2.

1 Statement of Financial Position

If you want to increase assets, do debiting. If you want to decrease assets, do crediting.

If you want to increase Owner’s Equity and Liabilities, do crediting. If you want to decrease
Owner’s Equity and Liabilities, do dediting.

2 Classification of Assets
1. Current Assets
- expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle. (operating cycle is the time between the acquisition of assets
for processing their realization in cash or cash equivalents.)
- it holds the asset primarily for the purpose of trading.
- it expects to realize the asset within twelve months after the reporting period
Calendar Year starts January 1 to December 31.
Fiscal Year starts in any months except January.
- the asset is cash or a cash equivalent unless the asset is restricted from
being exchanged or used to settle a liability for at least twelve months after
the reporting period.
2. Non-current Assets
- Anything that not falls in current assets is non-current assets.

Current Assets
1. Cash - medium of exchange that a bank will accept for deposit at face value.
2. Cash Equivalents - short-term, high liquid investments that are readily convertible to
know amounts of cash.
3. Notes Receivable - a written pledge that the customer will pay the business a fixed
amount of money on a certain date. (ex. promissory note)
4. Accounts Receivable - claims against customers arising from sale of services or
goods on credit. (ex. offers less security than a promissory note.)
5. Inventories - held for sale in the ordinary course of business. In the process of
production for such sale. In the form of materials of supplies to be consumed in the
production process or in the rendering of services.
6. Prepaid Expenses - expense that has been paid for in advance but not yet incurred.
In business, a prepaid expense is recorded as an asset on the balance sheet that
results from a business making advanced payments for goods or services to be
received in the future.

Non-current Assets
1. Property, Plant and Equipment - tangible assets that are held by an enterprise for
use of production or supply of goods or services, for rental to others, for
administrative purposes and which are expected to be used during more than one
period. Included: land, building, machinery and equipment, furniture and fixtures,
motor vehicles and equipment.
2. Accumulated Depreciation - contra account that contains the sum of the periodic
depreciation charges, the balance in this account is deducted from the cost of th
related asset equipment or buildings to obtain book value.
 3. Intangible Assets - (ex. trademark, copyright, licenses, franchises, patents,
goodwill, brand names, secret processes, subscription lists and non-competition
agreements)

2 Classification of Liabilities
1. Current Liabilities
- expects to settlethe liability in its normal operating cycle.
- hold the liability primarily for the purpose of trading.
- liability is due to be settled within twelve months after the reporting period.
- Entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reportinvg period.
2. Non-current Liabilities
- Anything that not falls in current assets is non-current assets.

Current Liabilities
1. Accounts Payable - represents the reverse relationship of the accounts receivable,
the buyer agrees to pay for them in the near future by accepting goods of services.
2. Notes Payable - reverse sense of notes receivable but in the case of notes payable
is the business entity is the maker of the note; that is, the business entity is the party
who promises to pay the other party a specified amount of money on a specified
future date.
3. Accrued Liabilities - owed to the others for unpaid expenses and this account
includes salaries payable, utilities payable, interest payable, and taxes payable.
4. Unearned Revenues - when the business entity receives payment before providing
its customers with goods and services, the amounts received are recorded in an
unearned revenue account (liability method) and when the goods or services are
provided to the customer, the unearned revenue is reduced and income is
recognized.
5. Current Portion of Long-Term Debt - are portions of mortgage notes, bond and
other long-term indebtedness which are to be paid withing one year from the balance
sheet date.

Non-current Liabilities
1. Mortgage Payable - records long-term debt of the business entity for which the
business entity has pledged certain assets as security to the creditor, in the event
that the debt payments are not made and the creditor can foreclose or cause the
mortgaged asset to be sold to enable the entity to settle the claim.
2. Bonds Payable - business organizations often obtain substantial sums of money
from lenders to finance the acquisition of equipment and other needed assets, they
obtain these funds by issuing bonds and the bond is a contract between the issuer
and the lender specifying the terms of repayment and the interest to be charged.

Owner's Equity
1. Capital - (from the latin capitalis, meaning "property") and this account is used to
record the original and additional investments of the owner of the business entity, it is
increased by the amount of profit earned during the year or is decreased by a loss,
the cash or other assets that the owner may withdraw from the business ultimately
reduce it and this account title bears the name of the owner.
 2. Withdrawals - when the owner of a business entity withdraws cash or other assets,
such are recorded in the drawing or withdrawal account rather than directly reducing
the owner's equity account.
3. Income Summary - it is a temporary account used at the end of the accounting
period to close income and expenses. This account shows the profit or loss for the
period before closing to the capital account.

2.2 Income Statement

Income
1. Service Income - revenues earned by performing services for a customer or client;
for example, accounting services by a CPA firm, laundry services by a laundry shop.
2. Sales - revenues earned as a result of sale of merchandise; for example, sale of
building materials by a construction supplies firm.

Expenses
1. Cost of Sales - the cost incurred to purchase or to produce the products sold to
customers during the period; also called cost of goods sold.
2. Salaries or Wages Expense - includes all payments as a result of an employer-
employee relationship such as salaries or wages, 13th month pay, cost of living
allowances and other related benefits.
3. Telecommunications, Electricity, Fuel and Water Expenses - expenses related to
use of telecommunications facilities, consumption of electricity, fuel and water.
4. Rent Expense - expense for space, equipment or other asset rentals.
5. Supplies Expense - expense of using supplies (e.g. office supplies) in the conduct
of daily business.
6. Insurance Expense - portion of premiums paid on insurance coverage (e.g. on
motor vehicle, health, life, fire, typhoon or flood) which has expired.
7. Depreciation Expense - the portion of the cost of a tangible asset (e.g. buildings
and equipment) allocated or charged as expense during an accounting period.
8. Uncollectible Accounts Expense - the amount of receivables estimated to be
doubtful of collection and charged as expense during an accounting period.
9. Interest Expense - expense related to use of borrowed funds.

2.3 Depreciation Method (Practice)

A machine was purchased at a cost of P3,300,000. It has a scrap value of P300,000 and
an estimated useful life of 10 years.

Compute the depreciation per year under:

a.) Straight Line Method
b.) Reducing balance method (rate of 15%)
c.) Machine hour method
- Year 1 to 5: 250 hours per year
- Year 6 to 10 : 200 hours per year
d.) The sum if the digits method.
a.) Straight Line Method
formula: Annual Depreciation = Acquisition Cost - Salvage Value
Estimated Useful Life in Year
Annual Depreciation = P3,300,000 - P300,000
10 years

Depreciation Amount = P3,300,000 - P300,000 = P3,000,000

Annual Depreciation = P300,000

Year Acquisition Annual Accumulated Book Value

Cost (AC) Depreciation Depreciation (BV)
(AnnD) (AccD)

1 P3,300,000 P300,000 P300,000 P3,000,000

2 P3,300,000 P300,000 P600,000 P2,700,000

3 P3,300,000 P300,000 P900,000 P2,400,000

4 P3,300,000 P300,000 P1,200,000 P2,100,000

5 P3,300,000 P300,000 P1,500,000 P1,800,000

6 P3,300,000 P300,000 P1,800,000 P1,500,000

7 P3,300,000 P300,000 P2,100,000 P1,200,000

8 P3,300,000 P300,000 P2,400,000 P900,000

9 P3,300,000 P300,000 P2,700,000 P600,000

10 P3,300,000 P300,000 P3,000,000 P300,000

b.)
Year

1 15% x P3,300,000 P495,000

2 15% x (P3,300,000 - P495,000) P420,750

3 15% x (P2,805,000 - P420,750) P357,637.50

15% x P2,384,250

4 15% x (P2,384,250 - P357,637.50) P303,991.88

15% x P2,026,612.50

5 15% x (P2,026,612.50 - P303,991.88) P258,393.09

15% x P1,722,620.62

6 15% x (P1,722,620.62 - P258,393.09) P219,634.13

15% x P1,464,227.53
 7 15% x (P1,464,227.53 - P219,634.13) P186,689.01
15% x P1,244,593.40

8 15% x (P1,244,593.40 - P186,689.01) P158,685.66

15% x P1,057,904.39

9 15% x (P1,057,904.39 - P158,685.66) P134,882.81

15% x P899,218.73

10 P899,218.73 - P134,882.81 - P300,000 P464,335.92

P3,000,000
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c.) Machine Hour Method

Total usage per hour: Year 1 to 5 - 250 hours each year (250 hours x 5 years = 1,250)
Year 6to 10 - 200 hours each year (200 hours x 5 years = 1,000)
Total usage per hour = 1,250 + 1,000 = 2,250 hours

Depreciation per hour = Acquisition Cost - Salvage Value

Total Usage Per Hour
Depreciation per hour = P3,300,000 - P300,000
2,250 hours
Depreciation per hour = P1,333.33

Years Usage Depreciation

(hours) (hours x P1,333.33)

1 250 P333,332.50

2 250 P333,332.50

3 250 P333,332.50

4 250 P333,332.50

5 250 P333,332.50

6 200 P266,666

7 200 P266,666

8 200 P266,666

9 200 P266,666

10 200 P266,666

P2,999,992.50
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