FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: LESSON 2
Accounting Elements I. Current Asset
• The quantitative information reported in the
statement of financial position and income
statement.
• These elements are considered as the building
blocks of the financial statements.
• These are:
o Assets
o Liabilities
o Equity
o Income
o Expenses
Types of accounts
1. Real accounts
- elements directly related to the measurement of
financial position are assets, liabilities and equity, and
their usefulness continues throughout the life of the
business and their year-end balances are forwarded to
the next accounting period.
2. Nominal accounts
- elements directly related to the measurement of
financial performance are income and expenses.
- These accounts provide information on the changes
in equity as the result of business operation.
- Their usefulness is limited to the year when they are
incurred and their year end balances are not forwarded
to the next accounting period.
ASSETS
➢ These are properties or rights on properties
owned by the business.
➢ These items of value are used by the enterprise
in their day to day activities.
➢ Assets are resources controlled by the
enterprise as a result of past business
transactions or events which future economic
benefits are expected to flow to the entity.
The essential characteristics of an asset are:
1. The asset is controlled by the entity
2. The asset is the result of a past transaction or event
3. The asset provides future economic benefits
4. The cost of the asset can be measured reliably.
Classification of Assets
1. Current Asset
2. Non-current Asset
1|jae
An asset shall be classified as current when it satisfies
any of the following criteria:
a. The asset is cash or cash equivalent unless
the asset is restricted from being exchanged or
used to settle a liability for at least twelve
months after the reporting period.
b. The entity holds the asset primarily for the
purpose of trading
c. The entity expects to realize the asset within
twelve months after the reporting period
d. The entity expects to realize the asset or
intends to sell or consume it within the entity’s
normal operating cycle.
Examples of current assets and contra-accounts:
1. Cash - includes currency or cash items on hand,
cash in bank, cash fund (petty cash fund,
payroll fund)
2. Cash equivalents - are short term highly liquid
investment that are readily convertible to
known amounts of cash and so near their
maturity that they present insignificant risk of
changes in value. Only highly liquid
investments that are acquired three months
before maturity date can qualify as cash
equivalents.
3. Trading securities - investments which are
readily marketable and represent temporary
investment of funds available for current
operations.
4. Accounts receivable – are open accounts or
those that are not supported by promissory
notes.
5. Allowance for doubtful accounts a contra-
asset account which is provided for possible
loss from uncollected accounts.
6. Note receivable - amount collectible
evidenced by a promissory note.
7. Merchandise inventory - goods held for sale by
trading concern
8. Finished goods, goods in process, raw
materials and factory supplies - inventories
held by manufacturing firm
9. Prepaid expenses - expenses paid in advance
(prepaid rent, prepaid insurance)
10. Unused supplies - supplies purchased for use
and are still unused
11. Accrued income - income earned but not yet
received (accrued interest income, accrued
rent income)
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: LESSON 2
II. Non-Current Asset
A. Property, Plant, and Equipment or Fixed
Assets
1. Office equipment
2. Store equipment
3. Delivery equipment
4. Machineries
5. Furniture and Fixtures
6. Land
7. Building
8. Accumulated depreciation - contra-
account used to accumulate expired
cost of fixed assets. It is a deduction
from property, plant and equipment.
B. Long Term Investments
• Investments are assets held by the
enterprise for the accretion of wealth
through capital distribution, such as
interest, royalties, dividends and
rentals, for capital appreciation or for
other benefits to the investing
enterprise.
• An investment may either be current
or non-current.
• A current investment is readily
realizable and is intended to be held
for not more than one year.
• A long term investment is intended to
be held for more than one year.
Examples: investments in bonds, investment in
subsidiaries
C. Intangibles
• Intangible assets are identifiable non-
monetary assets without physical
substance.
• It must be controlled by the enterprise
as a result of past event and from
which future economic benefits are
expected to flow to the enterprise.
Examples:
1. Copyright – right granted to authors,
composers, playwrights, artists,
publishers or distributors to publish,
and dispose of their works for a limited
time.
2. Franchise – right granted to operate a
utility or to manufacture or to market
a product of another company within a
specified area.
2|jae
3. Patent – right granted to an inventor
to manufacture or produce his
inventions or products.
4. Goodwill – an intangible advantage
that increases earnings over what is
normal, it is the excess of agreed value
over contributed value.
5. Trademark or brand name – a symbol,
sign, slogan or name used to mark a
product or distinguish it from other
products
6. Computer software, leasehold rights
D. Other non-current assets
• Include assets that do not fit into the
definition of the above-mentioned
non-current assets.
• These include long-term advances to
officers or employees, abandoned
property, and long-term refundable
deposits.
LIABILITIES
➢ Liabilities are debts or obligations of the
business.
➢ It refers to the present obligations of an
enterprise from past transactions or events,
the settlement of which is expected to result in
an outflow from the enterprise resources
embodying economic benefits.
I. Current Liabilities
A liability shall be classified as current when it
satisfies any of the following criteria:
a. The entity expects to settle the liability
within the entity’s normal operating cycle
b. The entity holds liability primarily for the
purpose of trading
c. The liability is due to be settled within
twelve months after the reporting period
d. The entity does not have an
unconditional right to defer settlement of
the liability for at least twelve months after
the reporting period.
Examples:
1. Accounts payable - amounts due to
suppliers for the purchase of goods
or services on credit
2. Notes payable - amounts due to
other parties evidenced by a
promissory note
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: LESSON 2
3. Accrued expenses - expenses INCOME/REVENUE
incurred but not yet paid ➢ Income refers to the earnings of the
4. Interest payable - unpaid interest on enterprise.
borrowings ➢ These includes sale of merchandise, income
5. Salaries payable due to performance or other type of income
6. Bank loans payable realized in the operation s of the business.
7. Unearned revenue / Unearned ➢ Technically, income is defined as the increase
income- income received but not yet in economic benefits during the accounting
earned period in the form of inflow or increase in asset
or decrease in liability that results in increase
8. SSS premium payable
in equity other than the contribution from
9. Phil health premium payable equity participants.
10. Withholding tax payable
The income accounts in a service concern maybe
II. Non-Current Liabilities named as follows:
Examples: 1. Service income - charges to clients or
1. Mortgage payable - economic customers for services rendered
obligations secured by collateral 2. Professional fees
2. Notes payable - debts supported by 3. rent income
notes and payable beyond one year 4. repair income
3. Deferred revenue - income received 5. laundry income
in advance but not yet earned and 6. ticket sales
which will be realized as income over a
period of more than one year or the
normal operating cycle if it exceeds For a merchandising firm, account titles are as
one year. follows:
EQUITY 1. Sales
➢ Equity is the difference between assets and 2. Sales returns - represent deduction from
liabilities. If the business owns assets worth sales due to merchandise returned by
P2,000,000 and has debts worth P 1,500,000, customers
the capital or owner’s equity is P 500,000. 3. Sales allowance - represent deductions from
𝐸𝑞𝑢𝑖𝑡𝑦 = 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 selling price of goods with defects or goods
➢ Equity represents residual interest in the sent to customers but not as ordered
assets of the enterprise after deducting all 4. Sales discounts - deductions from the selling
liabilities, otherwise known as net assets or net price due to payment of customers within the
worth. discount period.
➢ Terms used in reporting the equity of an
enterprise are owner’s equity or capital in sole
EXPENSES
proprietorship, partner’s equity or capital in a
partnership, and stockholder’s equity or Expenses are defined as the decrease in economic
shareholder’s equity in a corporation. benefit during the accounting period in the form of an
outflow or decrease in asset or increase in liability that
For a sole proprietorship and partnership, the equity
results in decrease in equity, other than distribution to
and withdrawal accounts are:
equity participants.
a. Owner’s capital - this includes the capital
contribution of the owner
Specifically, expenses include the following:
b. Owner’s drawing - this is used in recording
o cost of sales
the withdrawal capital made by the owner.
o distribution or selling expenses
o administrative expenses
o other operating expenses
o income tax expense.

3|jae
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: LESSON 2
Cost accounts - these accounts represent the value of ➢ A chart of accounts is a list of account titles
the goods sold. These include: classified or arranged according to the financial
1. Purchases - represent the original statements wherein they appear.
acquisition price of the goods for resale ➢ The number of accounts maintained for a
2. Purchase return - represent coat of goods particular business depends upon the nature
purchased but returned to suppliers because of its operations, the volume of transactions,
of damage, defect or unacceptable and the extent to which details are desired.
3. Purchase allowance - represent the
reduction in the cost of defective or damaged
goods bought but not returned to the supplier
4. Purchase discounts - represent the
reduction in the amount paid to the supplier
due to payment of account within the discount
period
5. Freight in - represent the cost of
transporting goods purchased from the
suppliers to the store or warehouse

Other expense accounts:

1. salaries and wages
2. advertising expense
3. rent expense
4. repairs and maintenance
5. transportation expense
6. taxes and licenses – amount of taxes and licenses
paid to the government
7. Doubtful accounts expense / bad debts expense –
possible loss or portion of the
uncollectible receivables allocated as expense for the
period.
8. depreciation expense - is the portion of the cost of
the fixed asset that is charged or
allocated as expense for the period.
9. insurance expense
10. supplies expense
11. utilities expense
12. representation and entertainment - represent
value placed on activities that will promote
goodwill and increase customers’ patronage.
13. SSS, Pag-ibig premiums – contributions of the
employer to SSS and |Pag-big
14. Miscellaneous expense – relatively small amount
paid for items or services which do not
fall under the above accounts.
CHART OF ACCOUNTS
➢ In recording business transactions and events,
the bookkeeper is usually guided by a chart of
accounts.
THE ACCOUNTING EQUATION
➢ An accounting equation shows the relationship
between assets and equities.
➢ Assets are properties owned or controlled by
the business.
➢ Rights or claims against the asset are called
equities.
➢ Equities are divided into two types:
1. Liabilities – the equity of creditors
2. Capital or owner’s equity – the equity
of the owner.
ASSETS = LIABILITIES + OWNER’S EQUITY
➢ Owner’s equity or capital is the excess of total
assets over total liabilities.
➢ Creditor’s claim has priority over claims of the
owner, thus, owner’s equity is considered
residual.
ASSETS – LIABILITIES = OWNER’S EQUITY
➢ A business is interested in items which resulted
to the increase or decrease in owner’s equity.
➢ The increase in owner’s equity may be due to
the income derived from the profit-directed
activities of the company or to additional
investment by the owner.
➢ The decrease in the owner’s equity may be due
to the expenses or costs incurred in the
operation.

4|jae