2.-The-Elements-of-Financial-Statements-and-Transaction-Analysis_042708.pdf

UNIVERSITY OF SOUTHERN MINDANAO Chapter 2 The Elements of Financial Statements and Transaction Analysis Acc 112b: Financial Accounting and Reporting Prepared by: Sandra Angela A. Bangcaya 2024  Learning Objectives Describe the...

UNIVERSITY OF SOUTHERN MINDANAO Chapter 2 The Elements of Financial Statements and Transaction Analysis Acc 112b: Financial Accounting and Reporting Prepared by: Sandra Angela A. Bangcaya 2024  Learning Objectives Describe the elements of financial statements. Describe the account and its uses. Describe the accounting equation. Analyze financial transactions Analyze the effects of business transactions on the elements of the financial statements. ACC112b. Chapter 2. Page 2  Topics Elements of financial statements. The account and its uses. The accounting equation. Analysis of financial transactions Effects of business transactions on the elements of the financial statements. ACC112b. Chapter 2. Page 3  Financial Statements A complete set of Financial Statement comprises per revised PAS No. 1: 1. a statement of financial position as at the end of the period; 2. a statement of comprehensive income for the period; 3. a statement of changes in equity for the period; 4. a statement of cash flows for the period; 5. notes, comprising a summary of significant accounting policies and other explanatory information; and 6. a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements ACC112b. Chapter 2. Page 4 Statement of Comprehensive Income ACC112b. Chapter 2. Page 5 Statement of Changes in Equity ACC112b. Chapter 2. Page 6 Statement of Financial Position ACC112b. Chapter 2. Page 7 The Account The basic summary device of accounting Detailed record of increases and decreases and the balance of each element that appears in the financial statements A group of accounts is called chart of accounts. ACC112b. Chapter 2. Page 8  Elements of Financial Statements Element Relates to Definition or Description Asset Financial A present economic resource controlled by the entity as a position result of past events. An economic resource is a right that has the potential to produce economic benefits. Liability Financial A present obligation of the entity to transfer an economic position resource as a result of past events. Equity Financial The residual interest in the assets of the entity after deduction position all its liabilities. Income Financial Increases in assets, or decreases in liabilities, that result in performance increase in equity, other than those relating to contributions from holders of equity claims. Expense Financial Decreases in assets, or increases in liabilities, that result in performance decreases in equity, other than those relating to distributions to holders of equity claims. ACC112b. Chapter 2. Page 9 ASSET A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. ACC112b. Chapter 2. Page 10 Three Aspects in the Definition of Assets 1. Right a. Rights that correspond to an obligation of another party i. Rights to receive cash ii. Rights to receive goods iii. Rights to exchange economic resource with another party on favorable terms iv. Rights to benefit from an obligation of another party to transfer an economic resource if a specific uncertain future event occurs. b. Right that does not correspond to an obligation of another party i. Rights over physical objects ii. Rights to use intellectual property ACC112b. Chapter 2. Page 11 2. Potential to produce economic benefits a. Receive contractual cash flows or other economic resource b. Exchange economic resources with another party on favorable terms c. Produce cash inflows or avoid cash outflows i. Using resources to produce goods and services ii. Using resources to enhance the value of other economic resource iii. Leasing the economic resource to another party d. Receive cash or other benefit by selling the resource e. Extinguish liabilities by transferring the economic resource ACC112b. Chapter 2. Page 12 3. Control Ability to direct the use of the resource Obtain economic benefits that may flow from it Prevent others from directing the use of the resource and obtaining economic benefits that may flow from it ACC112b. Chapter 2. Page 13 Classification of Assets 1. Current a. it expects to realize the assets, or intends to sell or consume it, in its normal operating cycle. b. It hold the assets primarily for trading c. Expected to be realized within 12 months after the reporting period d. Cash and cash equivalents (unless restricted) 2. Non-current All other assets that does not fit the definition of current assets. ACC112b. Chapter 2. Page 14 Examples of Assets CURRENT ASSETS. Cash, Accounts Receivable, Notes Receivable, Supplies, Prepaid Expenses. NON-CURRENT ASSETS. Land, Equipment, Machinery, Vehicles, Furniture and fixtures, Accumulated depreciation. ACC112b. Chapter 2. Page 15 LIABILITY A present obligation of the entity to transfer an economic resource as a result of past events. ACC112b. Chapter 2. Page 16 Criteria for Liability 1. The entity has an obligation An obligation is a duty that cannot be practically avoided. It is not necessary to know the entity to whom the obligation is owed. ACC112b. Chapter 2. Page 17 2. The obligation is to transfer an economic resource An item can be classified as a liability even though the probability of the transfer is low or the transfer may only be required if certain future event occurs. The obligation to handover an economic resource can includes Paying cash Deliver goods or provide services Exchange of economic resources with another party on unfavourable terms. Ex. Forward contracts and option Obligation to transfer an economic resource if a specified uncertain future event occurs. Obligation to issue a financial instrument if that financial instrument will oblige the entity to transfer economic resource ACC112b. Chapter 2. Page 18 3. The obligation is a present obligation that exists as a result of past events. The entity has already obtained economic benefits or taken an action as a consequence, the entity will or may have to transfer an economic resource ACC112b. Chapter 2. Page 19 Classification of Liabilities 1. Current a. It expects to settle the liability in its normal operating cycle. b. It holds the liability primarily for the purpose of trading. c. It is due to be settled within 12 months after the reporting period. d. The entity does not have the unconditional right to defer settlement of the liability for at least 12 months after the reporting period. 2. Non-current All other liabilities that does not fit the definition of current liability. ACC112b. Chapter 2. Page 20 Examples of Liabilities CURRENT LIABILITIES. Accounts payable, Notes payable, Unearned service revenue, Accrued expense payable. NON-CURRENT LIABILITIES. Mortgage payable, Bonds payable. ACC112b. Chapter 2. Page 21 EQUITY The residual interest in the assets of the entity after deduction all its liabilities. ACC112b. Chapter 2. Page 22 EQUITY Equity depends on the form of business organization. Sole proprietorship Bangcaya, Capital Bangcaya, withdrawal Partnership Bangcaya, capital Lemana, capital Corporation ✓ Stockholders’ equity ✓ Share capital ✓ Retained earnings ACC112b. Chapter 2. Page 23 Examples of Equity ✓Capital ✓ Withdrawal ✓ Income summary ACC112b. Chapter 2. Page 24 INCOME Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. ACC112b. Chapter 2. Page 25 Examples of Income ✓ Service revenue / service income ✓ Interest revenue / interest income ✓ Sales ACC112b. Chapter 2. Page 26 EXPENSE Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. ACC112b. Chapter 2. Page 27 Examples of Expense ✓Salaries expense ✓Utilities expense ✓Rent expense ✓Supplies expense ✓Depreciation expense ACC112b. Chapter 2. Page 28 ACCOUNTING EVENTS AND TRANSACTIONS An accounting event is an economic occurrence that causes changes in an enterprise’s assets, liabilities and/or equity. ACC112b. Chapter 2. Page 29 ACCOUNTING EQUATION Asset = Liability + Equity Asset = Liability + Equity (+Capital –Withdrawal + Income – Expense) Asset = Liability + Capital –Withdrawal + Income – Expense Debit = Credit ACC112b. Chapter 2. Page 30 TRANSACTION ANALYSIS Every financial transaction can be anaylzed or expressed in terms of its effects on the elements of financial statements specifically the accounts. Financial transaction worksheet can be used to analyze transactions. ACC112b. Chapter 2. Page 31  TRANSACTION ANALYSIS EXAMPLE During March 2020, the first month of operations, various transactions took place follows: Mar 1 Modesto started her new business by depositing 350,000 in a bank account in the name of Modesto Graphics Design at BPI Poblacion Branch. 2 Modesto hired an assistant for the business. The assistant will be paid a salary of 15,000 per month. 5 Computer equipment costing 145,000 is acquired on cash basis. 9 Computer supplies in the amount of 25,000 are purchased on account. 11 Modesto Graphics Design received 88,000 in cash for designing interactive websites for two exporters based inside the ASEAN Ecozone. ACC112b. Chapter 2. Page 32  TRANSACTION ANALYSIS EXAMPLE During March 2020, the first month of operations, various transactions took place follows: Mar Modesto paid 18,000 to MVP Bill Express, a one-stop shop bill payments service 16 company, for the semi-monthly utilities. 17 The entity has service agreements with several Netepreneurs to maintain and update their web site weekly. Modesto billed these clients 35,000 for service already rendered during month. 19 Modesto made a partial payment of 17, 000 for the Mar 9 purchase on account. 20 Checks totalling 25,000 were received from clients for billing dated Mar 17. 21 Modesto withdrew 20,000from the business for her personal use. 27 Alessandra Publishing submitted a bill to Modesto for 8,000 worth of newspaper advertisement for this month. Modesto will pay the bill next month. 31 Modesto paid her assistant designer salaries of 15,000 for the month. ACC112b. Chapter 2. Page 33  MODESTO GRAPHIC DESIGN CHART OF ACCOUNTS Assets Liabilities Owner’s equity Income Expenses 110 Cash 210 Accounts 310 Modesto, 410 Design 510 Utilities expense payable capital Revenue 120 Accounts 220 Notes payable 320 Modesto, 520 Salaries expense receivable withdrawal 130 Computer 330 Income 530 Advertising Supplies Summary expense 140 Computer 540 Computer Equipment Supplies expense 145 Accumulated 550 Depreciation depreciation – expense-Computer Computer Equipment Equipment ACC112b. Chapter 2. Page 34 TRANSACTION WORKSHEET See excel file. ACC112b. Chapter 2. Page 35 ACCOUNTING EVENTS AND TRANSACTIONS Although business entities engage in numerous transactions, all transactions can be classified into four types: 1. Source of asset (SA) a. Increase in asset = Increase in liability (SA) b. Increase in asset = Increase in equity (SA) 2. Exchange of asset (EA) a. Increase in one asset = Decrease in another asset (EA) 3. Use of asset (UA) a. Decrease in asset = Decrease in liability (UA) b. Decrease in asset = Decrease in equity (UA) 4. Exchange of claims (EC) a. Increase in liability = Decrease in equity (EC) b. Increase in equity = Decrease in liability (EC) c. Increase in liability = Decrease in another liability (EC) d. Increase in equity = Decrease in another equity (EC) ACC112b. Chapter 2. Page 36  Summary There are 5 elements in the financial statement namely asset, liability, equity, income and expense. The basic summary device of accounting if the account. The elements in the financial statement is broken down into accounts. Although business entities engage in numerous transactions, all transactions can be classified into four types namely source of asset (SA), exchange of asset (EA), use of asset (UA), and exchange of claims (EC). ACC112b. Chapter 2. Page 37  Reference Ballada, W. & Ballada, S., 2019. Basic Financial Accounting and Reporting. Manila, Philippines: DomeDane Publishers & Made Easy Books. Cabrera, M.E. & Cabrera, G.A. (2018-2019). Financial Accounting and Reporting. Manila, Philippines: GIC Enterprises & Co., Inc. ACC112b. Chapter 2. Page 38  End of Presentation Thank you and God Bless! ACC112b. Chapter 2. Page 39