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UNIVERSITY OF SOUTHERN MINDANAO

Chapter 2
The Elements of Financial Statements
and Transaction Analysis
Acc 112b: Financial Accounting and Reporting I

Prepared by: Ella Mae P. Villanueva & Sandra Angela A. Bangcaya

2023

Learning Objectives
• Describe the elements of financial statements.
• Describe the account and its uses.
• Describe the accounting equation.
• Analyze financial transactions
• State the effects of business transactions on the elements
of the financial statements.

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Topics
• Elements of financial statements.
• The account and its uses.
• The accounting equation.
• Analysis of financial transactions
• Effects of business transactions on the elements of the
financial statements.

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Financial Statements
A complete set of Financial Statement comprises per revised PAS No. 1:
1. a statement of financial position as at the end of the period;
2. a statement of comprehensive income for the period;
3. a statement of changes in equity for the period;
4. a statement of cash flows for the period;
5. notes, comprising a summary of significant accounting policies and other
explanatory information; and
6. a 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

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Statement of Comprehensive Income

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Statement of Changes in Equity

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Statement of Financial Position

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The Account
• The basic summary device of accounting
• Detailed record of increases and decreases and the balance
of each element that appears in the financial statements
• A group of accounts is called chart of accounts.

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Elements of Financial Statements

Element Relates to Definition or Description
Asset Financial A present economic resource controlled by the entity as a
position result of past events. An economic resource is a right that has
the potential to produce economic benefits.
Liability Financial A present obligation of the entity to transfer an economic
position resource as a result of past events.
Equity Financial The residual interest in the assets of the entity after deduction
position all its liabilities.
Income Financial Increases in assets, or decreases in liabilities, that result in
performance increase in equity, other than those relating to contributions
from holders of equity claims.
Expense Financial Decreases in assets, or increases in liabilities, that result in
performance decreases in equity, other than those relating to distributions
to holders of equity claims.
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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.

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Three Aspects in the Definition of Assets

1. Right
a. Rights that correspond to an obligation of another party
i. Rights to receive cash
ii. Rights to receive goods
iii. Rights to exchange economic resource with another party on
favorable terms
iv. Rights to benefit from an obligation of another party to transfer an
economic resource if a specific uncertain future event occurs.
b. Right that does not correspond to an obligation of another party
i. Rights over physical objects
ii. Rights to use intellectual property

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2. Potential to produce economic benefits

a. Receive contractual cash flows or other economic resource
b. Exchange economic resources with another party on
favorable terms
c. Produce cash inflows or avoid cash outflows
i. Using resources to produce goods and services
ii. Using resources to enhance the value of other economic resource
iii. Leasing the economic resource to another party
d. Receive cash or other benefit by selling the resource
e. Extinguish liabilities by transferring the economic resource

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3. Control
• Ability to direct the use of the resource
• Obtain economic benefits that may flow from it
• Prevent others from directing the use of the resource
and obtaining economic benefits that may flow from it

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Classification of Assets
1. Current
a. it expects to realize the assets, or intends to sell or consume it, in
its normal operating cycle.
b. It hold the assets primarily for trading
c. Expected to be realized within 12 months after the reporting
period
d. Cash and cash equivalents (unless restricted)
2. Non-current
• All other assets that does not fit the definition of current assets.

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Examples of Assets
CURRENT ASSETS. Cash, Accounts Receivable, Notes
Receivable, Supplies, Prepaid Expenses.

NON-CURRENT ASSETS. Land, Equipment, Machinery,

Vehicles, Furniture and fixtures, Accumulated
depreciation.

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LIABILITY
A present obligation of the entity to transfer an
economic resource as a result of past events.

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Criteria for Liability

1. The entity has an obligation
An obligation is a duty that cannot be practically
avoided. It is not necessary to know the entity to whom
the obligation is owed.

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2. The obligation is to transfer an economic resource

An item can be classified as a liability even though the
probability of the transfer is low or the transfer may only be
required if certain future event occurs. The obligation to handover
an economic resource can includes
• Paying cash
• Deliver goods or provide services
• Exchange of economic resources with another party on unfavourable
terms. Ex. Forward contracts and option
• Obligation to transfer an economic resource if a specified uncertain
future event occurs.
• Obligation to issue a financial instrument if that financial instrument will
oblige the entity to transfer economic resource
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3. The obligation is a present obligation that exists as

a result of past events.
• The entity has already obtained economic benefits or taken
an action
• as a consequence, the entity will or may have to transfer
an economic resource

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Classification of Liabilities
1. Current
a. It expects to settle the liability in its normal operating cycle.
b. It holds the liability primarily for the purpose of trading.
c. It is due to be settled within 12 months after the reporting
period.
d. The entity does not have the unconditional right to defer
settlement of the liability for at least 12 months after the
reporting period.
2. Non-current
• All other liabilities that does not fit the definition of current
liability.
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Examples of Liabilities
CURRENT LIABILITIES. Accounts payable, Notes payable,
Unearned service revenue, Accrued expense payable.

NON-CURRENT LIABILITIES. Mortgage payable, Bonds

payable.

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EQUITY
The residual interest in the assets of the entity after
deduction all its liabilities.

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EQUITY
Equity depends on the form of business
organization.
• Sole proprietorship Bangcaya, Capital Bangcaya, withdrawal
• Partnership Bangcaya, capital Lemana, capital
• Corporation
 Stockholders’ equity
 Share capital
 Retained earnings

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Examples of Equity
Capital
 Withdrawal
 Income summary

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INCOME
Increases in assets, or decreases in liabilities, that
result in increases in equity, other than those
relating to contributions from holders of equity
claims.

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Examples of Income
 Service revenue / service income
 Interest revenue / interest income
 Sales

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EXPENSE
Decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those
relating to distributions to holders of equity claims.

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Examples of Expense
Salaries expense
Utilities expense
Rent expense
Supplies expense
Depreciation expense

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ACCOUNTING EVENTS AND TRANSACTIONS

• An accounting event is an economic occurrence that
causes changes in an enterprise’s assets, liabilities and/or
equity.

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ACCOUNTING EQUATION
Asset = Liability + Equity
Asset = Liability + Equity (+Capital –Withdrawal + Income – Expense)
Asset = Liability + Capital –Withdrawal + Income – Expense
Debit = Credit

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TRANSACTION ANALYSIS
• Every financial transaction can be anaylzed or expressed
in terms of its effects on the elements of financial
statements specifically the accounts.
• Financial transaction worksheet can be used to analyze
transactions.

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TRANSACTION ANALYSIS EXAMPLE

During March 2020, the first month of operations, various transactions took place follows:
Mar
1
Modesto started her new business by depositing 350,000 in a bank
account in the name of Modesto Graphics Design at BPI Poblacion
Branch.
2
Modesto hired an assistant for the business. The assistant will be paid a
salary of 15,000 per month.
5
Computer equipment costing 145,000 is acquired on cash basis.
9
Computer supplies in the amount of 25,000 are purchased on account.
11
Modesto Graphics Design received 88,000 in cash for designing
interactive websites for two exporters based inside the ASEAN
Ecozone.
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TRANSACTION ANALYSIS EXAMPLE

During March 2020, the first month of operations, various transactions took place follows:
Mar Modesto paid 18,000 to MVP Bill Express, a one-stop shop bill payments service
16
company, for the semi-monthly utilities.
17 The entity has service agreements with several Netepreneurs to maintain and
update their web site weekly. Modesto billed these clients 35,000 for service
already rendered during month.
19 Modesto made a partial payment of 17, 000 for the Mar 9 purchase on account.
20 Checks totalling 25,000 were received from clients for billing dated Mar 17.
21 Modesto withdrew 20,000from the business for her personal use.
27 Alessandra Publishing submitted a bill to Modesto for 8,000 worth of newspaper
advertisement for this month. Modesto will pay the bill next month.
31 Modesto paid her assistant designer salaries of 15,000 for the month.
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MODESTO GRAPHIC DESIGN

CHART OF ACCOUNTS
Assets Liabilities Owner’s equity Income Expenses
110 Cash 210 Accounts 310 Modesto, 410 Design 510 Utilities expense
payable capital Revenue
120 Accounts 220 Notes payable 320 Modesto, 520 Salaries expense
receivable withdrawal
130 Computer 330 Income 530 Advertising
Supplies Summary expense
140 Computer 540 Computer
Equipment Supplies expense
145 Accumulated 550 Depreciation
depreciation – expense-Computer
Computer Equipment
Equipment

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TRANSACTION WORKSHEET
• See excel file.

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ACCOUNTING EVENTS AND TRANSACTIONS

Although business entities engage in numerous transactions, all transactions can be
classified into four types:
1. Source of asset (SA)
a. Increase in asset = Increase in liability (SA)
b. Increase in asset = Increase in equity (SA)
2. Exchange of asset (EA)
a. Increase in one asset = Decrease in another asset (EA)
3. Use of asset (UA)
a. Decrease in asset = Decrease in liability (UA)
b. Decrease in asset = Decrease in equity (UA)
4. Exchange of claims (EC)
a. Increase in liability = Decrease in equity (EC)
b. Increase in equity = Decrease in liability (EC)
c. Increase in liability = Decrease in another liability (EC)
d. Increase in equity = Decrease in another equity (EC)
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Summary
• There are 5 elements in the financial statement namely asset,
liability, equity, income and expense.
• The basic summary device of accounting if the account.
• The elements in the financial statement is broken down into
accounts.
• Although business entities engage in numerous transactions, all
transactions can be classified into four types namely source of
asset (SA), exchange of asset (EA), use of asset (UA), and
exchange of claims (EC).

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Reference
• Ballada, W. & Ballada, S., 2019. Basic Financial Accounting
and Reporting. Manila, Philippines: DomeDane Publishers &
Made Easy Books.
• Cabrera, M.E. & Cabrera, G.A. (2018-2019). Financial
Accounting and Reporting. Manila, Philippines: GIC
Enterprises & Co., Inc.

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End of Presentation
Thank you and God Bless!

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