to pay
❑ Interest Receivable - amount of interest collectible on promissory notes received from customers
and clients
❑ Advances to Employees – certain amount of money loaned to employees payable in cash or through
salary deductions
❑ Accrued Income – Income already earned but not yet collected
5. Inventories represent the unsold goods art the end of accounting period. This is applicable only to a
merchandising business.
6. Prepaid Expenses – include supplies and other expenses paid in advance
7. Contra-Asset Accounts -
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CURRENT ASSETS

7. Contra-Asset Accounts – are accounts deducted from the related asset accounts.
a. Allowance for Bad Debts – losses due to uncollectible accounts. This is deducted from the accounts
receivable accounts to het the net realizable value. This is in line with the financial statements’ qualitative
characteristic of conservatism wherein no profits would be anticipated but all probable or estimable
expenses should be recognized.
b. Accumulated Depreciation - represents the expired cost of property, plant, and equipment as a result of
usage and passage of time. This is deducted from the cost of the related asset account to get the carrying
value or book value of the asset.
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NONCURRENT ASSETS

1. Long-term investments are assets held by an enterprise for the accretion of wealth though capital
distribution such as interests, royalties, dividends and rentals, for capital appreciation or for other
benefits to the investing enterprise such as those obtained through trading relationships. Investments are
classified as long-term when they are intended to be held for an extended period of time.
2. Property, plant, and equipment are tangible assets that are held by an enterprise for use in the
production or supply of goods or services, or for administrative purposes. These assets are expected to
be used for more than one period. Examples
❑ Land – a piece of lot or real estate owned by the enterprise
❑ Building – edifice or structure used to accommodate the office, store, or factory of a business enterprise in the
conduct of its operations
❑ Equipment – Includes computers, air-conditioner, calculator, trucks, cars used by the business in its office, store,
or factory. Specific account titles may be used such as office equipment, store equipment, delivery equipment,
machinery equipment, etc.
❑ Furniture and Fixtures – includes tables, chairs, carpets, curtains, lamp and lighting, wall decors, etc.
❑ Intangible Assets - identifiable, non-monetary assets without physical substance held for use in the production
or supply of goods or services, for rental to others, or for administrative purposes. These include goodwill,
patents, copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists, non-
competitive agreements.
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ELEMENTS OF THE FINANCIAL STATEMENTS

Examples of Liabilities
LIABILITIES
➢ Accounts Payable
➢ Utilities Payable
The official definition of liabilities ➢ Interest Payable
define by IASB’s Framework for ➢ Taxes Payable
preparation and presentation of ➢ Notes Payable
financial statements are the present ➢ Loans Payable
obligations arising from the past ➢ Mortgage Payable
events, the settlement of which is ➢ Salaries Payable
expected to result in an outflow from
entity resources embodying economic
benefit.
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LIABILITIES

NONCURRENT
CURRENT LIABILITIES
LIABILITIES
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CURRENT LIABILITIES

Classify as current liability when it is:

1. Expected to be settled in the entity’s normal cycle;
2. It is held primarily for the purpose of being traded;
3. It is due to be settled within twelve months after the balance sheet date; or
4. The entity does not have an unconditional right to defer settlement of the liabilities for at least twelve
months after the balance sheet date.

Trade and Other Payables – include payables from any of the following accounts:
1. Accounts payable includes debts arising from the purchase from the purchase of an asset or the
acquisition of service on account.
2. Notes payable includes debts arising from the purchase of an asset or the acquisition of services on
account evidenced by a promissory note.
3. Loan Payable is a liability to pay the bank or other financing institution arising from funds borrowed by the
businesses from these institutions payable within twelve months or shorter. If the loan is payable beyond
twelve months, then it is classified under non-current liabilities.
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CURRENT LIABILITIES

4. Utilities Payable is an obligation to pay utility companies for services received from them. Examples of this
are telephone services to PLDT, electricity to Meralco, and water services to Maynilad.
5. Unearned revenues represent obligations of the business arising from advance payments received before
goods or services are provided to the customer. This will be settled when certain goods or services are
delivered or rendered.
6. Accrued liabilities include amounts owed to others for expenses already incurred but are not yet paid.
Examples of thee are salaries payable, utilities payable, taxes payable, and interest payable.
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NONCURRENT LIABILITIES

Noncurrent liabilities are long term liabilities or obligations which are payable for a period longer than one
year. Examples of noncurrent liabilities are as follows:

1. Mortgage payable is a long-term debt of the business with security or collateral in the form of real
properties. In case the business fails to pay the obligation, the creditor can foreclose or cause the
mortgaged asset to be sold and use the proceeds of the sale to settle the obligations.
2. Bonds payable is a certificate of indebtedness under the seal of a corporation, specifying the terms of
repayment and the rate of interest to be charged.
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ELEMENTS OF THE FINANCIAL STATEMENTS

Items recorded in equity

EQUITY
➢ Owner’s initial investments
➢ Withdrawals
Equity is officially defined by IASB’s ➢ Additional investments
Framework for preparation and ➢ Net Losses
presentation of financial statements, is ➢ Net Profits
the residual interest in the assets of the ➢ Dividends or distribution of profits
entity after deducting all its liabilities.
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EQUITY

Capital is an account bearing the name of the owner representing the original and additional investment of the
owner of the business increased by the amount of net income earned during the period. It is decreased by the
cash or other assets withdrawn by the owner as well as the net loss incurred during the period.

Drawing represents the withdrawals made by the owner of the business in cash or other assets.

Income Summary is the temporary account used at the end of the accounting period to close income and
expenses accounts. The balance of this account shows the net income or net loss for the period before it is
closed to the capital account.
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ELEMENTS OF THE FINANCIAL STATEMENTS

Examples
REVENUES
➢ Sales – used by Merchandising businesses
➢ Service Income – used by service business
The official definition of revenues ➢ Interest Income
defined by IASB’s Framework for ➢ Dividend Income
preparation and presentation of the ➢ Rent Income
financial statement is an increase in the
economic benefits during the
accounting period in the form of
inflows or enhancements of assets or
decrease of liabilities that result in
increases in equity, other than those
relating to contributions from equity
participants.
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ELEMENTS OF THE FINANCIAL STATEMENTS

Examples
EXPENSES
➢ Cost of Goods Sold
➢ Salaries Expense
The official definition of Expenses ➢ Depreciation
defined by IASB’s Framework for ➢ Interest Expense
preparation and presentation of a ➢ Utility Expense
financial statement is decreased in ➢ Transportation
economic benefits during the ➢ Marketing
accounting period in the form of ➢ Repairs and Maintenance
outflows or depreciation of assets or ➢ Permits and Licenses
incurred of liabilities that result in
decreases in equity, other than those
relating to distributions to equity
participants.
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1 Statement of Financial Position or Balance Sheet

It’s a report showing the financial condition /position of a business as of a given period. It
consists of assets, liabilities and equity.
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2 Statement of Comprehensive Income or Income Statement

It’s a report showing the result of operations for a given period. It consists of revenue, costs, and
expenses.
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3 Statement of Changes in Owner’s Equity

It’s a report showing the changes in capital or owner’s equity as a result of additional
investments or withdrawals, plus or minus the net income or loss for the period.
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4 Statement of Cash Flows

It’s a report showing the receipts and disbursements for the accounting period. It summarizes
the cash activities of the business by classifying cash inflows (receipts) and cash outflows
(payments) into operating, financing ang investing activities.