Module 1

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MODULE 1: ACCOUNTING IN ACTION
I. Learning Objectives
By the end of this module, the student should be able to:

1. Describe and relate the activities and users associated with accounting.
2. Explain the building blocks of accounting: ethics, principles, and assumptions.
3. Describe the forms of business ownership and the nature of business.
4. Explain the accounting equation, and define its components.
5. Investigate the effects of business transactions on the accounting equation.
6. Describe the four financial statements and how they are prepared.
II. Introduction
The purpose of accounting is to provide a means of recording, reporting, summarizing, and

interpreting economic data. In order to do this, an accounting system must be designed. A
system design serves the needs of users of accounting information. Once a system has been
designed, reports can be issued and decisions based upon these reports are made for various
departments. Since accounting is used by everyone in one form or another, a good
understanding of accounting principles is beneficial to all.
III. Lesson
CLO 1. Describe and relate the activities and users associated with accounting.
Definition of Accounting:
 Accounting is the art of recording, classifying and summarizing in a significant

manner and in terms of money, transactions and events which in part at least of a
financial character and interpreting the results thereof. (American Institute of Certified
Public Accountant)
 Accounting is a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities, that is intended to be useful in
making economic decision. (Accounting Standard Council)
 Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of the information.
(American Accounting Association)
Accounting consists of three basic activities—it identifies, records, and communicates the
economic events of an organization to interested users.
MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

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Three Activities
Who Uses Accounting Data

INTERNAL USERS
EXTERNAL USERS
Pictures excerpts from 2015 John Wiley & Sons, Inc.
In the world of business, several parties are interested to its records to seek answers to their
questions and bases for their decisions. These parties can be classified into Internal or those
who have direct interest to business records which are within the organizations and External
or those who are indirectly interested to accounting information which are outside the
organization.
Internal parties:
1. Owners. The providers of risk capital they are interested in profitability and stability
of business. They need accounting information to help them decide to increased,
LO 1
decreased, or dispose their interest in the business.
2. Management. The top management needs financial information as a measure for

making future financial decisions and measures of its effectiveness in running the
affairs of the business.
3. Rank-and-file employees. Employees are interested also in the information about the
stability and profitability of the business in order to assess the ability of the business
to provide renumeration, retirement benefits and employment opportunities.

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External parties:
1. Governments and their agencies. The government needs accounting information to

regulate the enterprise activities and determine the basis for taxation policies and
similar statistics.
2. Lenders. They are interested in financial information which enables them to

determine whether the loans and interest owed from them will be paid on maturity.
3. Suppliers and other trade creditors. They are interested in the information in order to
determine whether the amounts owing from them will be paid on time.
4. Prospective investors. They need information to help them to determine whether they
should invest in the business.
5. Public. The business establishments affect the members of the society in a variety of
ways. For example, does the enterprises make a substantial contribution to the local
economy? Ethics in Financial Reporting
CLO2. Explain the building blocks of accounting: ethics, principles, and assumptions.
Ethics in Financial Reporting

1. Recognize an ethical situation and ethical questions involved.
2. Identify and analyze the main elements in the situation.
3. Identify the alternatives, and assess the impact of each alternative on various
stakeholders.
4. Select the most ethical alternative and consider how to address the consequences.
Excerpts from 2015 John Wiley & Sons, Inc.

Generally Accepted Accounting Principles Illustration 1-4
Steps in analyzing ethics cases
and situations
Financial Statements
LO 2
Various users need financial u Balance Sheet
information u Income Statement
u Statement of Owner's Equity
u Statement of Cash Flows
u Note Disclosure
The accounting profession has developed Generally Accepted Accounting

standards that are generally accepted and Principles (GAAP)
universally practiced.
Excerpts from 2015 John Wiley & Sons, Inc.

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Generally Accepted Accounting Principles (GAAP) encompasses the conventions, rules and
procedures necessary to define what is accepted accounting practice. The principles have
developed on the basis of custom, experience, usage, reason, and practical necessity.
Standard-setting bodies:
 Accounting Standards Council (ASC). The main function of the ASC is to establish
and improve accounting standards that will be generally accepted in the Philippines.
 Financial Reporting Standards Council (FRSC). It is the accounting standard setting

body created by Professional Regulation Commission upon the recommendation of the
Board of Accountancy to assist the Board of Accountancy in carrying out its powers
and functions provided under R.A. No. 9298.
 International Accounting Standards Committee (IASC). It is the independent private

sector body with the objective of achieving uniformity in the accounting principles
which are used by business and other organizations for financial reporting around the
world.
 International Accounting Standards Board (IASB). Replace the IASC
Accounting Assumptions are the basic notions or fundamental premises on which the
accounting process is based. It serves as the foundation of accounting in order to avoid
misunderstanding or misconceptions but rather enhance the understanding and usefulness of
the financial statements.
1. ACCRUAL ACCOUNTING. Income is recognized when earned regardless of when

collected and expenses is recognized when incurred or consumed regardless of when is
to be paid.
2. GOING CONCERN or CONTINUITY. Businesses is viewed as to be continuing in

operations and thus the assets will be recorded based on their historical cost.
3. ACCOUNTING ENTITY or SEPARATE LEGAL ENTITY. Business enterprise is

separate from the owners, management, and employees who constitute the firm.
Personal expenses of the above stakeholders should not be recorded to the business.
4. TIME PERIOD. Due to indefinite life of the business, the financial statements should
be divided into accounting periods which are usually equal length of time. The
accounting period is either:
a. Calendar Year. It is a twelve-month period that ends on December 31.
b. Natural Business Year or Fiscal Year. It is a twelve-month period that ends on
any month other than December 31.
5. MONETARY UNIT. It has two aspects, the quantifiability and stability of the peso
concept.

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a. Quantifiability aspect means that the assets, liabilities, capital, revenue and
expenses should be stated in terms of a unit of measure which is the Philippine
peso.
b. Stability aspect means that the purchasing power of the peso is constant or
stable.
Measurement Principles
1. HISTORICAL COST PRINCIPLE (or cost principle) dictates that companies record
assets at their cost rather than current market values.
2. FAIR VALUE PRINCIPLE states that assets and liabilities should be reported at fair
value (the price received to sell an asset or settle a liability).
CLO 3. Describe the forms of business ownership and the nature of business.
Forms of Business Ownership

1. Proprietorship
2. Partnership
3. Corporation
Sole Proprietorship Partnership Corporation
 Owned by 1  Owned by 2 or  Generally,
person more persons ownership is
 Owner is often as  Often conduct in divided into shares
a manager retail and service- of stocks
 Owner receives type businesses  Shareholders has
the entire profits  Generally limited liability up
and suffers any unlimited personal to his/her invested
losses liability as to third shares
 Owner is parties  It is bounded under
personally liable  Income & losses state corporation
for all obligations are divided law
according to the  Share in the profits
partnership in the form of
agreement dividend is based
 Duties and on the declaration
responsibilities of & approval by the
each partners are board
reflected in the
partnership
agreement
Nature of business
1. Service Concern. This deals with the rendering of services to the customers such as
tailoring shops, beauty shops, law firms, accounting firms, and others.

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2. Trading or Merchandising Concern. This type of business deals with the buying of
goods and selling them the same goods for profit. Examples are sari-sari stores,
department stores, grocery stores, etc.
3. Manufacturing Concern. This involves purchase of raw materials and converting these
raw materials into finished products. Examples are textile manufacturing firms,
automobile manufacturing firms, pharmaceutical manufacturing companies, etc.
CLO4. Explain the accounting equation, and define its components.
Basic Accounting Equation
OWNER'S
ASSETS = LIABILITIES +
EQUITY
Provides the underlying framework for recording and summarizing economic events.
 Assets are claimed by either creditors or owners.
 If a business is liquidated, claims of creditors must be paid before ownership claims.
Assets
 Resources a business owns.
 Provide future services or benefits.
 Some example of assets:
o Cash on hand – it is a form of money either currency or coins that a business
has available to be used to exchange goods, debts, or services.
o Cash in bank – it is coins, currency, and cash items on deposit.
o Office supplies – are consumables items regularly used in offices by a
business such as pens, bond paper, stapler, fastener, folders, envelope, etc.
o Salon supplies – refers to an item used in a salon business such as make-up,
lipstick, foundations, etc.
o Accounts receivable – it is an amount collectible from client/customer by the
business.
o Notes receivable - it is an amount collectible from client/customer by the
business with a promissory note.
o Furniture and fixtures - are larger items of movable equipment that are used to
furnish an office such chairs, desks, filing cabinets, etc. which have a useful
life of more than one year.
o Prepaid expenses – refers to expenses paid in advance but not yet incurred or
consumed. Example: Prepaid rent and prepaid interest.
Liabilities
 Claims against assets (debts and obligations).
 Creditors (party to whom money is owed).
 Some example of liabilities:
o Accounts Payable – it is an amount owed or obligation from another person or
business for the purchase of an item on credit/account.

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o Notes Payable - it is an amount owed or obligation from another person or

business for the purchase of an item on credit/account and issued by a
promissory note
o Salaries and Wages Payable – it is an amount of obligation by business to their
employees who already rendered services buy not yet paid.
Owner's Equity
 Ownership claim on total assets.
 Referred to as residual equity.
 Investment by owners and revenues (+)
Drawings and expenses (-).
 Some example of accounts that affect the owner’s equity:
o Revenues - is the income generated from normal business operations such as
service fee, rental income, and professional fees.
o Rental expense – is the amount of expenses paid or incurred for occupying the
premises or the usage of something belongs to other persons or business.
o Utilities expense – is the amount of expenses paid or incurred for the use of
electricity, water, and telephone.
o Interest expense – is the amount of expenses for the use of money or
borrowed.
OWNER'S EQUITY
Owner's Capital Owner's Revenu Expens

- + -
Beginning Drawings es es
Increases in Owner’s Equity

 Investments by owner are the assets the owner puts into the business.
 Revenues result from business activities entered into for the purpose of earning
income.
 Common sources of revenue are: sales, fees, services, commissions, interest,
dividends, royalties, and rent.
Decreases in Owner’s Equity

 Drawings an owner may withdraw cash or other assets for personal use.
 Expenses are the cost of assets consumed or services used in the process of earning
revenue.
 Common expenses are: salaries expense, rent expense, utilities expense, tax expense,
etc.
CLO5. Investigate the effects of business transactions on the accounting equation.
Transactions are a business’s economic events recorded by accountants.

 May be external or internal.
 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting equation.

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Illustration: Are the following events recorded in the accounting records?
Illustration 1-7
Transaction Analysis
Illustration: Are the following events recorded in the accounting records?

Discuss product design with
Event Purchase computer potential customer Pay rent
Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
Record (YES) / Don’t Record (NO)
August 1, 2020 . Investment by Owner. Abigail Casabuena decides to start saloon business
named Beauty & Best Saloon "BeBe Saloon" by investing Php150,000 cash. LO 4
ASSETS = LIABILITIES + OWNER'S EQUITY
Accounts Notes Saloon Notes Accounts Owner's Owner's

Cash + Receivable + Receivable + Supplies + Equiipment = Payable + Payable + Capital - Drawing + Revenue - Expenses
Aug. 1 150,000 + + + + = + + 150,000 - + -
Note: The effect of the transaction above:
1. Cash column is added by Php150,000, because the business received cash from
the owner.
2. Owner’s Capital is added by Php150,000, because of investment by the owner in
the business.
August 3. Purchase of Equipment for Cash. BeBe Saloon purchases saloon equipment for
Php 70,000 cash.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Note: The effect of the transaction above: (The amount inside the parenthesis denote negative or
decrease in amount)
1. Cash column is deducted by Php70,000, because the business pay cash in buying
saloon equipment.
2. Equipment column is added by Php70,000, because the business received saloon
equipment from the supplier.

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August 5. Purchase of Supplies on Credit. BeBe saloon purchases Php16,000 worth of beauty
care supplies on credit/account.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
1. Saloon Supplies column is added by Php16,000, because the saloon supplies of
business was increased.
2. Account Payable column is added by Php16,000, because the business increased
their amount due or payable for the purchased of saloon equipment on credit.
August 6. Services performed for Cash. BeBe Saloon receives Php12,000 from customers for
services performed.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
1. Cash column is added by Php12,000, because the business received cash from
customer.
2. Revenue column is added by Php12,000, because the business performs services to
the customers.
August 7. Purchase of Advertising on Credit. BeBe saloon receives a bill for Php2,500 from
DYBZ which enters an agreement to air the saloon business from the opening of the saloon.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
1. Expenses column is added by Php2,500, because the saloon enters an agreement
to the advertising company to promote their business.

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2. Account Payable column is added by Php2,500, because the business increased

their payable for the services of advertising company.
August 10. Services performed for Cash and Credit. BeBe saloon performs Php35,000 for
services to De la Torre and Vinzon wedding. Php15,000 down payment and the balance on
account.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
1. Cash column is added by Php15,000 for the down payment received.
2. Accounts Receivable column is added by Php20,000 for the increased of
collectibles.
3. Revenue column is added by Php12,000, because the business performs services
to the customers.
August 15. Obtained a loan from bank. BeBe saloon enters an agreement to loan from PNB,
face value of the note - Php50,000 with a term of 1 year at 18% interest in advance.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
1. Cash column is added by Php41,000 for the proceeds of bank loan.
2. Expenses column is added by Php9,000 representing interest for 1 year collected
in advance. (This could be posted in Prepaid Interest under assets as an addition)
3. Notes Payable column is added by Php50,000 for the amount of loan from the
bank with a promissory note.
August 15. Payment of Expenses. BeBe saloon pays the following in cash: office rent
Php18,000 for three months, salaries and wages Php9,000, and utilities Php2,000

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Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
1. Cash column is deducted by Php29,000 for the payment of expenses.
2. Expenses column is added by Php29,000 for the incurrence of expenses such as
office rental, salaries & wages, and utilities.
August 17. Payment of Accounts Payable. BeBe saloon pays Php2,500 DYBZ for the balance
(in August 7 transaction).

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
1. Cash column is deducted by Php2,500 for the payment of accounts.
2. Accounts Payable column is deducted by Php2,500 for the reduction of accounts
by payment.

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August18. Receipts of Cash on Account. BeBe saloon receives Php6,000 in cash from
Vinzon (in August 10 transaction).

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
Aug. 18 6,000 + (6,000) + + + = + + - + -
1. Cash column is added by Php6,000 for the collections.
2. Accounts Receivable column is deducted by Php6,000 for the reduction
collectibles due to collection.
August 20. Withdrawal of Cash by Owner. Casabuena withdraws Php13,000 in cash from the
business for personal use.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
Aug. 18 6,000 + (6,000) + + + = + + - + -
Aug. 20 (13,000) + + + + = + + - 13,000 + -
1. Cash column is deducted by Php13,000 for giving cash to owner.

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2. Owner’s Drawing column is added by Php13,000 for personal drawings.
August 25. Services performed for a promissory note. BeBe Saloon perform services
amounting to Php12,000 for a non-interest-bearing note.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
Aug. 18 6,000 + (6,000) + + + = + + - + -
Aug. 20 (13,000) + + + + = + + - 13,000 + -
Aug. 25 + + 12,000 + + = + + - + 12,000 -
1. Notes Receivable column is added by Php12,000 for receiving a non-interest-
bearing note.
2. Revenue column is added by Php12,000 for rendering services.
August 27. Partial collections of notes receivable. BeBe Saloon collect Php8,000 for the
services rendered last August 25.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
Aug. 18 6,000 + (6,000) + + + = + + - + -
Aug. 20 (13,000) + + + + = + + - 13,000 + -
Aug. 25 + + 12,000 + + = + + - + 12,000 -
Aug. 27 8,000 + + (8,000) + + = + + - + -
1. Cash column is added by Php8,000 for the collection.
2. Notes Receivable column is deducted by Php8,000 for the partial payment made
by the customer.

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August 29. Return of Purchased Supplies on Credit. BeBe saloon returned Php1,000 worth of
beauty care supplies purchased last August 5 and received debit memo from the supplier.

Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
Aug. 18 6,000 + (6,000) + + + = + + - + -
Aug. 20 (13,000) + + + + = + + - 13,000 + -
Aug. 25 + + 12,000 + + = + + - + 12,000 -
Aug. 27 8,000 + + (8,000) + + = + + - + -
Aug. 29 + + + (1,000) + = + (1,000) + - + -
1. Saloon Supplies column is deducted by Php1,000 for the return of said supplies.
2. Accounts Payable column is deducted by Php1,000 for the reduction of payable.
All the transactions maintain the accounting equation, thus


Aug. 1 150,000 + + + + = + + 150,000 - + -
Aug. 3 (70,000) + + + + 70,000 = + + - + -
Aug. 5 + + + 16,000 + = + 16,000 + - + -
Aug. 6 12,000 + + + + = + + - + 12,000 -
Aug. 7 + + + + = + 2,500 + - + - 2,500
Aug. 10 15,000 + 20,000 + + + = + + - + 35,000 -
Aug. 15 41,000 + + + + = 50,000 + + - + - 9,000
Aug. 15 (29,000) 18,000
9,000
2,000
Aug. 17 (2,500) + + + + = + (2,500) + - + -
Aug. 18 6,000 + (6,000) + + + = + + - + -
Aug. 20 (13,000) + + + + = + + - 13,000 + -
Aug. 25 + + 12,000 + + = + + - + 12,000 -
Aug. 27 8,000 + + (8,000) + + = + + - + -
Aug. 29 + + + (1,000) + = + (1,000) + - + -
TOTAL 117,500 + 14,000 + 4,000 + 15,000 + 70,000 = 50,000 + 15,000 + 150,000 - 13,000 + 59,000 - 40,500
TOTAL 220,500 = 65,000 + 155,500

Summary of Transactions
1. Each transaction is analyzed in terms of its effect on:
a. The three components of the basic accounting equation.
b. Specific of items within each component.
2. The two sides of the equation must always be equal.

LEARNING Describe the four financial statements 15
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OBJECTIVE and how they are prepared.
CLO 6. Describe the four financial statements and how they are prepared.
Companies prepare four financial statements
Owner’s Equity Statement of Cash

Income Statement Balance Sheet
Statement Flows
Financial Statements represent a formal record of the financial activities of an entity. These
are written reports that quantify the financial strength, performance and liquidity of a
company. Financial Statements reflect the financial effects of business transactions and
events on the entity.
Income Statement, also known as the Profit and Loss Statement, reports the company's LO 5
financial performance in terms of net profit or loss over a specified period. Income Statement
is composed of the following two elements:
 Income: What the business has earned over a period (e.g. sales revenue, dividend
income, etc)
 Expense: The cost incurred by the business over a period (e.g. salaries and
wages, depreciation, rental charges, etc)
Net profit or loss is arrived by deducting expenses from income.
Statement of Changes in Equity or Owner’s Equity Statement, also known as

the Statement of Retained Earnings, details the movement in owners' equity over a period.
The movement in owners' equity is derived from the following components:
 Net Profit or loss during the period as reported in the income statement
 Share capital issued or repaid during the period
 Dividend payments
 Gains or losses recognized directly in equity (e.g. revaluation surpluses)
 Effects of a change in accounting policy or correction of accounting error
Statement of Financial Position, also known as the Balance Sheet, presents the financial
position of an entity at a given date. It is comprised of the following three elements:

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 Assets: Something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc)
 Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
 Equity: What the business owes to its owners. This represents the amount of capital
that remains in the business after its assets are used to pay off its outstanding
liabilities. Equity therefore represents the difference between the assets and liabilities.
Cash Flow Statement, presents the movement in cash and bank balances over a period. The
movement in cash flows is classified into the following segments:
 Operating Activities: Represents the cash flow from primary activities of a business.
 Investing Activities: Represents cash flow from the purchase and sale of assets other
than inventories (e.g. purchase of a factory plant)
 Financing Activities: Represents cash flow generated or spent on raising and repaying
share capital and debt together with the payments of interest and dividends.
CAGALITAN's Dormitory
INCOME STATEMENT
For the Year Ended December 31, 2020
Gross Receipts from: Schedule (in Philippine Peso)

Tenants 1 3,158,400.00
Cafeteria 2 12,264,720.00
Laundry 3 1,222,000.00
Total Gross Receipts 16,645,120.00
Less: Cost and Expenses:
Cost of Goods Sold - Cafeteria 8,760,514.29
Laundry Supplies 244,400.00
Salaries and Wages 2,790,840.00
13th Month Pay 232,570.00
SSS Contribution - Employer Share 111,633.60
PhilHealth Contribution - Employer Share 55,816.80
Pag-ibig Contribution - Employer Share 55,816.80
Depreciation - Building 4 1,320,211.20
Depreciation - Dormitory Facilities 5 238,211.59
Depreciation - Cafeteria Facilities 6 42,077.08
Depreciation - Laundry Facilities 7 18,639.27
Advertisement and Promotion 44,800.00
Utilities Expense 8 395,988.00
Legal Permits 5,204.08
Uniform 10,000.00
Maintenance 9 19,920.00
Office Supplies 18,250.00
Miscellaneous 20,000.00
Total Cost and Expenses 14,384,892.71
Net Income before Income Tax 2,260,227.29
Less: Income Tax (30%) 678,068.19
Net Income 1,582,159.10

17
The net income is carried forward to Owner’s Equity Statement.
OWNER'S EQUITY STATEMENT
(in Philippine Peso)

Cagalitan Capital - January 1 -
Add: Investments 44,000,000.00
Net Income 1,582,159.10 45,582,159.10
Total 45,582,159.10
Less: Withdrawals 1,265,727.28
Cagalitan Capital - December 31 44,316,431.82
BALANCE SHEET
December 31, 2020
(in Philippine Peso)
ASSETS Schedule
CURRENT ASSETS
Cash and Cash Equivalents 2,337,521.31
Food Supplies Inventory 86,915.79
Laundry Supplies Inventory 36,876.69
Total Current Assets 2,461,313.79
NONCURRENT ASSETS
Land 7,230,000.00
Building 34,742,400.00
Less: Accumulated Depreciation 1,320,211.20 33,422,188.80
Dormitory Facilities 1,422,353.00
Less: Accumulated Depreciation 238,211.59 1,184,141.41
Cafeteria Facilities 174,895.00
Less: Accumulated Depreciation 42,077.08 132,817.92
Laundry Facilities 132,842.00
Less: Accumulated Depreciation 18,639.27 114,202.73
Total Noncurrent Assets 42,083,350.85
TOTAL ASSETS 44,544,664.64
LIABILITIES & OWNER'S EQUITY

CURRENT LIABILITIES
Income Tax Payable 169,517.05
SSS Contribution Payable 9,302.80
PhilHealth Contribution Payable 4,651.40
Pag-ibig Contribution Payable 4,651.40
VAT Payable 10 40,110.18
Total Current Liabilities 228,232.82
OWNER'S EQUITY:
Cagalitan Capital - December 31 44,316,431.82
TOTAL LIABILITIES & OWNER'S EQUITY 44,544,664.64

18
Schedule 1: Gross Receipts from Tenants:
Tenants 188
Monthly Fee 1,400.00
Total Monthly Collections 263,200.00
# of Months in a year 12
Total Grossl Receipts from Tenants 3,158,400.00
Schedule 2: Gross Receipts from Cafeteria:
Product Quanity Price Total
Pork sisig 46,800 25 1,170,000
Fried Fish 46,800 25 1,170,000
Adobong Manok 43,680 25 1,092,000
Laswa 18,720 15 280,800
Pinakbet 46,800 15 702,000
Beef Steak 28,080 40 1,123,200
Fried Porkchop 37,440 30 1,123,200
Beef Calderita 23,400 40 936,000
Pochero 46,800 30 1,404,000
Suasages 15,600 15 234,000
Chicken Curry 43,680 25 1,092,000
Fried chicken 46,800 20 936,000
Bottled Mineral Water 32,760 10 327,600
Soft drinks 37,440 18 673,920
Total Gross Receipts from Cafeteria 12,264,720
Schedule 3: Gross Receipt from Laundry:

Number of Tenants 188
Average Kilo of Laundry per Tenant per Week 5
Total Kilos Laundry per Week 940
Number of Weeks per Year 52
Total Kilos Laundry in a Year 48,880
Service Fee per Kilo 25.00
TOTAL 1,222,000.00
Schedule 4: Depreciation - Building

Estimated
Useful Life Annual
Total Cost Scrap Value in Years Depreciation
Building 34,742,400.00 1,737,120.00 25 1,320,211.20
Total Depreciation - Building 34,742,400.00 1,320,211.20

19
Schedule 5: Depreciation - Dormitory Facilities

Estimated
Useful Life Annual
Quantity Unit Price Total Cost Scrap Value in Years Depreciation
Bed 188 3,000.00 564,000.00 28,200.00 5 107,160.00
Foam 188 1,000.00 188,000.00 9,400.00 5 35,720.00
Aircon 48 7,998.00 383,904.00 19,195.20 7 52,101.26
Water Tank ( 2,200 gallon) 1 50,000.00 50,000.00 2,500.00 7 6,785.71
Cabinet 47 2,500.00 117,500.00 5,875.00 7 15,946.43
Sofa 1 1,500.00 1,500.00 75.00 5 285.00
Tables 3 500.00 1,500.00 75.00 6 237.50
Chairs 3 199.00 597.00 29.85 6 94.53
CCTV 3 12,000.00 36,000.00 1,800.00 5 6,840.00
Generator 1 30,000.00 30,000.00 1,500.00 6 4,750.00
Big Trashcans 6 800.00 4,800.00 240.00 5 912.00
Fire extinguisher 12 1,250.00 15,000.00 750.00 5 2,850.00
Curtain 48 199.00 9,552.00 477.60 5 1,814.88
Computer Set 1 20,000.00 20,000.00 1,000.00 7 2,714.29
Total Depreciation - Dormitory Facilities 1,422,353.00 238,211.59
Schedule 6: Depreciation - Cafeteria Facilities

Estimated
Useful Life Annual
Quantity Unit Price Total Cost Scrap Value in Years Depreciation
Table 12 3,200.00 38,400.00 1,920.00 7 5,211.43
Chairs (Long) 24 500.00 12,000.00 600.00 7 1,628.57
Ceiling fan 4 1,950.00 7,800.00 390.00 5 1,482.00
Cash Register 1 24,400.00 7,800.00 390.00 15 1,482.00
Spoon 150 10.00 1,500.00 75.00 5 475.00
Fork 150 10.00 1,500.00 75.00 5 475.00
Carajay 3 289.00 867.00 43.35 5 274.55
Calderon 4 350.00 1,400.00 70.00 5 443.33
Rice Cooker 2 15,000.00 30,000.00 1,500.00 5 9,500.00
Plastic Chairs 24 199.00 4,776.00 238.80 5 1,512.40
Mixing Bowl 2 500.00 1,000.00 50.00 5 316.67
Frying Pan 3 899.00 2,697.00 134.85 5 854.05
Heater 2 310.00 620.00 31.00 5 196.33
Gadget Set 3 799.00 2,397.00 119.85 5 759.05
Tray Plate 150 50.00 7,500.00 375.00 5 2,375.00
Knife (Set) 2 599.00 1,198.00 59.90 5 379.37
Scissors (Set) 2 500.00 1,000.00 50.00 5 316.67
Dringing Glass 150 9.00 1,350.00 67.50 5 427.50
Shipping Dish 12 250.00 3,000.00 150.00 5 950.00
Water Dispenser 2 4,950.00 9,900.00 495.00 5 1,881.00
Bucket 2 200.00 400.00 20.00 5 126.67
Fire Extinguisher 1 1,250.00 1,250.00 62.50 5 237.50
TV 1 8,000.00 8,000.00 400.00 5 1,520.00
Bowls 150 29.00 4,350.00 217.50 5 1,377.50
Refrigerator 1 6,800.00 6,800.00 340.00 5 1,292.00
Freezer 1 11,000.00 11,000.00 550.00 5 2,090.00
Gas Stove 2 1,790.00 3,580.00 179.00 5 1,133.67
Roll Up 2 2,000.00 4,000.00 200.00 5 1,266.67
Drinking Glass Rack 1 800.00 800.00 40.00 5 253.33
Colander 2 400.00 800.00 40.00 5 253.33
Chopping Board 5 199.00 995.00 49.75 5 315.08
Tongs 10 50.00 500.00 25.00 5 158.33
Ladle 12 179.00 2,148.00 107.40 5 680.20
Peeler 3 40.00 120.00 6.00 5 38.00
Casserole 3 249.00 747.00 37.35 5 236.55
Serving Spoon (Set) 2 250.00 500.00 25.00 5 158.33
Total Depreciation - Cafeteria Facilities 174,895.00 42,077.08

20
Schedule 7: Depreciation - Laundry Facilities

Estimated
Useful Life Annual
Laundry Quantity Unit Price Total Cost Scrap Value in Years Depreciation
Laundry Machine 6 20,000.00 120,000.00 6,000.00 7 16,285.71
Chairs 8 199.00 1,592.00 79.60 7 216.06
Ceiling Fan 1 1,950.00 1,950.00 97.50 5 370.50
Hanger 200 28.00 5,600.00 280.00 5 1,064.00
Basket 5 100.00 500.00 25.00 5 95.00
Long Table 1 3,200.00 3,200.00 160.00 5 608.00
Total Depreciation - Laundry Facilities 132,842.00 18,639.27
Schedule 8: Utilities Expense:
Electric Consumption (Php10,000.00 per month) 120,000.00

Water Consumption (Php20,000.00 per month) 240,000.00
Internet Connection (Php2,999.00 per month) 35,988.00
Total Utilities Expense 395,988.00
Schedule 9: Maintenance:
Labor for Maintenance per day 415.00

Multiply: Four inspections per month 4
Monthly Maintenance 1,660.00
Multiply 12
Total Maintenance Expense 19,920.00
Schedule 10: VAT Payable - 2020
Output VAT
Cafeteria 12,264,720.00 X 12% = 1,471,766.40
Laundry 1,222,000.00 X 12% = 146,640.00
Total Output VAT 1,618,406.40
Less: Input VAT:
Cost of Goods Sold - Cafeteria 8,760,514.29 X 12% = 1,051,261.71
Laundry Supplies 244,400.00 X 12% = 29,328.00
Advertisement and Promotion 44,800.00 X 12% = 5,376.00
VAT Due 481,322.13
Less: VAT paid in 11 months 441,211.95
VAT Payable 40,110.18

21
STATEMENT OF CASH FLOW
Cash Flow from Operating Activities: (in Philippine Peso)

Net Income 1,582,159.10
Depreciation - Building 1,320,211.20
Depreciation - Dormitory Facilities 238,211.59
Depreciation - Cafeteria Facilities 42,077.08
Depreciation - Laundry Facilities 18,639.27
Increase in Food Supplies Inventory (86,915.79)
Increase in Laundry Supplies Inventory (36,876.69)
Increase in Income Tax Payable 169,517.05
Increase in SSS Contribution Payable 9,302.80
Increase in PhilHealth Contribution Payable 4,651.40
Increase in Pag-ibig Contribution Payable 4,651.40
Increase in VAT Payable 40,110.18
Net Cash Flow Provided by Operating Activties 3,305,738.59
Cash Flow from Investing Activities:

Purchase of Land (7,230,000.00)
Construction of Building (34,742,400.00)
Purchase of Dormitory Facilities (1,422,353.00)
Purchase of Cafeteria Facilities (174,895.00)
Purchase of Laundry Facilities (132,842.00)
Net Cash Used in Investing Activities (43,702,490.00)
Cash Flow from Financing Activities:

Cagalitan's Investments 44,000,000.00
Withdrawal (1,265,727.28)
Net Cash Provided by Financing Activties 42,734,272.72
Increase in Cash and Cash Equivalents 2,337,521.31

Cash and Cash Equivalents - Beginning 0
Cash and Cash Equivalents - Ending 2,337,521.31
The Cash and Cash Equivalents – Ending in the Statement of Cash Flow must be the same
with the Cash and Cash Equivalents – Ending in the Balance Sheet.
Income Statement
 Reports the revenues and expenses for a specific period of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).
 Does not include investment and withdrawal transactions between the owner and the
business in measuring net income.
Owner’s Equity Statement

 Reports the changes in owner’s equity for a specific period of time.
 The time period is the same as that covered by the income statement.
Balance Sheet
 Reports the assets, liabilities, and owner's equity at a specific date.
 Lists assets at the top, followed by liabilities and owner’s equity.
 Total assets must equal total liabilities and owner's equity.
 Is a snapshot of the company’s financial condition at a specific moment in time
(usually the month-end or year-end).

22
Statement of Cash Flows

 Information on the cash receipts and payments for a specific period of time.
 Answers the following:
o Where did cash come from?
o What was cash used for?
o What was the change in the cash balance?
IV. Learning Activities
MUST DO 1. (CLO 1) Interview one of business within your locality and ask them if they
properly recorded the business transactions properly. And ask the following questions:
1. Does accounting is important in every business?
2. Why accounting is a “language of business”?
After the interview, collate all the information and complete the KWL chart below. In the
first column, write what you already know about the topic. In the second column, write what
you want to know about the topic and in the Third column, write what you learned from the
topic.
MUST DO 2. (CLO 2) Indicate whether the following statements are true or false.
1. The three steps in the accounting process are identification, recording, and
communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and company officers.
5. Managerial accounting activities focus on reports for internal users.
MUST DO 3. (CLO 3) State whether the business is a Service, Merchandising, or

Manufacturing.
1. Computer repair shop

23
2. Tailoring shop
3. Rice retailing
4. Rice milling
5. Gasoline station
6. Dental clinic
7. Fitness Gym
8. Gowns rental
9. Sardines manufacturing
10. Public Utility Bus
MUST DO 4. (CLO 4) Classify the following items as investment by owner, owner’s

drawings, revenue, or expenses. Then indicate whether each item increases or decreases
owner’s equity.
Classification Effects on Equity
1. Rent Expense ___________ ______________
2. Service Revenue ___________ ______________
3. Drawings ___________ ______________
4. Salaries and Wages Expense ___________ ______________
MUST DO. (CLO 5) Presented below is selected information related to Alamon Review
Center at December 31, 2019. Flanagan reports financial information monthly.
Learning Equipment Php100,000 Utilities Expense Php40,000

Cash 80,000 Accounts Receivable 90,000
Service Revenue 360,000 Salaries and Wages Expense 70,000
Rent Expense 110,000 Notes Payable 165,000
Accounts Payable 20,000 Owner’s Drawings 50,000
(a) Determine the total assets of at December 31, 2019.
(b) Determine the net income reported for December 2019.
(c) Determine the owner’s equity at December 31, 2019.
MUST DO 6. (CLO 6) Discuss the benefits of each financial statement on the part of the
owner or management and outside parties?

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1

MODULE 1: ACCOUNTING IN ACTION

By the end of this module, the student should be able to:

The purpose of accounting is to provide a means of recording, reporting, summarizing, and

 Accounting is the art of recording, classifying and summarizing in a significant

 Accounting is a service activity. Its function is to provide quantitative information,

 Accounting is the process of identifying, measuring and communicating economic

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

Who Uses Accounting Data

Pictures excerpts from 2015 John Wiley & Sons, Inc.

2. Management. The top management needs financial information as a measure for

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

1. Governments and their agencies. The government needs accounting information to

2. Lenders. They are interested in financial information which enables them to

Ethics in Financial Reporting

Excerpts from 2015 John Wiley & Sons, Inc.

The accounting profession has developed Generally Accepted Accounting

Excerpts from 2015 John Wiley & Sons, Inc.

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

 Financial Reporting Standards Council (FRSC). It is the accounting standard setting

 International Accounting Standards Committee (IASC). It is the independent private

 International Accounting Standards Board (IASB). Replace the IASC

1. ACCRUAL ACCOUNTING. Income is recognized when earned regardless of when

2. GOING CONCERN or CONTINUITY. Businesses is viewed as to be continuing in

3. ACCOUNTING ENTITY or SEPARATE LEGAL ENTITY. Business enterprise is

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

Forms of Business Ownership

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

CLO4. Explain the accounting equation, and define its components.

Basic Accounting Equation

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

o Notes Payable - it is an amount owed or obligation from another person or

Owner's Capital Owner's Revenu Expens

Increases in Owner’s Equity

Decreases in Owner’s Equity

CLO5. Investigate the effects of business transactions on the accounting equation.

Transactions are a business’s economic events recorded by accountants.

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

Illustration: Are the following events recorded in the accounting records?

Record (YES) / Don’t Record (NO)

Pictures excerpts from 2015 John Wiley & Sons, Inc.

Accounts Notes Saloon Notes Accounts Owner's Owner's

Accounts Notes Saloon Notes Accounts Owner's Owner's

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

Accounts Notes Saloon Notes Accounts Owner's Owner's

Accounts Notes Saloon Notes Accounts Owner's Owner's

Accounts Notes Saloon Notes Accounts Owner's Owner's

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

2. Account Payable column is added by Php2,500, because the business increased

Accounts Notes Saloon Notes Accounts Owner's Owner's

Accounts Notes Saloon Notes Accounts Owner's Owner's

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

ASSETS = LIABILITIES + OWNER'S EQUITY

Accounts Notes Saloon Notes Accounts Owner's Owner's

Accounts Notes Saloon Notes Accounts Owner's Owner's

MODULE in ACTGFU1 GEOFREY A. RIVERA, CPA, MBA 1006geofreyrivera@gmail.com

Accounts Notes Saloon Notes Accounts Owner's Owner's