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    FABM2 Q1 Textbook (P. 1-52)

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    FABM2 Q1 Textbook (P. 1-52)

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    FABM2 Q1 Textbook (p. 1-52)

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    FABM2 Q1 Textbook (P. 1-52)

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    ~ Financial Position a E In this chapter, you should be able to 1. identify and describe the elements of the Statement of Financial Position (SFP) or Balance Sheet (BS); 2. classify the accounts of the Statement of Financial Position into current and noncurrent items; 8. prepare the Statement of Financial Position of a sole proprietorship; 4. prepare Statement of Financial Position report form; and 5. prepare Statement of Financial Position account form. Financial Statements In this second accounting subject, the first four chapters shall deal with the preparation of the basic financial statements and their analysis and interpretation. The bookkeeper starts with the (1) analysis of business transactions and economic events, followed by the (2) recording in the general journal and special journals, and (3) classifying in the general ledgers. The general ledger accounts are summarized as assets, liabilities, owner's equity, revenue, cost, and expenses. Financial statements are prepared from these summarized accounts. ‘The financial statements are as follows: 1. Statement of Financial Position or Balance Sheet 2. Statement of Income or Statement of Results of Operation 8. Statement of Cash Flows The statement of changes in owner's equity is also prepared to connect the Statement of Income with the Statement of Financial Position 8. The financial statement analysis and interpretation is the last step in the c accounting process. ; The accounting cycle covers a period of usually one calendar year, starting on January 1 and ending on December 31. This accounting period is called a calendar year. A period of twelve months ending on a date other than December 31 is called fiscal year. In the Contents of Statement of Financial Position accounting The Statement of Financial Position, also called Balance Sheet, reports basrenee the permanent accounts as of the end of an accounting period. For example, Heart on this specific date, December 31, 20X5, the statement of financial Position reports the assets, liabilities, and owner's equity. \ Xe ost Liabilities are what the business owes or claims against assets. - e'"" Assets are what the business owns. ¢ Owner's equity is what the business is worth. The accounts in the balance sheet are called permanent accounts or real accounts. Their balances are forwarded as beginning balances in the next accounting period. The ste 1. Jou 2. Pos IIE one scorns suse od Maagenen Terk a hcg? The Statement of Financial Position or Balance Sheet contains the apters shall deal following: nd their analysis, A. The Heading lysis of business Name of th Seeding inte 1. Name of the Business 2 generalledgers. 2. Title of the Report iabilties, owner's 3. Date of the Report (specific date) se prepared from Be Cifencs Example OMT Trading ‘Statement of Financial Position peration December 81, 20X5 in Phil Iso prepared to fe Eietporre eee) inancial Position. B. The Asset Section last step in the C. The Liability Section D. The Owner's Equity Section e calendar year, Scounting period J on a date other Accounting Process In the accounting cycle, the accountant is guided by the company's accounting policies. These accounting policies are the specific principles, chet reports bases, conventions, rules, and practices adopted by an enterprise in Pel es oaio Preparing and presenting financial statements. The accounting process ate ear involves the following: * INPUT ‘ oy ws Meee or Sr tassets. - Ms" eu ee Reese iat] Sees Classifying enw Cray eee Interpretatio ent accounts or balances in the The steps in the accounting cycle are the following 1. Journalizing — Journalize the economic transactions and events. 2. Posting - Post the journal entries in number 1 to the general ledgers. 3. Trial Balance ~ Prepare the trial balance from the general ledgers. & . The su 4, Adjusting — Adjust the ledger balances. owner Financial Statements ~ Make income statement and balance sheet from the adjusted trial balance. To 6. Closing — Close or transfer the income and expense accounts to be pref income and expense summary account and the latter account to Ei 9 owner's drawing, and the owner's drawing to owner's equity Pane 7. Post-Closing Trial Balance - Make a trial kalance of all assets, cts: liabilities, and owner's equity. ane liability e Documents —_Journalize in Books ee | and th of Original Entry of Final Ent | or net where Th 1 debits incom credit | Th incom staten Bes aie trees Cc a ‘As discussed in Accounting 1, the accounting cycle starts with (1) the analysis of source documents, followed by (2) the journalizing in general journal and special journals, and (3) the posting in the general ledgers. NMI cares os koto, Busnes, ad Mansgenet& Tete a Sst Acoutng gE ance sheet counts to account to ity. all assets, with (1) the g in general sral ledgers. The summarized postings in the general ledgers consist of asset, liability, ‘owner's equity, income, and expenses accounts. To facilitate the preparation of the financial statements, a worksheet is prepared. The worksheet consists of a listing of all account titles from the general ledgers with their debit or credit balances. The total of debit balances should equal the total of credit balances. There may be a need to make some adjustments. These are posted in the adjustments columns. The adjusted balances are extended to income statement columns for income and expense accounts, and to the balance sheet columns for the asset, liability, and owner's equity accounts. The difference between the debit total and the credit total of the income statement columns is the net income or net loss. The excess of credit total over debit total is the net income, whereas the excess of debit total over credit total is the net loss. ‘The net income, which is the excess of the total credits over the total debits of the income statement columns, is posted on the debit side of the income statement to balance the income statement columns, and on the credit side of the balance sheet to balance the balance sheet columns. The net loss is the excess of the total debits over the total credits of the income statement columns. It is posted on the credit side of the income statement to balance the income statement columns, and on the debit side of the balance sheet to balance the balance sheet columns. ac} Eerie (olan ai Statement J Statement The income statement and the statement of financial position are prepared from the worksheet. The statement of owner's equity shows the beginning equity increased by net income, and additional owner's investment and/or decreased by net loss and withdrawals by the owner. ‘The components of the accounting equation are (1) assets, (2) liabilities, and (8) owners’ equity. Asset is any itern owned by the entity; abilities are ‘amounts owed by the entity to third parties; and owners’ equity is the share cof the owners in the entity. The accounting equation as follows: Assets =| ilties + Owner's Equity ‘The analysis of transactions and events will always yield results in at least two effects in the accounting equation. The assets, liabilities, and owner’s equity are presented in the balance sheet. The balance sheet is the report of the financial position or financial condition. Further, there are two other elements affecting owner's equity other than what the owners contribute to or withdraw from the entity. The two other elements are the revenue, and cost and expenses. Revenue refers to the sales or gross income. Cost means the cost of products sold or services rendered, and expenses are those incurred to run the entity. In fa car repair business, revenue is the amount that customers need to pay for repair services. Cost includes payments and obligations to be paid to the mechanics, Expenses include the Meralco electric bills, telephone bills, clerk's salaries, among others. ‘When revenue exceeds cost and expenses, the result is a net income, and when revenue is less than cost and expenses, the result is a net loss. Net income increases owner's equity and net loss decreases owner's equity. The revenues, and cost and expenses are summarized in the income statement. position are General ledger accounts have their natural balances. y shows the s investment Assets Debit Balance Liabilities Credit Balance Owner's Equity Credit Balance Revenue or Income Credit Balance (2) liabilities, Cost and Expenses Debit Balance liabilities are ‘is the share To determine whether an account is to be debited or credited, the rules of debits and credits should serve as guidelines, Debits Credits |. Debit asset account for . Credit asset account for increase in asset. decrease in asset. results in at 2. Debit liability account for 2. Credit liability account for decrease in liability. increase in liability. 1. Debit owner's equity Credit owner's equity _ account for decrease in account for increase in estos Serna Sark cae, ner :; cto Debit income account for Credit income account for ee es decrease in income. increase in income. fiestokier . Debit expense account for . Credit expense account the entity In increase in expense. for decrease expenst need to pay to be paid to Z Eos bills, a Assets (ee none Uabliy eee ce Debit Credit Debit Credit forincrease | for decrease for decrease | for increase 2 net income, Ec sticae @) ‘Owner's Equity Debit Credi in the income fordecrease | forincrease @), Income ©), Expense Debit Credit Debit Credit for decrease | for increase forincrease | for decrease Chapter 1: Statement of Financia Postion I ‘The general ledger account looks like a letter T, hence it is termed as T account. This is a diagram that represents the general ledger account. ‘There is a left side of the letter T and a right side. The left side is for debits and the right side is for credits. The ledger balance of an account is the difference between the total of debit entries and the total of the credit entries. To compute for the balance of an account, compute for the total postings on the left. Do the same on the right side. The sum on the left minus the sum on the right is the debit balance. The sum on the right minus the sum on the left is the credit balance. Stated another way, when debit total exceeds credit total in an account, the balance has a debit balance. When the credit total exceeds debit total, the account has a credit balance. Elements of Financial Statements Itis a resource controlled by the enterprise as ‘a result of past events and from which future ‘economic benefits are expected to flow to the “enterprise. Itis @ present obligation of the enterprise arising from past events. The settlement of which is ‘expected to result in an outflow of resources from the enterprise embodying economic benefits. Its the residual interest or remainder of the asset of the enterprise after deducting all its liabilities. “These are increases in economic benefits during ‘the accounting period in the form of inflows or ‘enhancements of assets or decreases of liabilities | that result in increases in equity; other than those relating to contributions from equity participants. | gee cee a ‘These are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incidences of liabilities that result in decreases in equity; other than those relating to distribution to equity participants. Th and di Th noncu sheet Curren Ar follow ih tis termed as dger account. Je is for debits account is the | of the credit e for the total the left minus ight minus the hen debit total nalance. When balance. srprise as h future ow to the prise arising which is sources from enefits during F outflows or ofliabilities her than those jicipant } ‘The Statement of Financial Position or Balance Sheet shall be identified and distinguished from other statements. The entity shall present current and noncurrent assets and current and .s, as separate classifications on the face of the balance ‘An asset shall be classified as current when it satisfies any of the following criteria: 1. Itis expected to be realized, or is intended for sale or consumption within the entity's normal operating cycle. 2. Its held primatily for the purpose of being traded. 3. It is expected to be realized within the twelve months after the balance sheet date. 4. tis cash or a 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. IFRS, 2007 All other assets shall be classified as noncurrent. tions of The operating cycle of an entity is the time between the act assets for processing and their realization into cash or cash equivalents. When the entity's normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months. Current Liabilities A liability shall be classified as current when it satisfies any of the following criteria: 4. Its expected to be settled in the entity's normal operating cycle. itis held primarily for trading. It is due to be settled within twelve months after the balance sheet date. 4, The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. All other liabilities shall be classified as noncurrent. hope tater of Financial Postion ERT ‘As a minimum, the face of the balance sheet of a sole proprietorship shall include amounts for the following: Assets cash and cash equivalents trade and other receivables inventories biological assets investments Total As =e aog8 financial assets g._ investment property h. property, plant and equipment Liabilities Ace a. trade and other payables b. provisions c. financial liabilities 4d. liabilities for taxes Owner's Equity ‘Statement of Financial Position ‘There are two forms of Statement of Financial Position or Balance Sheet, the report form and the account form. Report Form (Vertical Form) Assets Total Assets Liabilities ‘Owner's Equity Total Liabilities and Owner's Equity proprietorship Balance Sheet, Account Form (Horizontal Form) Liabilities F ‘Owner's Equity E Total Liabilities and Owner's Equity ‘Account Form Statement Financial Position or Balance Sheet (Prepared from the Post-Ciosing Trial Balance) ‘Angel Service Company Statement of Financial Position December 31, 20X1 Lables and Owner's Equity ‘Curent Assets Curent Labites (Cash on Hand and in Barks P 52000 Account Payable-Tado 50900 ‘Accounts Recsvabl (nto P15,000 580000 Account Payable-Orhers 30,000 —aaehpbecaamad Twes/SSSIPhiHeath/ECIHOMF Payable 20000 oo 100000 Teal Curent Labities 1,200,000 Unused Suppies 38000 oe $3000 encurert ibites ; “otal Curent Assets 625,000 FOO Lane Payable 138000 ‘Total Lables 77388;600 Ona?’ Equity ‘Net Equipment 27850000 Angel Reyes, Capital 2198,000 "etl bits and Ones Eqaty ‘Chapter: Statement of Francial Poston RT Report Form Statement of Financial Position or Balance Sheet (Prepared from the Post-Closing Trial Balance) $$$ Angel Service Comy ‘Statement of Financial Position December 31, 20X1 Assets Current Assets Cash on Hand and in Banks P 52,000 Accounts Receivable (net of P15,000 allowance for bad debts) $90,000 Notes Receivable 100,000 Unused Supplies 38,000 Prepaid Expenses 43,000 Total Current Assets 823,000, Noncurrent Assets Equipment 2,800,000 Less: Accumulated Depreciation 150,000 Net Equipment 2,650,000, Total Assets P 3,473,000 Liabilties and Owner's Equity Current Liabilities ‘Accounts Payable Trade P 850,000 ‘Accounts Payable—Others 380,000 Taxes/SSS/PhiHealth/EC/HDMF Payable 20,000 Total Current Liabities 1,200,000 Noncurrent Liabilities Loans Payable Total Liabilities ‘Owner's Equity ‘Angel Reyes, Capital 2,135,000 Total Liabilities and Owner's Equity 3,473,000) e) P 52,000 's) 590,000 100,000 38,000 43,000 823,000, 2,800,000 150,000 2,650,000 P 3,473,000 P 850,000 330,000 20,000 1,200,000 138,000 1,838,000 2,185,000, P.3,473,000 In an ongoing business, the accounting period starts with the cary forward balances of the real accounts or the balance sheet accounts. The nominal accounts or income statement accounts start with zero balances. Within the accounting period, transactions and events are recorded. An adjusted trial balance is prepared from the general ledgers at the end of the ‘accounting period. This is called post-closing trial balance. To demonstrate this, the following is the post-closing Trial Balance of Angel Service Company ‘as of December 31, 20X1. Note that the accounts and amounts in the post- closing trial balance are the same as those in the statement of financial position. ‘Angel Service Company Post-Closing Trial Balance December 31, 20X1 Dr. ‘Cash on Hand and in Banks P 52,000 ‘Accounts Receivable 605,000 Allowance for Bad Debts Notes Receivable 100,000 Unused Supplies 38,000 Propaid Expenses 43,000 Equipment 2,800,000 ‘Accumulated Depreciation ~ Equipment 150,000 ‘Accounts Payable~Trade 850,000 ‘Accounts Payable-Others 330,000 Taxes/SSS/EC/PhilHealth/ HDMF Payable 20,000 Loans Payable 198,000 Angel Reyes, Capital 2,135,000 Totals 3,638,000 3,638,000 (Chapter: Statement of Financial Poston ff] R 1. What elements are included in the Statement of Financial Position (SFP)? What is the heading for SFP? 2. What are the components of the accounting equation? Explain ‘each of the components. 3. Whatis the left side and the right side of an account? Would the placement be the same for any kind of account? 4. Assets less liabilities equals residual interest. What is meant by “residual interest?” 5. Explain why net income increases owner's equity, whereas net loss decreases owner's equity. 6. Of what value are source documents in the recording of transactions? Bring samples to olass. Write the accounting equation from the post-closing trial balance of Leyes Service Grafix. Assets = Liabilities + Owner's Equity Requirement 2 From the post-closing trial balance of Leyes Service Grafix as of December 31, 20X1, prepare a Statement of Financial Position. A. Report Form B. Account Form MIRE esr ns uss sec ete aie a , Post-Closing Trial Balance i December 31, 20X1 Financial Dr. cr. 2 Explain _ Cash in Bank P 100,000 Accounts Receivable 480,000 Nould the Allowance for Bad Debts P 5,000 i Prepaid Rent 10,000 meant by g Office Equipment 660,000 eee ‘Accumulated Depreciation Office Equipment 60,000 ording of Salaries Payable 30,000 ‘Account Payable 240,000 Fred Leyes, Capital 915,000 Total P 1,250,000 P_ 1,250,000 Pinklane Company Post-Closing Trial Balance December 31, 20X1 (in Philippine Peso) ACCT TITLE Dr. cr. 1110. Cash in Bank P 123,153 1120 Petty Cash Fund 10,000 1130 Accounts Receivable 659,340 1181. Allowance for Bad Debts P 15,000 1140 Notes Receivable 132,200 1150. Merchandise Inventory, Dec. 31, 20X1 774,307 1160 Prepaid Expenses 3,200 1210 Fumiture and Fixture 900,000 1211. Accumulated Dep'n-Fur/Fix 45,000 1220 Transportation Equipment 1,400,000 1221 Accumulated Dep'n-Trans Equipment 140,000 2110 Account Payable Trade 960,300 2120 Note Payable-Noncurrent 234,000 2180 SSS, PhilHealth, HDMF Payable 4,000 2140 Withholding Taxes Payable 2,600 2150 Accrued Expenses Payable 1,300 8110 Pinky Ramos, Capital 2,600,000 Totals 4002200 P 4,002,200 28,002,200 F4002,209 Requirement 1: Compute the accounting equation for the above post: closing trial balance of Pinkiane Company as of December 31, 20X1 Assets = Liabilities + Capital Requirement 2: Prepare Statement of Financial Position as of December 31, 20X1. B1 ~ Account Form B2 - Report Form 45,000 140,000 960,300 234,000 4,000 2,600 1,300 2,600,000 4,002,200 bove post: 20X1. pital tion as of Mavic Enterprises Post-Closing Trial Balance December 31, 20X1 (in Philippine Peso) TILE Dr. Petty Cash Fund 5,000 Cash in Bank 146,400 Accounts Receivable 175,000 ‘Allowance for Bad Debts Unused Supplies 135,000 Prepaid Insurance 2,000 Rental Deposit 150,000 Office Equipment 70,000 Accumulated Depreciation Office Equipment Laboratory Equipment 400,000 Accumulated Depreciation Laboratory Equipment Expenses Payable ‘Accounts Payable Loans Payable Withholding Taxes Payable SSS/EC Premiums Payable HOMF Premiums Payable PhillHealth Premiums Payable Mavic Perez, Capital Mavic Perez, Drawings Totals Required: Statement of Financial Position {@) Report Form (6) Account Form Chapter 1: Statement of Financial Postion Tae) ~ Statement of Income and Statement of Owner's Equity E In this chapter, you should be able to 1. identify the elements of the statement of income for a service business and merchandising business; 2. prepare statement of income for a service business using the single-step approach; 8. prepare statement of income for ‘a merchandising business using the multistep approach; 4, discuss the different forms of business organization; and 5. prepare statement of changes in equity fora single proprietorship. Income Statement The income statement, also called profit and loss statement, presents an entity's result of operations for a period of time. For example, the following should be displayed prominently 1. the name of the reporting entity DM Trading 2. title of the report Income Statement 8, the period of time covered by the report For the Year Ended Dec. 31, 20X5 4. the currency (in Philippine Peso) The income statement of a sole proprietorship shall include the following 1. revenue 2. costs and expenses a. cost of services or b. cost of goods sold c. selling expenses d. administrative expenses; and 3. net income or net loss. ‘A common form of presenting the income statement is classifying expenses according to functions. The form starts with the revenue for the reporting period, then deducting the cost of sales to arrive at the gross profit. Ilustration DM Trading Income Statement For the Year End December 31, 20X5 Revenue 3,000,000 Less: Cost of Sales 1,800,000 Gross Profit 7,200,000 Less: Distribution Costs or Selling Expenses P 300,000 Administrative Expenses 400,000 Operating Income ‘Add: Other Income Less: Other Expenses Net Income for the Year Lg nent, presents an Ie, the following ‘These are revenues or gross income’ ading from sale of company products and 2 Statement services, » Year Ended 1, 20X5. ippine Peso) ‘of Sales or Cost of Services | These are direct costofthe products ude the following: sold or the sennces rendered: Salaries Expense This includes salaries of employees for services rendered. This includes telephone, water, and electricity used. This includes rentals for the use of equipment, office, building, and land spaces owned by others. ies Expense This includes laboratory, medical, ‘ and office supplies used. ent is classifying e revenue for the rrive at the gross This includes fare for trips and travels; cost of gasoline and oil used for company vehicles. includes portion of the cost of building and equipment allocated to ‘one accounting period. ntation Expense This includes the amount paid to restaurants and hotels for treating customers and others. P3,000,000 4,800,000 7,200,000 0. 700,000 Expense This includes interest on debts or monetary obligations. 500,000 ‘Chapter 2: Statement of Income and Statement of Owner's Equity A] Single-Step Income Statement (Service Business) To illustrate a single-step income statement, here are the nominal accounts. Liberty Medical Services Nominal Accounts For the Year Ended December 31, 20X1 Debits Credits Service Income P 9,660,000 Cost of Services P 6,030,000 Salaries Expense 41,200,000 Employees’ Benefits 200,000 Professional Fees 180,000 Usiities Expense 360,000 Rent Expense 480,000 Taxes and Licenses 120,000, Supplies Expense 178,000 Advertising Expense 132,000, Transportation Expense 240,000 Depreciation Expense 60,000 Representation Expense 180,000 Interest Expense 20,000 Subtotals 3,377,000 9,660,000 Net Income 283,000 P 9,660,000 9,660,000 These are the steps in preparing the single-step income statement. 1. Start with a clean paper by writing the heading. a. Name of the Company b. Income Statement ©. Forthe ended (period maybe a year or less) 2. List the income account, and on rightmost section of the paper, the amounts. 8. List the cost and expense accounts on another amounts column on the left of (2). 4, Compute the total cost and expenses. 8. Deduct total cost and expenses from the income to arrive at the net income or net loss. Write net income on the debit column or the net loss on the credit column to balance Debits and Credits. 6. Write the peso sign on the first amount in the amounts column. and on the totals. Draw double lines below the totals. UMMA crest scr ers Magn A Tstik Ba enti? Service | Less: Cc Net incor Mul To illu statement Sales Sales Dis Sales Ret Purchase: Purchases Purchase: Freight in Salaries E Rent Expo Uniities Ex Bad Debs: Depreciat Traneport Insurance Supplies E Taxes and Merchandi Merchandis 3usiness) > are the nominal Liberty Medical Services ‘Statement of Income For the Year End December 31, 20X1 "| Service Income P _} Less: Cost of Service P 6,030,000 | Salaries Expense 1,200,000 Employees’ Benefits 200,000 Professional Fees 180,000 Utilities Expense 360,000 Rent Expense 480,000 Taxes and Licenses 120,000 ‘Supplies Expense 178,000 ‘Advertising Expense 132,000, Transportation Expense 240,000 Depreciation Expense 60,000 Representation Expense 180,000 Interest Expense 20,000 Cost and Expenses 9,377,000 9,660,000 Income 289,000 Multistep Income Statement (Merchandising Business) To illustrate multistep income statement, listed here are the income ent accounts of Karel Trading Company as of December 31, 20X1. ome statement. jing. yoe a year or less) section of the paper, ther amounts column come to arrive at the n the debit column or e Debits and Credits. the amounts column v the totals. a Here i Karel Trading Company Income Statement For the Year Ended December 31, 20X1 The Statement of Comprehensive Income (SCI) presents the statement statement subjects. Sales P 875,000 Less: Sales Discount P 16,000 Sales Returns and Alowances 101,000 112000 Net Sales, 8,758,000 Net Incom Less: Cost of Sales spees.con Merchandise Inventory, Jan 1 P 728,000 Fairy ‘Add: Purchases P 4,125,000 Less: Dscounts P115:00, Fair v Retuns and Alowances 118,000 __ 299,000 ae 3,892,000 Curre |Add: Freightin 206,000 _ 4,098,000 Com, Total Goods Avail or Sales 4,826,000 Less: Mecchandie Invertry, Dec 31 810000 _ 4016000 Gross Prot 4742,000 Statem Less: Selling and Administrative Expenses To she Salaries Expense 1,218,000 Foancial F Rent Expense {600,000 Exuity Uiites Expense 840,000 Bad Dedts Expense 116,000 Inaso Depreciation Expense 50,000 setes refle Transportation Expense 360,000 Seating fr Insurance Expense 60,000 Supplies Expense 240,000 the Tare and Licenses 180,000 _ 9,664.00 ine Net come ati 2 ad of income information with information as required by the Financial This s¢ ‘Accounting Standard Board (FASB) and the Intemational Accounting tree form: Standards Board (IASB). The SCI can be presented separately or in coxporatior combination with the statement come. When presented separately, the statement of comprehensive income starts with the net income, plus or Foams of Bt minus comprehensive income items on certain value change on investment “= securities. WNIT Frees scone unr nd Margen: Trike At —____——— Here is an example of statement of comprehensive income. Note that the nt of comprehensive income is discussed in advanced accounting P.8876,000 6,000 For the Year Ended December 31, 20X4 117,000 000 eo Income P 5,000.000 ex comprehensive (loss)/income 28,000 Fair value change on available-for-sale (400,000) Fair value change on cash flow hedge 550,000 Actuarial loss from defined benefit pension plans (6,000) ‘Currency translation differences (75,000) i pee NE ‘Comprehensive Income 070,000 326,000 310,000 _ 4,016,000 4.742,000 ent of Changes in Owner's Equity (Sole Proprietorship) To show the link of the statement of income with the statement of 218,000 Position, there is a need to discuss the Statement of Changes in 600,000 ty (SCE). 840,000 F i 116,000 Ina sole proprietorship, changes in equity between two balance sheet 50,000 reflect the increases and decreases in its net assets during the period 360,000 ting from 60,000 é A Is 240,000 the net of income and expenses for the reporting period (the net 180,000 __3,684,000 income or the net loss); P 1,078,000 Boe _ 2. additional investment of the owners; and Ee iivanemant distribution of owner's equity in the form of owner's drawings. by the Financial This section presents the statements of changes in equity for the tional Accounting e forms of business organization: sole proprietorship, partnership, and J separately or in poration. ied separately, the 2 et income, plus or of Business Organizations ange on investment __ An organization is defined as having two or more individuals working er toward the attainment of a goal or goals. A business is an ion formed in any of the following: Sole Proprietorship—is the simplest form of business organization. ‘Only one individual owns the business. Hi: = ‘Chapter 2: Statement f income and Statement of Owner’ Equity PS (RIE 02 sony rs ann Tenn tis eres 2. Partnership—is an association of two or more persons to carry on as co-owners of a business for profit. The partnership is bound by this contract: ‘By the contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves” (Article 1767, New Civil Code) 3, Corporations a separate body consisting of at least five individuals and treated by law as a unit. It is “an artificial being created by operation of law, having the right of succession and the powers, attributes and properties exoressly authorized by law or incident to its existence” (Sec. 2, The Corporation Code of the Philippines). Statement of Owner's Equity The statement of financial position or balance sheet shows the same components of the assets and liabilities for the three forms of business organization. The accounting equation is applied in the same manner for sole proprietorship, partnership, and corporation. ‘The Accounting Equation Comparative Owner's Equity ‘A. Sole Proprietorship - Sole Proprietor ~ Delia Jona P 700,000 200,000 (30,000) 140,000 (40,000) Capital, beginning of accounting period Net income for the accounting period (Year 1) This is bbe presen ‘Standards Net (loss) for the accounting period (Year 2) Additional investment by the sole proprietor Asset withdrawals or drawings by the sole proprietor srsons to carry on as ship is bound by this 1 more persons bind dustry to a common ‘among themselves” B. Partnership In a partnership, there are more than one owner. Assume the partners are Marko Reynes and Jose Canlas, and the following changes happened within the accounting period: Marko Reynes Jose Canlas ares Capital Accounts changes due to : = Initial investment P 900,000 P 600,000 : is x . z eee - Additional investment 400,000 150,000 ae aa - Permanent decrease in capital 100 80,000 by law or incident to of the Philippines). ‘Subtotal Drawing accounts changes due to eet shows the same - Share in losses 240,000 -60,000 se forms of business - Share in incomes 190,000 190,000 the same manner for - Withdrawal of cash or other assets 30,000 30,000 ‘Subtotal. 80,000 — 100,000 Net partners’ Equity at end of period © P_880,000 P_770,000 3. Corporation In a corporation, there are many owners or stockholders. The equity is not shown per individual stockholders, instead, the owners! equity is shown as a group of stockholders. From the general ledger, the following are the usual accounts representing owners’ equity ‘Common stock P 10,000,000 Additional contributed capital 2,000,000 Retained earnings (Profits not yet declared as dividends or not yet distributed to stockholders ) 1,500,000 a Jona Total Stockholders’ Equity at the end of P.700,000 Accounting period P 13,500,000 ) 200,000 a (80,000) This is a simplified illustration for a corporation. Other information will ) (30, jidelines of the International Financial Reporting ; 140,000 proprietor (40,000) sie Acountng 2. From the information in A, B, and C, the owner's or owners’ equity will appear as follows in the balance sheet: A. Delia Jona owner's equity P-970,000 B, Reynes and Canlas Partnership Partners’ Equity Marko Reynes Capital P 960,000 Drawings Dr. Balance (80,000) P 880,000 Jose Canlas Capital P 670,000 Drawings Cr. Balance 100,000 770,000 Total Partners’ Equity 1,650,000 C. Stockholders’ Equity Share Capital Common Stock ‘One milion shares at P10 par value per share P10,000,000 Additional Paid-in capital 2,000,000 Total share capital 12,000,000 Retained Earnings 1,500,000 Total Stockholders’ Equity P13,500,000 ‘Statement of Changes in Owner's Equity - Sole Proprietorship Expanded illustrations of owner's equity for a sole proprietorship iustrating (A) net income and (8) net loss are as follows: ‘The equity of the owner of the business in a sole proprietorship is the balance in the balance sheet account, Owners’ Capital. The latter is given this name. For example, Greg Templo: Capital in Templo Trading) is expected to have a natural credit balance. It is forwarded as a beginning balance in the succeeding accounting period. If Greg Templo: Capital has a credit balance of P800,000 on December 31, 20X1, the carry forward balance on January 1, 20X2 is P900,000. For the accounting period 20X2, the 900,000 will change as a result of transactions and events in 20X2. IMlustration 1, Net Ir or Net L Addit Cash . Result of Wher the state Greg Templo Add: _ Net In Addit Subtotal Less: Withd Greg Templo On Dece Templo Tradi Greg Templo ners’ equity will 970,000 | P 880,000 ) 770,000 1,650,000 re P10,000,000 2,000,000 12,000,000 1,500,000 13,500,000 ip le proprietorship sprietorship is the The latter is given ading) is expected yeginning balance apital has a credit orward balance on period 20X2, the nts in 20X2, Mlustration 1. Net Income for 20X2 750,000 or 2. Net Loss for 20X2 (280,000) 8. Additional investment by Greg Templo 200,000 Cash withdrawals by Greg Templo 80,000 Result of Operation Is a Net Income When the result of 20X2 operation has a net income of P750,000, the statement of changes in equity will appear as follows: ‘Templo Trading Statement of Changes in Owner's Equity For the Year Ended December 31, 20X2 g Templo, Capital, January 1, 20X2 900,000 i: Net Income for 20X2 750,000 200,000 Additional Investment 950,000 1,850,000. 80,000 P 1,770,000 : Withdrawals by Propreitor g Templo, Capital December 31, 20X2 3g Templo, Capital Chapter 2: Statement of Income and Statement of Owners aut IP B. Result of Operation Is a Net Loss When the result of 20X2 operation has a net loss of P280,000, instead of net profit, the statement of changes in equity will appear as follows: Templo Trading Statement of Changes in Owner's Equity For the Year Ended December 31, 202 900,000 Greg Templo, Capital, January 1, 20X2 Add: Additional Investment 200,000 Subtotal 1,100,000 Less: Net Loss for 20X2. P 280,000 Withdrawals by Propreitor 80,000 360,000 Greg Templo, Capital December 31, 20X2 740,000 1, How often should income statements be prepared? 2. Which is more important a. statement of financial position (balance sheet) or b. statement of results of operation (income statement)? 3. Explain the following: ‘a. balance sheet for a specific date (for example, December 31, 20X1) b. income statement is for a period of time (for example: For the Year Ended December 31, 20X1) 4, What are the advantages of multistep income statement over a single-step income statement? 6. Relate accounts in the income statement with those in the balance sheet. Discuss with your classmate how the income statement accounts affect balance sheet accounts. oss of P280,000, ity will appear as P 900,000 200,000 1,100,000 360,000 1,050,000 280,000 70,000 60,000 9,000 5,000 6,000 60,000 P_2,790,000_ 2,790,000 P 740,000 sred? eet) or statement)? ple, December (for example: For statement over a vith those in the how the income bunts. Chapter 2: Statement of income ad Statement of Owners Equity IE Income Statement Accounts December 31, 20X1 Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Advertising Sales Salaries Commission Expense Miscellanoous Selling Expense Rent Expense Office Salaries Light and Water Insurance Expense Taxes and Licenses Interest Expense Bad Debts Expenses Merchandise Inventory, Jan 1, 20X1 Depreciation Expense - Furn. & Equip. Merchandise Inventory, Dec. 31, 20X1 Fill in the blanks. 1. Net Sales 2, Net Purchases 8. Cost of Goods Sold 4. Gross Profit 5. Selling and Administrative Expenses Net Income Reporting Period Dr 5,000 220,000 10,000 30,000 15,000 3,000 15,000 20,000 2,000 4,000 5,000 4,000 20,000 87,000 10,000 cr. 478,000 3,000 60,000 Accounts obtained from the books of accounts LMN Trading any on December 31, 20X1 will enable you to make a multistep statement. jn Bank ounts Receivable ciation Expense Expense Expense P_2,285,000 "Merchandise Inventory Dec. 31, 20X1 is P180,000. What is the reporting period? { : . Chapter 2:Statement of income ad Statement of One's Eouty ER] de Exercise 2-4 Compute the owner's equity for Norman Gonzales on December 31, 20X1 based on the following data: ; Norman Gonzales, Capital January 1, 20X1 P 450,000 Cr. i Norman Gonzales, Cash Drawings for 20X1 120,000 Dr. : Norman Gonzales, Additional Investment 20X1 80,000 Cr. Net Income 20X1 90,000 Cr. & B Exercise 2-5 Prepare a statement of equity for Darwin Enterprise. Darwin Enterprise December 31, 20X1 Dr. cr. Darwin, Capital P 3,000,000 Darwin Additional Investment 500,000 Darwin, Drawing P 600,000 Net Income P 200,000 I ne tse. nore rete ae on December > 450,000 Cr. 120,000 Dr. 80,000 Cr. 90,000 Cr. cr. P 3,000,000 500,000 200,000 Pp ELE In this chapter, you should be able to 1. discuss the elements of statement of cash flows; ' 2. distinguish among operating activities, investing | activities, and financing activities; and i 8. prepare statement of cash flows using {a) indirect method and (b) direct method. ecourting 2 The Intemational Financial Reporting Standards of the International ‘Accounting Standards Board has its objective to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a cash flow statement. ‘The statement of cash flows is a basic financial statement. It provides Higt information about cash receipts and cash payments of an entity during a High sa more the period, I classifies the information into operating, investing, and financing atiities.It reconciles the cash balance beginning with the cash balance ending. ‘Bement The cash flow statement, when used with the income statement and balance sheet, provides information on the effect on cash, of changes in the aseets (other than cash), liabilities, and owner's equity accounts ofthe entity. It provides the users 1. abasis to evaluate the ability ofthe entity to generate cash; 2. an information on how the entity generates cash from some or all of the following: from operations oe . from ope aye from borrowings from investors |. from sales of noncurrent assets an information on how the entity uses cash which may be for some orall ofthe folowing: a b, c 4, a. for operations b. for payment of borrowed money ee ont c. for income to investors sale of d._ purchase of noncurrent assets s : payment 4, an information to determine the liquidity and solvency of the entity; 5. an information for estimating future cash inflow and cash outflow; tee and 6. an information for evaluating the relationship between cash flow and ity. The primary purpose of information about the cash receipts and cash payments of an entity, period. The secondary objective is to group the information as to operating, gg ee sence tr ett ng profi the statement of cash flows is to provide during a actvte: the International the provision of equivalents of an ment. It provides n entity during a 9, and financing he cash balance @ statement and of changes in the unts of the entity. ate cash; om some or all of | may be for some ¢ncy of the entity; and cash outflow; een cash flow and ows is to provide fan entity during a on as to operating, ‘evesting, and financing activities. Use statement of cash flows to assess Eauidiy, solvency, and proftabiity of an entity. “sale of goods, services, as well as other revenues. The outflows are for ‘eayments to suppliers of goods and services, taxes, and other expenses. ‘pient and equipment, intangibles, and other long-term assets. The inflow ‘Eom investing activities consists of cash receipts from sale of property, plant ‘eed equipment, intangibles, and other long-term assets. Liquidity is the ability to pay current obligations; solvency is the ability ‘ef 2 company to survive over a long term; and profitability is the ability to tte reasonable return on investments. High sales but low cash may indicate bad debts on sales on account. sales with high cash indicates profitable operation, where sales are than cash outlays for operations. ents of Cash Flows Cash flows from operating activities — These are cash flows that are directly related to earning the net income or suffering the net loss. 2. Cash flows from investing activities ~ These are cash flows for the acquisition or disposition of plant, equipment, and investments. 3. Cash flows from financing activities ~ These are cash flows for financing the entity through cash receipts from and cash payments to investors or creditors other than to, or from suppliers. “Operating Activities are the principal revenue-producing activities ofthe and other activities that are neither investing nor financing activities, ing activities include the cash effects of transactions that enter into determination of net income. Investing Activities are the acquisition and disposal of long-term assets J other investments. Financing Activities are activities that result in changes in the size and ion of the equity investments of owners and long-term liabilities of The inflow from operating activities comes from cash receipts from the Seaman The outflow for investing activities consists of payments for property, The inflow from financing activities consists of cash from equity investors ‘er owners of the entity and cash from borrowings. The outflow for financing ‘ctivties consists of cash back to equity investors or owners of the entity ‘22d cash for repayments of cash borrowed. Chater 3: Statement of Cash Flows OR gD ne nets stn ent ty Not all cash receipts are revenues and not all cash payments are expenses. It is also common to earn revenue prior to receiving cash and to incur expenses prior to paying cash. For these reasons, to better understand the relationship of cash flow and profitability, itis important to review the accrual basis of accounting. The book now introduces the difference between the two methods of ithe cash basis of accounting and the accrual basis of accounting. account jes revenue or income when cash is The cash basis of accounting recognizs received and recognizes expenses only when cash is paid. On the other hand, the accrual basis of accounting recognizes revenue or income in the accounting period in which itis earned, whether or not cash has been reeeived, and recognizes expenses in the accounting period in which itis sthods, it is incurred, whether or not cash has been paid. Between the two met the accrual basis of accounting that sin accordance-with generally accepted ‘aevounting principles. The objective of accounting is to fairly measure the results of the operation for a given period of time, and the financial position ts of a certain or specific date. The results of operation are shown in the income statement, and the financial position is shown in the balance sheet ‘statement of financial position. Rarely does the cash basis of accounting fairly measures results of operation and financial position, thusits limited use: Whether the business is service, trading, or manufacturing, there is a need to always employ a system of fair measurement. Fair measurement does not mean accurate measurement, but rather, measurement within acceptable range. At the end of the accounting or reporting period, adjusting entries are made to correct certain accounts. “The following are indications that the accrual basis of accounting isin use: 1. recognition of accounts receivable 2.. recognition of accounts payable 3, recognition of bad debts expense or uncollectible accounts receivable 44, recognition of depreciation of property and plant and equipment 5. recognition of prepaid expenses 6. recognition of accrued expenses or expenses payable 7. recognition of cash receipts for income not yet earned = sosi - TE When service or goods are delivered to customers, whether physically re r : era ‘constructively, it brings revenue or income and the right to collect from Eee oa ‘customer. The revenue or income is recognized as a credit to sales or ce income, and a debit to accounts receivable; sales is the account for view the “alg g business; and service income for a service business. wo methods of For such transaction, this is the journal entry. sof accounting. @ when cash is Accounts Receivable PXXX |, On the other 5 a Seer comel in Sales or Service Income PXXX qe cash has been To record income i, xd in which it is yo methods, itis erally accepted rly measure the nancial position This is an entry made when the sale is on account or on credit. At a later ‘ash is collected from the customer at which time the journal entry for ection is as follows: : re shown in the Cash PXXX { ppsencasiet Accounts Receivable PXXX i is of accounting ; us its limited use. To record collection from customer s uihere 6 feeh When cash is received on the date of sale of the product or service, this ‘ ithin acceptable B journal entry. sting entries are an ne Sales or Service Income PXXX Cee To record sales on cash basis. ‘of Accounts Payable When goods or supplies are bought, and the entity does not pay cash the time of purchase, the entity makes a promise to pay at a future date. transaction, called a purchase on account or on credit, is recorded as ek MAnannemntehane ectible accounts 1d equipment oe Purchase or Merchandise Inventory Accounts Payable PXXX able ; To record purchase of goods on credit ned Chapter 3: Statement of Cash Flows [CYS] for uncoll the balan an allowé an estim: becomes receivabl accounts 2. Laboratory Supplies PXXX ‘Accounts Payable To record supplies bought on credit PXXX, Payments of accounts payable is recorded as follows: ‘Accounts Payable PXXX Cash To record payment PXXX The j , Purchase of goods and supplies on cash basis is recorded as follows: 1. Purchases or Merchandise Inventory PXXX Cash To record purchase of goods on cash PXXX R na Plan the year 2. Laboratory Supplies PXXX He ser Cash PXXX Sand To record supplies bought on cash should 2 through is the pr periods are bul vehicles Lan since it The Recognition of Bad Debts Expense Before the income statements are prepared, there is a need to recognize that portion of the accounts receivable from customers that may net be collected. These are called bad debts. The amounts due from customers fre recorded as gross amounts with the debits to accounts receivable, For the entity may not be able to collect from all the customers, full the amount collectible from them. The entity probable uncollectible amounts varying reasons, ‘ora customer may not pay in will find the best way of determining the from customers. The journal entry is as follows: Bad Debts Expense PXXK PXXX To. value, 2 physica replace at the ¢ Allowance for Bad Debts To adjust for estimated uncollectible accounts The bad debts expense is one of those accounts listed as expenses in the income statement. The journal entry recognizes bad debts or uncollectible accounts receivable. There is a credit allowance for bad debts or allowance RE ons reins esr crn nc ‘uncollectible accounts. Either one of these two ‘accounts is shown in balance sheet as a deduction from accounts receivable. Meanwhile, ‘allowance account is used to indicate that the non-collectibilty is still “ee estimate. Once a particular or specific amount due from a customer es definitely uncollectible, the same is written off the accounts ble. To write off is to take out the bad accounts receivable from the its receivable and from the allowance for bad debts. POX ws: x PXAX The journal entry is as follows: Allowance for Bad Debts PXXX ded as follows: ‘Accounts Receivable PXXX To adjust for the write-off of receivables which are definitely | uncollectible cognition of Depreciation of Plant and Equipment Piant and equipment are those assets with useful lives extending beyond : syear when they were purchased. They are assets with physical existence. XX se the assets (plant and equipment) will help create revenue over a period PXXX ond the year they are acquired, the application of their costs to revenue also be over a period beyond their year of acquisition. This is done ough a process called depreciation accounting. Depreciation accounting “he process of allocating the cost of plant and equipment to the years or | sods expected to benefit from their use. Examples of plant and equipment ing, furniture, office equipment, laboratory equipment, and motor sicles or transportation equipment. XX PXXK , need to recognize s that may not be ue from customers ints receivable. For nll the customers, om them. The entity collectible amounts Landis also a long-lived asset. Itis generally not subject to depreciation it practically has an indefinite number of years of existence. The depreciation expense is journalized this way: Depreciation Expense PXXX z ‘Accumulated Depreciation PXXX F XXX To record depreciation PXXX To compute for depreciation, determine the cost of the asset, its scrap and its estimated useful life. The estimated useful life is based on ssical wear and tear, obsolescence, and company policy on repairs and ‘placements. The scrap value is the estimated selling price of the asset “st the end of its useful life. Depreciable cost is cost less scrap value. It is counts, sd as expenses in the ebts or uncollectible d debts or allowance IED newton mtn bn the cost of the plant and equipment that is allocated over a period of time, in which allocated amounts are the debits to depreciation expense. A common method of determining depreciation expense is the straight line method. The straight line method of depreciation determines the cost of the asset, and from this cost, the scrap value is subtracted. The net, called depreciable cost, is divided by its estimated useful life. The formula is as follows: Cost of Plant and Equipment ~ Sorap Value Example Cost of Delivery Truck 1,250,000 Scrap Value 250,000 Estimated Life 5 years ‘The computation is as follows: P1,250,00 - 250,000 5 Years = 200,000 depreciation expense per year The journal entry is as follows: Depreciation Expense - Delivery Equipment 200,000 ‘Accumulated Depreciation - Delivery Equipment 200,000 To adjust depreciation for the year ‘Such is the formula as there is an increase in expense and a decrease in asset. According to the rules of debits and credits, an increase in expense is a debit to an expense account, and a decrease in asset is a credit to the asset account. In the case of the latter, instead of directly crediting Delivery Equipment, the credit is to the contra-delivery equipment account, with the title, Accumulated Depreciation ~ Delivery Equipment. The account ‘Accumulated Depreciation — Delivery Equipmentis a deduction from Delivery when presented in the balance sheet. In the balance sheet these period of time, ts will appear among the other assets, as follows: expense. A the straight line Delivery Equipment P 1,250,000 nes the cost of “The net, called Less: Accumulated Depreciation 200,000 Net P 1,050,000 “When the depreciable cost of P1,000,000 has been fully recorded as no more expense is recorded. If the estimate of the five-year life is to reality, most likely the delivery equipment is no longer serviceable sseller, and therefore has to be sold as scrap. It is also possible to zero scrap value for certain depreciable assets. ‘of Prepaid Expenses ‘Certain expenses are paid in advance of actual use. There are two of recording such advance payments: the asset method and the method. When the asset method is used, an asset account is d upon payment, and for the expense method, an expense account Under the asset method, the adjusting entry at the end of the period (or reporting period) is the recognition of the expense by debiting the expense account for the increase in expense, and St to the asset account for the decrease in asset. On the other hand, the expense method, the end of period adjustment is a debit to the Renee per eet ‘sccount for the unused portion, and a credit to the expense account. Examples A The company paid a one year comprehensive insurance on the 90,000 ‘company car. Payment on February 1, 20X1 is P12,000. The journal maaan ‘entries for the payment and the yearend adjustments are as follows: ‘Asset Method Expense Method Prepaid insurance 12,000 Insurance Expense 12,000 oe Cash 12,000 | Cash 12,000 jcrease in expense To record payment of To record payment of sset is a credit to insurance premium. insurance premium. { directly crediting et Insurance Ext 11,000 | Prepaid ti 41,000 = et ance Expense 11\ paid Insurance 1, Psat Prepaid Incurance 11,000 | Insurance Expense 1,000 To adjust for the 11-month To adjust for the one month expenee. Unused insurance premium. Chapter 3: Statement of Cash Flows B. On December 16, 20X1, the company purchased office supplies The from Goodwill Trading amounting to P10,000. By December 31, credit to 20X1, the consumed office supplies amounted to P4,000 leaving ability an unused portion of P6,000. Recording of the purchase and the year-end adjustment are as follows: Se a ‘Asset Method Expense Method 20X1 Dec. 16 Unused Office Supplies 10,000 | Office Supplies Expense 10,000 Cash 40,000 | Cash 10,000 To record purchase of office To record purchase of office supplies supplies 20x1 Dec. 31 Office Supplies Expense 4,000 | Unused Office Supplies 6,000 Unused Office Supplies 4,000 | Insurance Expense 6,000 To adjust for used office To adjust for the unused office supplies supplies eee ee an Recognition of Accrued Expenses or Expenses Payable at the End of the ‘Accounting Period A company may have availed of or has incurred some expenses, payments for which have not been made. The expenses that usually fll in this category are salaries to employees, professional fees to contractors, electric bills, telephone bills, and water bills. Example On December 31, 20X1, the unpaid Meralco electric bill amounts to P20,000. The following is a journal entry adjustment: 20x1 Dec. 31 Utilities Expense Utilities Payable or Accrued Expenses Payable 20,000 To adjust for unpaid electric bill for the month of Dec. 20X1 om titre usenet Terbook Nes fice supplies The debit to utilities expense is for the increase in the expense, and the ecember 31,

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