Accounting Concepts and Asset Classification

Fundamentals of Accountancy, Business and Management 2

• This course covers the fundamentals of accountancy, business, and management.
• The course was created in 2016 for senior high school students in Malvar, Batangas.
• The course is part of the STEM (Science, Technology, Engineering, and Mathematics) program.

Content Standard

• Students demonstrate understanding of account titles under assets, liabilities, and capital accounts in the Statement of Financial Position (SFP).
• Key account titles include cash, receivables, inventories, prepaid expenses, property, plant, and equipment, payables, accrued expenses, unearned income, long-term liabilities, and capital.
• This knowledge prepares students to create SFPs using the Statement of Comprehensive Income (SCI).

Performance Standards

• Students can solve exercises to prepare an SFP for a single proprietorship.
• Proper classification of accounts (current and noncurrent) is required using the report form.

Essential Learning Competencies

• Students identify and describe the elements of the SFP.
• Students prepare an SFP using report and account forms, classifying items as current or noncurrent.

Accounting Cycle

• The accounting cycle includes steps like analyzing transactions, preparing journal entries, posting entries, preparing an unadjusted trial balance, adjusting entries, preparing an adjusted trial balance, preparing financial statements, and creating reversing entries (if necessary).

Financial Statements

• Financial statements communicate financial information periodically to users.
• They represent the financial position and performance of an entity.
• The objective of financial statements is to provide useful information on financial position, financial performance, and cash flows for economic decision-making.

Elements of Financial Statements

• The financial statements detail assets, liabilities, equity, income, expenses (including gains and losses), contributions to owners, and distributions to owners.
• Cash flows are also included.

Frequency of Reporting

• Financial statements are presented at least annually.
• Entities must disclose the period covered in statements differing from annual periods.
• For periods longer or shorter than a year, the reason for the variation and lack of comparability should be made clear.

Components of Financial Statements

• Key components include the Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity, and Notes to the Financial Statements.

Statement of Financial Position (Balance Sheet)

• The balance sheet shows an entity’s assets, liabilities, and owner's equity.
• Assets are classified into current and noncurrent.

Assets

• Assets are resources controlled by an entity as a result of past transactions or events from which future economic benefits are expected to flow to the entity.
• Assets are categorized as current or noncurrent.
• Current assets are expected to be converted to cash, sold, or consumed within the entity's normal operating cycle. Examples include cash, accounts receivable, and inventory.
• Noncurrent assets are not expected to be converted to cash, sold, or consumed within the entity's normal operating cycle. Examples include property, plant, and equipment, and long-term investments.

Liabilities

• Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
• Liabilities can be categorized as current or noncurrent.
• Current liabilities are obligations expected to be settled within the entity's operating cycle.
• Noncurrent liabilities are obligations expected to be settled after the operating cycle.

Owner's Equity

• Owner's equity is the residual interest in the assets of an entity after deducting all its liabilities.
• It represents the owners' stake in the business.

Single Step Approach and Multi-step Approach for Statement of Comprehensive Income (SCI)

• Students prepare SCI for a service and merchandising business using the single-step and multi-step approaches.
• The single-step approach groups all revenues and expenses together to arrive at net income.
• In a multi-step approach, various income and expenses are categorized into sections and then added and subtracted.

Statement of Comprehensive Income (SCI)

• The SCI measures the changes in equity (or net assets) during a period arising from all transactions and other events other than those resulting from transactions with owners.
• It encompasses items of income and expenses, including profit or loss from operations as well as (discretionary) reclassification adjustments.
• The profit or loss section (typically the "bottom line") is calculated before considering the components of other comprehensive income.
• The SCI may present separate components of other comprehensive (non-profit-or-loss-affecting) transactions (e.g. foreign currency exchange, etc) and reclassification adjustments.
• Includes a final line representing the total comprehensive income for the period.

Financial Ratio Analysis

• Financial ratios use relationships between accounts to analyze and interpret a company's financial position and performance.
• Liquidity ratio: measures the capacity of a company to meet its short-term obligations. Examples include current ratio, quick ratio, and working capital.
• Solvency ratio: indicates the extent to which a company's assets can cover its liabilities. Examples include debt/assets ratio, debt-to-equity ratio, debt/capital, and equity ratio.
• Profitability ratios measure profitability of operations, and include gross profit margin, net profit margin, and return on equity.
• Efficiency (management) ratios reflect how effectively a company uses its resources (assets) examples include accounts receivable turnover and inventory turnover.

Methods of Financial Statement Analysis

• Horizontal analysis compares financial information over different periods.
• Vertical analysis expresses each item as a percentage of a specific total (e.g. representing net sales figure).