Accounting Basics Quiz

Chapter 3: Accounting Elements and Account Titles

• This chapter covers accounting elements and account titles, essential components in financial reporting.
• Accounting elements include assets, liabilities, capital/equity, revenue, and expenses.
• These elements are grouped together to summarize business transactions and activities.

Learning Objectives

• Understand the nature of accounting elements.
• Comprehend the broad classification of accounting elements.
• Identify the classification of assets.
• Recognize the criteria for classifying an item as a current asset.
• Define the operating cycle concept.
• List various account titles classified as assets.
• Explain the concept of "contra-accounts."
• Detail the characteristics and requirements of liabilities.
• Analyze elements impacting owner's equity.
• Discuss merchandising account titles.

Accounting Elements

• Assets are resources controlled by the business, resulting from past transactions, and expected to generate future economic benefits.
• Liabilities represent present obligations arising from past transactions, where settlement leads to an outflow of resources.
• Equity (or capital) represents the residual interest in the assets after deducting liabilities.
• Revenue encompasses increases in economic benefits from ordinary activities, not including contributions from equity participants.
• Expenses indicate decreases in economic benefits, such as the use of assets or the incurrence of liabilities.

Assets

• Assets are resources controlled by the business, with rights to future economic benefits.
• An asset must: be a resource of the business, be controlled by the enterprise, be the result of past events, and provide future economic benefits.

Current Assets

• Assets expected to be realized or consumed within the normal operating cycle or within 12 months of the balance sheet date.
• Includes cash, cash equivalents, collectibles (trade receivables), goods intended for sale, or inventory.
• Cash assets that are restricted for specific uses (not for ordinary operation) are not considered current.

Current Assets Accounts

• Cash: Money in hand or in the bank, checks, and other negotiable instruments.
• Petty Cash Fund: Money specifically earmarked for small expenses.
• Notes Receivable: Money owed to the business, supported by promissory notes.
• Accounts Receivable: Money owed to the business, not backed by a promissory note.
• Allowance for Bad Debts: An account for potential losses from uncollected receivables (a "contra-asset).
• Interest Receivable: Interest earned on notes receivable.
• Advances to Officers/Employees: Money owed by officers/employees to the business.
• Supplies: Office supplies purchased but not yet consumed.
• Prepaid Expenses: Expenses paid in advance.

Non-Current Assets

• Assets not expected to be converted to cash or used up within the normal operating cycle (over one year).
• Classification: Property, plant, and equipment; long-term Investments; intangible assets; other non-current assets.
• Property, Plant, and Equipment (PPE): Tangible assets used in production or other operations. Includes land, buildings, machinery, equipment, furniture, fixtures.
• Accumulated Depreciation: The sum of depreciation over the years, deducted from the related PPE.
• Long-term Investments: Investments that will be held for more than one year (e.g., stocks, bonds, subsidiaries).
• Intangible Assets: Non-physical resources (e.g., patents, copyrights, trademarks).
• Other Non-current Assets: Assets not categorized in other classifications.

Liabilities

• Liabilities represent present obligations of the business resulting in the outflow of economic benefits arising from past transactions.
• A liability must be a present obligation existing at the balance sheet date that arises from a past transaction and lead to future outflows of resources.
• Classifications include current and non-current liabilities.

Current Liabilities

• Current liabilities are obligations expected to be settled within the entity's normal operating cycle or within one year of the balance sheet date (or, if not expected, they do not have the unconditional right to defer the settlement).
• Account Titles: Accounts payable, notes payable, bank payable/loan payable, utilities payable, salaries payable, interest payable, SSS/Philhealth premium payable, withholding tax/income tax payable, unearned income/precollected income.

Non-Current Liabilities

• Non-current liabilities are obligations expected to be settled beyond the operating cycle (i.e., more than one year).
• Classifications include mortgages payable, long-term bank payables, non-current portions of long-term debt, finance lease liabilities.

Equity (or Owner's Equity)

• Represents the residual interest in the assets after deducting liabilities.
• Usually includes capital, withdrawals/drawings, net income/loss.

Income Accounts

• Show the increases in economic benefits from ordinary business operations (excluding contributions from equity participants).
• Includes revenue and gains.
• Revenue is a primary element arising during ordinary business activities. Gains may or may not be from ordinary activities.

Income Account Titles

• Service income: Income earned from services rendered.
• Professional income: Income earned by professionals.
• Rental Income: Income from renting properties.
• Interest Income: Income from loans or investments.
• Miscellaneous Income: Income not categorized in other accounts.
• Gains from Sale of Assets: Income from selling assets not typically sold in ordinary operations.

Expense Accounts

• Expenses decrease economic benefits by depleting assets or incurring liabilities.
• Types: salaries/wages, rent, office supplies, store supplies, insurance, interest, taxes, utilities, bad debts, depreciation, SSS contribution, Philhealth contribution, Pag-IBIG contribution, miscellaneous expenses.

Merchandising Accounts

• Specific account titles used for businesses dealing in goods.
• Account Titles: Sales, sales returns and allowances, sales discounts, purchases, freight-in, purchase returns and allowances, purchase discounts, merchandise inventory, cost of goods sold, freight-out.