ABM 1 Compilation Notes PDF

**COMPILATION NOTES FOR ABM 1** **The Nature of Accounting and Its Business Environment** **Lesson Objectives** - **Define accounting** - **Describe its nature and functions in business** **Accounting --** is the systematic process of measuring and reporting relevant financial information a...

**COMPILATION NOTES FOR ABM 1** **The Nature of Accounting and Its Business Environment** **Lesson Objectives** - **Define accounting** - **Describe its nature and functions in business** **Accounting --** is the systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit. Its underlying purpose is to provide financial information. It is capable of being expressed in monetary terms. AICPA defines [accounting] as the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction, and events, which are in part at least of a financial character, and interpreting the result thereof. **Nature of Accounting** 1\. **Systematic process** -- a series of actions that produce something or that lead to a particular result. The four aspects of accounting are recording, classifying, summarizing, and interpreting that leads to the users the relevant financial information needed by the interested parties. 2\. **An Art** -- a skill acquired by experience, study, or observation. It is also defined as occupation requiring knowledge or skill or function of serving. Activity is something that is done as work or for a particular purpose. 3\. **Accounting is a service activity**. **Services** is the occupation or function of serving. Activity is something that is done as work or for a particular purpose. Combining the meaning of the two words, accounting is a work or occupation for serving a particular purpose. **Four aspect of Accounting** 1\. **Recording** -- writing down of business transactions chronologically in the books of account as they transpire. 2\. **Classifying** -- sorting similar and related business transactions into the three categories of assets, liabilities and owner's equity. 3\. **Summarizing** -- preparing the financial statements from the transactions recorded in the books of account that are designed to meet the information needs of its users. 4\. **Interpreting** -- representing the qualitative and quantitative financial information about the business transactions in a language comprehensible to the users of financial statements. By interpreting the data in the financial statements, users are able to determine the financial standing of the company as well as its stability and growth potential. **Accounting** has different branches with each branch rendering a different service. Users of financial information include both internal and external users. Internal users include owners, investors, stockholders, management, and employees. External users include financial institutions, creditors, government, and potential investors and creditors. **Users of Financial Information** **Internal Users** -- Internal users are the primary users of financial information who are inside the reporting entity and are directly involved in managing the company's daily operations. 1\. **Investors/Owners/Stockholders** -- these parties provide the financial resources to keep the business going. They decide whether to invest or not depending on the estimated amount of income on the investment. Upon investment, they would want to know the financial position or results of operation of their investment. 2\. **Management** -- managers use financial information to set goals for their companies. Managers evaluate their progress towards these goals and use financial data as a guide for future management actions. 3\. **Employees** -- although employees are not directly involved in the decision making of the company, they are nonetheless interested in the financial information of the company to determine if they have a future in the company. **Externals Users** -- external users are secondary users of financial information who are parties outside the company. They may not be directly involved in the company's operations but their decisions may significantly affect the business entity. 1\. **Financial Institutions/Creditors** -- before extending credit, financial institutions use financial information to determine the capacity of the business organization to pay its obligations and their interests at the appropriate time. 2\. **Government** -- financial information is important for tax purposes and in checking of compliance with Securities and Exchange Commission (SEC) requirements. 3\. **Potential Investors/Creditors** -- Before making an investment or extending credit, potential investors or creditors may not only be interested in the company's current financial position and results of operations, but also in the company's financial history. This should give them the assurance that their investment will yield a reasonable rate of return or the credit extended will be paid within a reasonable period of time. **Types of Business Organizations** 1\. **Sole/Single Proprietorship** -- owned and managed by only one person 2\. **Partnership** -- owned and managed by two or more people who agree to contribute money, property, or industry to a common fund for the purpose of earning a profit. 3\. **Corporation** -- managed by an elected board of directors where the investors are called stockholders and the unit of ownership is called share of stock. 4\. **Cooperative** -- an association of small producers and consumers who come together voluntarily to form a business which they own, manage, and patronize. **Three Types of Business activities/Operations** 1\. **Service** -- engaged in the rendering of services 2\. **Trading/Merchandising** -- engaged in buying and selling goods 3\. **Manufacturing** -- engaged in the production of items to be sold **Fundamental Concepts** 1\. **Entity Concept** regards the business enterprise as separate and distinct from its owners and from other business enterprises. 2**. Periodicity** is the concept behind providing financial accounting information about the economic activities of an enterprise for specified time periods. For reporting purposes, one year is usually considered as one accounting period. \* An accounting period may be classified as either of the following: a\. **Calendar year** -- a twelve month period that starts on January 1 and end on December 31 b\. **Fiscal year** -- a twelve month period that starts on any month of the year other than January and ends twelve months after the start period, e.g., a business whose fiscal year starts May 1, 2016 ends its fiscal year on April 30, 2017. 3\. **Going Concern** is a concept which assumes that the business enterprise will continue to operate indefinitely. **Basic Accounting Principles** 1\. **Objectivity principle** states that all business transactions that will be entered in the accounting records must be duly supported by verifiable evidence. Example: Payments must be supported by official receipts and bank deposits must be supported by deposit slips. 2**. Historical cost** means that all properties and services acquired by the business must be recorded at their original acquisition cost. Example: Land bought in 2001 for two million pesos should be recorded at two million pesos even though its market value in the year 2016 is already three million pesos. 3\. **Accrual Principle** states that income should be recognized at the time it is earned such as when goods are delivered or when services have been rendered. Likewise, expenses should be recognized at the time they are incurred such as when goods and services are actually used and not at the time when the entity pays for those goods and services. Example: A resort cannot consider as income the advance payment of a customer who paid his two-week resort has not yet rendered the service to the customer. As such, the advance payment by the customer should be considered as a liability on the part of the resort in the form of services to be rendered. 4\. **Adequate disclosure** states that all material facts that will significantly affect the financial statements must be indicated. Example: Land bought at two million pesos in 2001 should be recorded at historical cost in the 2016 financial statements. However, the current market value of three million pesos in the year 2016 may be indicated in the financial statements for the year 2016 in the form of a footnote ore parenthetical note. 5\. **Materiality** means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the relative importance of an item or event. An item is considered significant if knowledge of it would influence prudent users of the financial statements. Example: Items of significant amount such as paper clips can be charged outright to expenses. 6\. **Consistency** means that approaches used in reporting must be uniformly employed from period to period to allow comparison of results between time periods. Any changes must be clearly explained. Example: If the straight line method of depreciation is being used by the company, then the method should be uniformly used by the company in computing its annual depreciation. **CHAPTER TEST** **I**. Identify the user of the financial statements in each of the following statements. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 1. Determines the capacity of the business organization to pay its obligations and their interests at the appropriate time. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 2. Set goals for their companies and evaluate their progress towards these goals \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 3. Decide whether to invest or not depending on the estimated amount of income on the investment \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 4. Collection of taxes \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 5. Job stability in the company **II**. State the accounting principle applicable in each case. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 6. Paper clips were automatically charged to expenses. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 7. Even though a project will take five years to finish, an annual report was furnished to the investors. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 8. There are around five beauty salons in the vicinity and the business doesn't earn much due to stiff competition. However, the accountant prepares the annual financial statements with the assumption that the business will not close any time. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 9. A business agreed to pay a down payment for the purchase of additional ten machine early next year in line with its business expansion. This was an added note to the financial statements. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_10. The telephone bill for the month, received end of the month, was recorded although it will be paid on the third day of the following month. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_11. Separate financial statements were prepared for the restaurant and the barber shop of Mr. Panot. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 12. The market value of the land was ignored for purposes of financial statement reporting. **III**. State the type of business activity performed by each establishment. 13\. SM Hypermarket \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 26. Siguion Reyna Law Firm \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 14\. David's Beauty Salon \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 27. Marikina Shoe Center \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 15\. Wilcon Depot \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 28. Kids Dental Clinic \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 16\. Ace Hardware \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 29. JM Furniture Factory \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 17\. Roche Pharmaceutical \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 30. SGV Auditing Firm \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 18\. Bronu Barber Shop \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 31. AA Security Agency \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 19\. JWT Advertising Agency \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 32. Ahead Review Center \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 20\. Pure Foods Corp. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 33. Sun Textile Mills \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 21\. National Book Store \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 34. Anson Vulcanizing \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 22\. Land Mark Dept. Store \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 35. Ukay Ukay Store \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 23\. Calayan Medical Clinic \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 36. Prima Plastic Extrusion \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 24\. Wellness Spa \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 37. Pure Gold Supermarket \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 25\. Belo Medical Clinic \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 38. Procter & Gable Co. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ **IV**. Enumerate the three forms of business organizations. 39\. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 40\. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 41\. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ **V**. Enumerate the three types of business operations 42\. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 43\. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 44\. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ **Accounting for the Service Business** **Assets, Liabilities, Capital, Revenue, and Expenses of the Financial Statements** **I. The Financial Statements** **Lesson Objectives:** - Classify the type of financial statements - Identify the typical accounts used in financial statements **Types of Financial Statements** 1**. Statement of Financial Position or Balance Sheet** -- shows the financial condition/position of a business as of a given period. It consist of assets, liabilities, and capital. 2\. **Statement of Comprehensive Income or Income Statement** The Income Statement shows the result of operations for a given period. It consists of the revenue, cost, and expenses. The statement of comprehensive income consists of the revenue, cost, and expenses and also contains components of other comprehensive income (including reclassification adjustments) as follows: changes in revaluation surplus, gains and losses on benefit plans, gains and losses from investments in equity instruments, finance costs, share of associates, etc. 3\. **Statement of Changes in Owner's Equity or Statement of Owner's Equity** -- shows the changes in the capital or owner's equity as a result of additional investment or withdrawals by the owner, plus the net income or minus the net loss for the year. 4\. **Statement of Cash Flows** -- summarizes the cash receipts and cash disbursements for the accounting period. It summarizes the cash activities of the business by classifying cash inflows (receipts) and cash outflows (payment) into operating, investing, and financing activities. It shows the net increase or decrease of cash in a given period and the cash balance at the end of the period. This allows management to assess the business' ability to generate cash and project future cash flows. **Typical Account Titles Used** **Balance Sheet** Balance sheet accounts, namely assets, liabilities, and owner's equity, are classified as real and permanent accounts. **Assets** -- economic resources owned by the business expected for future gain. They are property and rights of value owned by the business. **Liabilities** -- include debts, obligations to pay, and claims of the creditors on the assets of the business. **Owner's Equity or Capital** -- includes the interest of the owners on the business; claims of the owners on the assets of the business; and the investment of the owner plus or minus the results of operations. Owner's Equity or Capital comes for two main sources -- investment of owners and earnings of the business. **The Fundamental Accounting Equation ASSETS = LIABILITIES + OWNER'S EQUITY** Illustration: 1\. Given liabilities of P50,000 and the owner's equity of P150,000, find the value of assets. 2\. Given assets of P180,000 and the owner's equity of P110,000, find the liabilities. **ASSETS** **Lesson Objective** - Classify and identify assets as a basic elements of accounting **Classification of Current Assets** It is classified as current asset when it is: 1\. expected to be realized in, or is intended for sale or consumption in the entity's normal operating cycle; 2\. held primarily for the purpose of being traded 3\. expected to be realized within twelve months of the balance sheet date 4\. 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 Examples of **current assets** are as follows: 1\. **Cash** includes coins, currencies, checks, bank deposits, and other cash items readily available for use in the operations of the business. 2\. **Cash equivalents** are short -- term investments that are readily convertible to known amounts of cash which are subject to an insignificant risk to changes in value 3\. **Marketable securities** are stocks and bonds purchased by the enterprises and are to be held for only a short span of time or duration. They are usually purchased when a business has excess cash. 4\. **Trade and other Receivables** include the amounts collectible from any of the following accounts: a\. **Accounts Receivable** -- amount collectible from the customer to whom sales have been made or services have been rendered on account or credit b\. **Notes Receivable** -- promissory note issued by the client or the customer in exchange for services or goods received as evidence of his/her obligation to pay c\. **Interest Receivable** -- amount of interest collectible on promissory notes received from customers and clients d\. **Advances to Employees** -- certain amount of money loaned to employees payable in cash or through salary deductions e\. **Accrued Income** -- income already earned but not yet received 5\. **Inventories** represent the unsold goods at the end of the accounting period. This is applicable only to a merchandising business. 6\. **Prepaid Expenses** include supplies bought for use in the business or services and benefits to be receive by the business in the future paid in advance 7\. **Contra-Asset Accounts** are accounts deducted from the related asset accounts. a\. **Allowance for bad debts** -- losses due to uncollectible accounts. This is deducted from the accounts receivable accounts to get the realizable value. b\. **Accumulated depreciation** -- represents the expired cost of property, plant, and equipment as a result of usage and passage of time. This is deducted from the cost of the related asset account to get the carrying value or book value of the asset. **Classification of Non-Current Assets** 1\. **Long-term investments** are assets held by an enterprises for the accretion of wealth through capital distribution such as interests, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those obtained through trading relationships. Investments are classified as long-term when they are intended to be held for an extended period of time. 2\. **Property, plant, and equipment** are tangible assets that are held by an enterprises for use in the production or supply of goods or services, or for administrative purposes. These assets are expected to be used for more than one period. Examples: a\. **Land** -- a piece of lot or real estate owned by the enterprise on which a building can be constructed for business purposes b\. **Building** -- edifice or structure used to accommodate the office, store, or factory of a business enterprise in the conduct of its operations c\. **Equipment** -- includes typewriter, air-conditioner, calculator, filing cabinet, computer, electric fan, trucks, and cars used by the business in its office, store, or factory. Specific account titles may be used such as office equipment, store equipment, delivery equipment, transportation equipment, and machinery equipment. d\. **Furniture and Fixtures** -- include tables, chairs, carpets, curtains, lamp and lighting fixtures, and store furniture and fixtures. e\. **Intangible Assets** -- identifiable, non-monetary assets without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. These include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists, an non-competition agreements. **DRILL 1 --** Identify the following asset accounts \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 1. Tables, chairs, curtains, lighting fixtures, and wall decors \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 2. Typewriter, air-conditioning, filing cabinet, computer, trucks, cars used in business \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 3. An account representing the amounts owed by charge customers evidenced by a note \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 4. Edifice, structure used to house the office, store, or factory \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 5. Lot used by the business on which a building can be constructed \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 6. Non-monetary assets without physical substance held for use in the production or supply of goods, for rental to others, or administrative purposes, e.g., patents, copyrights... \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 7. An account representing the amounts owed by charge customers **LIABILITIES** Lesson Objective - Classify and identify liabilities as a basic element of accounting **Classification of Current Liabilities** It is classify as current when: 1\. it is expected to be settled in the entity's normal operating cycle 2\. it is held primarily for the purpose of being traded 3\. 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 **Trade and Other Payables** -- include payables from any of the following accounts: 1\. **Accounts payable** includes debts arising from the purchase of an asset or the acquisition of services on account 2\. **Notes payable** includes debts arising from the purchase of an asset or the acquisition of services on account evidenced by a promissory note 3\. **Loan Payable** is a liability to pay the bank or other financing institution arising from funds borrowed by the business from these institutions payable within twelve months and shorter. 4\. **Utilities payable** is an obligation to pay utility companies for services received from them. Examples of this are telephone services to PLDT, electricity to Meralco, and water services to Maynilad. 5\. **Unearned revenues** represent obligations of the business arising from advance payments received before goods and services are provided to the customer. This will be settled when certain goods and services are delivered or rendered. 6\. **Accrued liabilities** include amounts owed to others for expenses already incurred but not yet paid. Examples of these are salaries payable, utilities payable, taxes payable, and interest payable. **Classification of Non-Current Liabilities** Non-current liabilities are long term liabilities or obligations which are payable for a period longer than one year. Examples of non-current liabilities are as follows: 1\. **Mortgage payable** is a long-term debt of the business with security or collateral in the form of real properties. In case the business fails to pay the obligation, the creditor can foreclose or cause the mortgaged to be sold and use the proceeds of the sale to settle the obligation. 2\. **Bonds payable** is a certificate of indebtedness under the seal of a corporation, specifying the terms of repayment and the rate of interest to be charged. **DRILL 2** -- Identify the following liability accounts: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 1. Certificate of indebtedness under the seal of a corporation \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 2. Debts arising from acquisition of services on account \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 3. Liability arising from amount of money borrowed by the business either from a bank or from \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 4. Long-term debt of the business with security or collateral in the form of real properties \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 5. Debts arising from purchase of an asset on account evidenced by a promissory note \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 6. An obligation to pay utility companies for services received from them \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 7. Obligations of the business arising from advance payment received before services are \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 8. Amount owed to others for expenses already incurred but not yet paid **OWNER'S EQUITY** Lesson Objective: - Define and identify owner's equity as a basic element of accounting **Capital** is an account bearing the name of the owner representing the original and additional investment of the owner of the business increased by the amount of net income earned during the year. It is decreased by the cash or other assets withdrawn by the owner as well as the net loss incurred during the year. **Drawing** represents the withdrawals made by the owner of the business in cash or other assets. **Income Summary** is a temporary account used at the end of the accounting period to close income and expense accounts. The balance of this account shows the net income or net loss for the period before it is closed to the capital account. This will be taken up during the discussion of closing entries. **DRILL 3** -- Test your understanding 1\. What are the factors that increase the capital accounts? 2\. What are the factors that decrease the capital accounts? **INCOME AND EXPENSES** Lesson Objective - Classify and identify income and expenses as basic elements of accounting **Income Statement** accounts, namely revenue and expenses, are classified as nominal or temporary accounts. a\. **Service income** includes revenues earned or generated by the business in performing services for a customer or client. The following are different examples of income and the accounting term used to describe the income: \* Laundry services by a laundry shop (Laundry Income) \* Medical services by a doctor (Medical Fees) \* Dental services by a dentist (Dental Fees) \* Legal services by a lawyer (Legal Fees) \* Advisory services by a consultant (Consultancy Fees) b\. **Salaries and Wages expense** include all payments made to employees or workers for rendering services to a company. Examples are salaries or wages, 13^th^ monthly pay, cost of living allowances, and other related benefits given to the employees. c\. **Utilities Expense** is an expense related to the use of electricity, fuel, water, and telecom facilities. d\. **Supplies expense** covers office supplies used by a business in the conduct of its daily operations. e\. **Insurance Expense** is the expired portion of premiums paid on insurance coverage such as premiums paid for health or life insurance, motor vehicles, or other properties. f\. **Depreciation expense** is the annual portion of the cost of tangible assets such as building, machineries, and equipment charged as expense for the year. g\. **Uncollectible accounts expense / bad debts expense** means the amount of receivables charged as expense for the period because they are estimated to be doubtful of collection. h\. **Interest expense** is the amount of money charged to the borrower for the use of borrowed funds. **SINGLE -- STEP INCOME STATEMENT** Lesson Objective - To be able to prepare the single -- step income statement of a service business. Illustration Below are accounts taken from the books of Luffy's Ship Repair Services for the month of August, 2016. Prepare an income statement from the given data. Repairs Revenue P200,000 Rent Income 10,000 Salaries and Wages 35,000 Utilities Expense 14,000 Supplies Expense 11,000 Depreciation Expense 2,000 Miscellaneous Expense 3,000 **Luffy's Ship Repair Services** **Income Statement** **For Month Ended August 31, 2016** Repairs Revenue P 200,000 Other Income [10,000] Total Income P 210,000 Expenses Salaries and Wages P 35,000 Utilities 14,000 Supplies 11,000 Depreciation 2,000 Miscellaneous [3,000] [65,000] Net Income P 145,000 ====== **DRILL 4** -- Identify the following income statement accounts \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 1. Expenses related to the use of electricity, fuel, water, and telecommunication facilities \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 2. Revenues earned by performing services for a customer \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 3. Amount paid for the use of space, equipment, or other rentals \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 4. Payments made to employees for rendering services to the company \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 5. Amount of supplies used in the conduct of daily business \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 6. Expired portion of premiums paid on insurance coverage \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 7. The amount of money charged to the borrower for the use of borrowed funds \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 8. The amount of receivables charged as expense for the period because they are estimated to be doubtful of collection **EXERCISE 1** Below are balance sheet accounts. Classify these accounts by writing them under their proper columns. Land Prepaid Insurance Accounts Payable Unearned Rent Accounts Receivable Notes Receivable Loan Payable Accrued Liabilities Notes Payable Truck Furniture Prepaid Rent Bonds Payable Mortgage Payable Cash Supplies Building Equipment Taxes Payable Utilities Payable **Assets** **Liabilities** \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ **EXERCISE 2** For each of the following, write **I** if it is an Income Statement item and **B** if it is a balance sheet item. \_\_ 1. Accounts Payable \_\_ 11. Interest Receivable \_\_ 2. Building \_\_ 12. Supplies Expense \_\_ 3. Miscellaneous Expense \_\_ 13. Interest Income \_\_ 4. Cash \_\_ 14. Mortgage Payable \_\_ 5. Insurance Expense \_\_ 15. Supplies \_\_ 6. Salaries Expense \_\_ 16. Interest Expense \_\_ 7. Prepaid Rent \_\_ 17. Equipment \_\_ 8. Drawing Account \_\_ 18. Furniture \_\_ 9. Accrued Expense \_\_ 19. Accrued Income \_\_ 10. Loan Payable \_\_ 20. Unearned Rent **EXERCISE 3** Complete the table. **ASSETS (₱)** **LIABILITIES (₱)** **OWNER'S EQUITY (₱)** ---------------- --------------------- ------------------------ 960,000 518,000 6,008,000 4,255,000 807,000 777,000 3,000,000 2,005,000 1,123,000 933,000 **EXERCISE 4** Answer the following questions. Show your computation in good form. 1\. The economic resources of a business amount to P600,000 and its economic obligations amounted to P285,000. What would be its residual interest? 2\. The economic resources of a business amount to P300,000 and its economic obligations amount to P125,000. What would be its residual interest? 3\. If owner's equity is P150,000 which is 40% of the total assets, how much is the total liabilities of the business? 4\. If the economic obligations of a business amount to P60,000 and its residual interest amounts to P150,000, what would be of the amount of the economic resources of the business? 5\. If the owner's equity is thrice the total liabilities which is ¼ of total assets, what would be the owner's equity of the business? The amount of total assets is P800,000. **EXERCISE 5** Below are accounts taken from the books of Yurki Cross School Security Services for the amount of April. Prepare an income statement using the given data. School Security Income P280,000 Salaries Expense 55,000 Rent Expense 18,000 Utilities Expense 12,000 Supplies Expense 10,000 **CHAPTER TEST** I. Identify the term that best suits each statement. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 1. The costs related to earning revenue \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 2. Shows the changes in the capital or owner's equity as a result of additional \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 3. Debts, obligations to pay, claims of the creditors on the assets of the business \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 4. Economic resources owned by the business expected for future gain \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 5. The costs of doing business \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 6. Shows the results of operations for a given period \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 7. Interest of the owners on the business \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 8. Shows the financial condition/position of a business as of a given period \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 9. Represents the withdrawals made by the owner of the business either in cash or other \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ 10. Earnings of the business II\. Answer the following questions. Show your computation in good form. 11\. If owner's equity is P125,000 which is 40% of the total assets, how much is the total liabilities of the business? 12\. The economic resources of a business amount to P1,600,000 and its economic obligations amount to P788,000, what would be its residual interest? 13\. The economic resources of a business amount to P555,000 and its economic obligations amount to P225,000. What would be its residual interest? 14\. If the total liabilities amount to P580,000 which is ¼ of the total assets, what is the amount of the residual interest of the business? 15\. How much would be the economic resources of a business if its residual interest is 150% of its economic obligations of P480,000? **Multiple Choice** Instruction: Encircle the letter of the correct answer in each of the given question. 1\. The residual interest in the assets of the enterprise after deducting all the liabilities a\. assets c. gains b\. liabilities d. owner's equity 2\. This represents the claim of the creditor's over the assets of the enterprise a\. revenue c. expenses b\. owner's equity d. liabilities 3\. Are resources controlled by the enterprise as a result of past transactions and events and from which future economic benefits are expected to flow the enterprise a\. liabilities c. expenses b\. assets d. owner's equity 4\. The excess of revenues over costs and expenses a\. profit c. expenditure b\. loss d. breakeven 5\. The basic accounting equation a\. A = L -- OE c. L x OE = A b\. A = L + OE d. OE = A -- L 6\. The excess of costs and expenses over revenues a\. loss c. expenditure b\. profit d. breakeven 7\. Which of the following is not considered as account title? a\. cash in bank c. withdrawal b\. accounts receivable d. accounts payable 8\. Which of the following is an intangible asset? a\. land c. copyright b\. furniture and fixtures d. building 9\. The "asset-offset" or "contra-asset" account that is shown as deduction from property and equipment is termed as a\. accumulated amortization c. depreciable value b\. accumulated depreciation d. depreciation expense 10\. The anticipated loss that the business may incur arising from an uncollected receivable account is termed as a\. Uncollectible Accounts c. Estimated Uncollectible Accounts b\. Provision for Doubtful Accounts d. Allowance for Doubtful Accounts