ACCOUNTING AND BUSINESS

WHAT ARE FINANCIAL STATEMENTS?

The accountant’s reports to the proprietor or business management which are considered the “end
products” of the accounting process are called “financial statements”.

Financial Statements are the means by which the information accumulated and processed in financial
accounting are periodically communicated to the users. They are designed to serve the needs of variety
of users, particularly owner and creditors. The objective of financial statements is to provide information
about the financial position, performance and cash flows of an enterprise that is vital in making a sound
economic decisions. There are six (6) basic financial statements as per revised PAS No. 1. These are as
follows:

1. A Statement of financial position as at the end of the period; (Balance Sheet)

2. A Statement of comprehensive income for the period; (Income Statement)
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.

BALANCE SHEET

It is a financial statement which shows the financial position of enterprise as of a particular date. It
consists of three (3) sections which are the Asset, Liabilities, and Owner’s Equity section. A balance sheet
is always worded as follows;

“As of specific date “

The balance sheet measures and evaluates in terms of the enterprise’s liquidity, solvency, financial
structure and capacity for adaptation. Liquidity is the stability of the enterprise to meet currently
maturing obligations. Solvency is the availability of cash over the longer term to meet maturing
obligations. Financial Structure is the source of financing for assets of the enterprise. It indicates how
much is borrowed capital and how much is equity capital. Capacity for adaptation is the financial
flexibility of the enterprise to use the available cash for unexpected requirements and investment
opportunities.

Shown below is the an example of balance sheet of DIY Laundry Services as of June 30, 2021 prepared
under Report Form
 DIY Laundry Services
Balance Sheet
As of June 30, 2021

ASSETS

Current Assets:
Cash in Bank PHP 605,000.00
Accounts Receivable PHP 50,000.00
Less : Est. Uncollectible Accounts 500.00 49,500.00
Laundry Supplies 100,000.00
Total Current Assets PHP 754,500.00

Non-Current Assets:
The Balance Sheet answers the
Property and Equipment
following questions:
Laundry Equipment PHP 250,000.00
Less : Accumulated Depreciation 7,500.00
Total Non-Current Assets 242,500.00
How much the business owns?
Total Assets PHP 997,000.00
(Referring to Assets)
P997,000.00
LIABILITIES & OWNER'S EQUITY

LIABILITIES

Current Liabilities:
Notes Payable PHP 100,000.00
Accounts Payable 50,000.00 How much the business owes?
Accrued Advertising 5,000.00 (Referring to Liabilities)
Total Current Liabilities PHP 155,000.00 P 155,000.00

OWNER'S EQUITY
How much left for the business?
S. Santos, Capital PHP 842,000.00 (Referring to Owner’s Equity)
P 842,000.00
Total Liabilities & Owner's Equity PHP 997,000.00

In the balance sheet above, the business tells us that of the Php 997,000.00 assets it owns, Php
155,000.00 represents the claim of the creditors while the balance of Php 842,000.00 represents the
claim of the owner over the assets of the business. In other words, the assets of the business are subject
to the claims of the creditors at one hand and the owner on the other hand. The creditors have
continuous financial interests on the business as the business could not pay its obligations to them. If
there are no creditors, the owner has the sole right to the assets.
BASIC ACCOUNTING EQUATION

At all times, total assets must be equal to the total liabilities plus owner’s equity as expressed in the
equation.

ASSETS = LIABILITIES + OWNER’S EQUITY

Assets are found at the left-hand side of the equation which we termed as “Debit” while Liabilities and
Owner’s Equity are found at the right-hand side of the equation which we termed as “Credit”. The final
rule is that the “total of the left will always equal to the total of the right”. This is the significance of
the double-entry system of bookkeeping.

Substituting our equation with the Balance Sheet data:

ASSETS = LIABILITIES + OWNER’S EQUITY

P 997,000.00 = P155, 000.00 + P842, 000.00

If the owner wants to know his propriety interest in the business, the accounting equation may be
slightly modified and restated as follows:

OWNER’S EQUITY = ASSETS - LIABILITIES

P 842,000.00 = P 997,000.00 - P155, 000.00

INCOME STATEMENT

It is a financial statement which shows the performance of the enterprise for a given period of time. The
performance of the enterprise is primarily measured in terms of the level of income earned by the
enterprise through effective and efficient utilization of its resources. This income performance used to
be known as the “results of operations” of the enterprise consisting of revenues, expenses and
operating results which could either be profit or loss. The relationship among the three can be
expressed in the following:
 Revenue P xxx

- Expenses xxx

= Profit (Loss) P xxx

The information presented in an income statement is usually considered the most important
information provided by the financial accounting because profitability is a paramount concern to those
interested in the economic activities of the enterprise. The period covered by the income statement
may be:

“For the month ended” “For the quarter ended”

“For the year ended” or any accounting period that may be chosen

Shown below is the Income Statement of DIY Laundry Services for the month ended June 30, 2021
prepared under Modified Single Step Form.

DIY Laundry Services

Income Statement
For the month ended June 30, 2021

Revenue :
Laundry Income PHP 100,000.00 The income statement answers the
following questions:
Operating Expenses :
Uncollectible Account Exp PHP 400.00 Does the business make profit?
Does the business incur a loss?
Depreciation Expense 3,000.00
Does the business make no profit
Salaries Expense 10,500.00 and incur a loss?
Rent Expense 6,000.00
Utilities Expense 12,500.00
Laundry Supplies Expense 22,000.00
Taxes & Licenses 5,000.00
Advertising Expense 3,500.00 62,900.00
Operating Income PHP 37,100.00
Less : Finance Charges
Interest Expenses 1,000.00
Profit for the month PHP 36,100.00
The business makes profit if total income earned exceeds total expenses incurred. If the total expenses
incurred exceed total income earned, the business incurs a loss. In the above Income Statement, it
shoes that the business is making “profit” of P 22,150.00

Although the business is already making profit, through planning and control procedures, expenses can
be minimized so that profit can also be maximized.

EXPANDED ACCOUNTING EQUATION

We learned that the basic accounting equation are all Balance Sheet components, A=L+OE. This time, we
introduce to you the expanded accounting equation whereby we are putting together the components
of Income Statement which are Revenues and Expenses. Revenue will increase Owner’s Equity and will
be decreased by Expenses and Owner’s Withdrawals. Remember, owner’s withdrawal is a part of
owner’s equity. Hence, the expanded accounting equation is

ASSETS = LIABILITIES + OWNER’S EQUITY (+Revenue – Expenses)

Substituting this equation with the Balance Sheet and Income Statement Data:

ASSETS = LIABILITIES + OWNER’S EQUITY (+Revenue - Expenses)

P 997, 000.00 = P155, 000.00 + P805, 900.00 (+P100, 000.00 – P63, 900.000)

STATEMENT OF CHANGES IN EQUITY

It is financial statement that summarizes the changes in equity for a given period of time. The beginning
equity of the owner is increased by the additional investment and profit. Correspondingly, it is
decreased by withdrawal and loss.

Shown below is the Statement of Changes in Owner’s Equity of DIY Laundry Services for the month
ended June 30, 2021.
 DIY Laundry Services
Statement of Changes in Owner's Equity The Statement of Changes in
For the month ended June 30, 2021 Owner’s Equity answers the following
questions:
S. Santos, Owner's Equity - June 1, 2021 PHP 825,900.00
What causes the increase in Owner’s
Add : Additional Investment PHP 0.00 Equity of Mr. Santos from
Profit for the month 36,100.00 36,100.00 P 825,900.00 to P 842,000.00
Total 862,000.00
Less : Withdrawal 20,000.00
S. Santos, Owner's Equity - June 30, 2021 PHP 842,000.00

Looking at the above Statement of Changes in Owner’s Equity, the beginning equity of the owner, Mr. S.
Santos in the amount of P 825,900.00 is increased to P 842,000.00 as a result of its operation. The
amount of increase is calculated as follows:

Owner’s Equity at the end P842,000.00

Less: Owner’s Equity at the beginning 825,900.00
Increase in Owner’s Equity P16,100.00

The increase in owner’s equity by P 16,100.00 is accounted for as follows:

Profit for the month (Increase Owner’s Equity) P 36,100.00

Less : Owner’s Withdrawal (Decrease Owner’s Equity) 20,000.00
Net Increase in Owner’s Equity P 16,100.00