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BM2409 INTRODUCTION TO ACCOUNTING AND BUSINESS Language of Business Accounting is the language of business. Different accounting bodies have published technical definitions of...

BM2409 INTRODUCTION TO ACCOUNTING AND BUSINESS Language of Business Accounting is the language of business. Different accounting bodies have published technical definitions of accounting, including the American Institute of Certified Public Accountants (AICPA). AICPA, the world’s largest member-association representing the accounting profession and with a history of serving the public interest since 1887, defines accounting: “The art of recording, classifying, and summarizing in a significant manner in terms of money, transactions, and events which are, in part, least of financial character, and interpreting the results thereof.” Studying the statement above will give users of information a better understanding of accounting (AccountingVerse, 2022): Accounting is considered an art because it requires skills and creative judgment. One has to be trained in this discipline to be able to perform accounting functions well. Accounting is also considered a science because it is a body of knowledge. However, accounting is not an exact science since the rules and principles are constantly changing (improved). Accounting involves interconnected “phases.” Recording pertains to writing down or keeping records of business transactions. Classifying involves grouping similar items that have been recorded. Once they are classified, information is summarized into reports which we call financial statements. Concerned with transactions and events having financial character. For example, hiring an additional employee is qualitative information without financial character. Hence, it is not recorded. However, the payment of salaries, acquisition of an office building, sale of goods, etc., are recorded because they involve financial value. Business transactions are expressed in terms of money. They are assigned amounts when processed in an accounting system. Using the above example, it is not enough to record that the company paid salaries for April. It must include monetary figures –for example, P20,000 salaries expense. Interpreting results is part of the phases of accounting. Information is useless if it cannot be interpreted and understood. The amounts, figures, and other data in the financial reports have useful meanings to the users. Users of Accounting Information Accounting information helps users in making better financial decisions. Users of financial information may be both internal and external to the organization. Internal Users Management analyzes the organization's performance and position and takes appropriate measures to improve the company's results. Employees assess the company's profitability and its consequence on their future remuneration and job security. Owners analyze their investment's viability and profitability and determine any future course of action. External Users Creditors determine the creditworthiness of the organization. Creditors set credit terms according to their customers’ financial health assessment. Creditors include suppliers as well as lenders of finance such as banks. Investors analyze the feasibility of investing in the company. Investors want to ensure they can earn a reasonable return on their investment before committing any financial resources to the company. 01 Handout 1 *Property of STI Page 1 of 15  BM2409 Customers assess the financial position of their suppliers, which is necessary to maintain a stable supply source in the long term. The government determines the credibility of the tax returns on behalf of the company and the regulatory authorities to ensure that the company’s disclosure of accounting information follows the rules and regulations set to protect the interests of the stakeholders who rely on such information in making decisions. Types of Business Organization Identifying the most appropriate organizational form can be influenced by tax issues, legal issues, financial concerns, and personal concerns. For this overview, basic information is presented to establish a general impression of business organizations. Sole Proprietorship Definition Advantages Disadvantages This type of business Ease of entry and exit Unlimited liability organization consists of one (1) Full ownership and control Limitations in raising capital individual doing business called Tax savings Lack of continuity the proprietor. Few government regulations Partnership Definition Advantages Disadvantages This type of business Ease of formation Unlimited liability organization consists of two (2) Additional sources of capital Lack of continuity or more individuals doing Management base Difficulty in transferring business together called Tax implementation ownership partners. Limitations in raising capital Corporation Definition Advantages Disadvantages It has a separate legal Limited Liability Time and cost of formation personality from the owners; it Unlimited life Regulation can conduct business under its Ease in transforming Taxes name. It is a business owned by ownership stockholders. Ability to raise capital Cooperative Definition Advantages Disadvantages This business organization is Operating cost savings Lack of efficiency owned by individuals and Avoidance of wastes Personal gain operated for their mutual Financial concessions Lack of funds benefit. The persons making up Cheap source of supply High cost the group are called members. Development of human value Internal rivalries and factions Cooperatives may be Democratic management Lack of incentives incorporated or Consumer protection Erosion unincorporated. Characteristics of a Sole Proprietorship 01 Handout 1 *Property of STI Page 2 of 15  BM2409 The following are several features that distinguish a proprietorship from other types of business organizations. Separate Legal Entity – A proprietorship is a business entity formed when an individual decides to create a business. It is an entity that exists apart from its owner. However, the proprietorship has many of the rights that a person has. For example, a proprietorship may buy, own, and sell a property; enter into contracts; sue and be sued. Items that the business owns and those items that the business has to pay later belong to the business. No Continuous Life or Transferability of Ownership – The life of a proprietorship business is limited by either the choice or death of the owner, whichever comes first. Thus, there is no transferability of ownership in a proprietorship. Unlimited Liability of Owner – A proprietor has unlimited liability for the business's debts. General partners in partnerships have the same liability; however, stockholders in corporations have limited liability. This unlimited liability makes owning a proprietorship unattractive due to the owner’s fear of losing their wealth if the proprietorship fails. Unification of Ownership and Management – The proprietorship owners also manage the business. This unification between owners and management benefits the proprietorship and its sole owner because their goals are the same. Equally, the separation between stockholders (owners of the corporation) and management in a corporation may create problems. Corporate officers may decide to run the business for their benefit rather than the company's. Stockholders may find it difficult to lodge an effective protest against management because of the distance between them and the top managers. Individual Taxation – Proprietorships are not separate taxable entities. The income earned by the business flows directly to the sole owner. The owner pays tax on the business income on their tax return. Additionally, the owner must pay a self-employment tax for both the employee and employer portions. Less Government Regulation – This is an advantage for the proprietorship. There are no stockholders to notify or articles of incorporation to file. The owner/manager can easily make decisions. Types of Business Organization According to Industry Service Business – A business that sells services to customers. Examples of this type of business are business process outsourcing companies. The revenue account for this business is called Service Revenue. Merchandising Business – A business that sells goods to customers. Examples of this type of business are grocery stores or supermarkets. The revenue account for this business is Sales. This business maintains an inventory account since it buys and sells goods. How the Differences in Business Types Affect Accounting Business Types According to Business Organization/Structure Financial Sole Proprietorship Partnership Corporation Cooperative Statement Income Depends on the Depends on the Depends on the Depends on the Statement industry: whether industry: whether industry: whether industry: whether service, service, service, service, merchandising, or merchandising, or merchandising, or merchandising, manufacturing manufacturing manufacturing or manufacturing Balance Equity/Capital: The Equity/Capital: Each Shareholders’ Equity: Equity/Capital: Sheet owner has his capital partner has a capital The ownership account. account. structure is 01 Handout 1 *Property of STI Page 3 of 15  BM2409 Business Types According to Business Organization/Structure expressed through With the number of reserve/surplus shares. portion Business Types According to Industry Financial Statement Service Merchandising Income Statement The revenue account is Service The revenue account is Sales. Revenue. The cost of Goods Sold is deducted from Sales. Balance Sheet No inventory account An inventory account is included. Generally Accepted Accounting Principles The accounting profession has developed standards that are generally accepted and universally practiced. This common set of standards is called generally accepted accounting principles (GAAP) and was created by the Financial Accounting Standards Board (FASB). It dictates how economic events should be recorded and reported in the financial statements. The Financial Reporting Standards Council (FRSC) of the Philippines is the regulatory body tasked with establishing GAAP in the Philippines. The FRSC is the successor of the Accounting Standards Council (ASC). The ASC was created in November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish GAAP in the Philippines. The FRSC carries on the decision made by the ASC to converge Philippine accounting standards with international accounting standards issued by the International Accounting Standards Board (IASB) (Accounting, 2022). Accounting Concepts and Principles Accounting Concepts and Principles are a set of general conventions devised to provide a basic framework for financial reporting. As financial reporting involves significant professional judgments by accountants, these concepts and principles ensure that the users of financial information are not misled by the adoption of accounting policies and practices that go against the spirit of the accountancy profession. Accountants must, therefore, actively consider whether the accounting treatments adopted are consistent with the accounting concepts and principles (Accounting Concept and Principles, 2020). Relevance. Information should be relevant to the decision-making needs of the user. Information is relevant if it helps users of the financial statements in predicting future trends of the business or confirming or correcting any past predictions they have made. The same piece of information which assists users in confirming their past predictions may also help form future forecasts. a. Example: A company discloses an increase in Earnings Per Share (EPS) from P5 to P6 since the last reporting period. The information is relevant to investors as it may assist them in confirming their past predictions regarding the company's profitability and help them forecast future trends in the company's earnings. 01 Handout 1 *Property of STI Page 4 of 15  BM2409 Reliability. Information is reliable if a user can depend upon it to be materially accurate and faithfully represent the information it purports to present. Significant misstatements or omissions in financial statements reduce the reliability of the information contained in them. a. Example: A company is being sued for damages by a rival firm, the settlement of which could threaten the company's financial stability. Non-disclosure of this information would render the financial statements unreliable for its users. Matching Principle and Concept. The Matching Principle requires that expenses incurred by an organization must be charged to the income statement in the accounting period in which the revenue to which those expenses relate is earned. a. Example: Use of matching principle in IFRS and GAAP include the following: 1. Deferred Taxation. IAS 12 Income Taxes and FAS 109 Accounting for Income Taxes require accounting for taxable and deductible temporary differences arising in the calculation of income tax in a manner that results in the matching of tax expense with the accounting profit earned during a period. 2. Cost of Goods Sold. The cost incurred in manufacturing or procuring inventory is charged to the income statement of the accounting period in which the inventory is sold. Therefore, any inventory remaining unsold at the end of an accounting period is excluded from the computation of the cost of goods sold. 3. Government Grants. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance requires the recognition of grants as income over the accounting periods in which the entity's related costs (intended to be compensated by the grant) are incurred. Timeliness of Accounting Information. The timeliness principle in accounting refers to the need for accounting information to be timely presented to the users for their decision-making needs. a. Example: Users of accounting information must be provided financial statements on a timely basis to ensure that their financial decisions are based on up-to-date data. It can be achieved by reporting the financial performance of companies with sufficient regularity (e.g., monthly, quarterly, semi-annually, or annual), depending on the size and complexity of the business operations. Unreasonable delays in reporting accounting information to users must also be avoided. Neutrality. Information reported in the financial statements must be free from bias. It should reflect a balanced view of the company's activities without trying to present them how the company wants them to be given. Information may be deliberately biased or systematically biased. Deliberate bias occurs when circumstances and conditions cause management to misstate financial statements intentionally. a. Examples: 1. Managers of a company are provided a bonus based on reported profit. It might tempt the management to adopt accounting policies that result in higher profits rather than those that better reflect the company's performance in line with GAAP. 2. A company is facing severe liquidity problems. Management may decide to window-dress the financial statements to improve the company's current ratios to hide the gravity of the situation. 01 Handout 1 *Property of STI Page 5 of 15  BM2409 3. A company is facing litigation. Although a reasonable estimate of the possible settlement amount could be made, management disclosed its inability to measure the potential liability sufficiently. Systematic bias occurs when accounting systems favor one outcome over another over time. a. Example: Accounting policies within an organization may be overly careful because of the cultural influence of an over-guarded leadership. Faithful Representation. Presented information in the financial statements should faithfully represent the transaction and events that occur during a period. Faithfull representation requires that transactions and events be accounted for in a manner that represents their actual economic substance rather than the mere legal form. This concept is known as Substance Over Form. It requires that if the substance of a transaction differs from its legal form, then such transaction should be accounted for following its substance and economic reality. a. Example: A machine is leased to Company A for the entire duration of its useful life. Although Company A is not the legal owner of the machine, it may be recognized as an asset on its balance sheet since the Company has control over the economic benefits that would be derived from the use of the asset. It is an application of the accountancy concept of substance over legal form, where the economic substance of a transaction takes precedence over its legal aspects. Prudence. Financial statement preparation requires professional judgment in adopting accounting policies and estimates. Prudence requires that accountants exercise a degree of cautiousness in adopting policies and significant estimates -- assets and income of the entity are not overstated, whereas liability and expenses are not understated. a. Example: Inventory is recorded at lower cost or net realizable value (NRV) rather than the expected selling price. It ensures profit on the sale of inventory is only realized when the actual sale occurs. Completeness. The reliability of the information in the financial statements is achieved only if the complete financial information is provided relevant to the users' business and financial decision-making needs. Therefore, information must be complete in all material respects. Incomplete information reduces the relevance of the financial statements. It decreases its reliability since users base their decisions on information that only presents a partial view of the entity's activities. Single Economic Entity Concept. Consolidated financial statements of a group of companies are prepared based on a single economic entity concept. It suggests that companies associated with each other through common control operate as a single economic unit. Therefore, the consolidated financial statements of a group of companies should reflect the essence of such an arrangement. Consolidated financial statements of a group of companies must be prepared as if the entire group constitutes a single entity to avoid the misrepresentation of the scale of the group's activities. Money Measurement Concept. The Money Measurement Concept in accounting, also known as Measurability Concept, means that only transactions and events that can be measured in monetary terms are recognized in the financial statements. All transactions and events recorded in the financial statements must be condensed to a unit of monetary currency. Where it is impossible to assign a reliable monetary value to a transaction or event, it shall not be recorded in the financial statements. a. Examples: 01 Handout 1 *Property of STI Page 6 of 15  BM2409 1. The skills and competence of employees cannot be attributed to an objective monetary value and should, therefore, not be recognized as assets on the balance sheet. However, those transactions related to employees that can be measured reliably, such as salaries, expenses and pension obligations, are recognized in the financial statements. 2. Where it is impossible to reliably measure the amount of settlement of a legal claim against the company, no liability is recognized in the financial statements. Instead, the nature and circumstances surrounding the lawsuit are disclosed in the supplementary notes to the financial statements if considered material. Comparability/Consistency. Financial statements of one (1) accounting period can be compared to another for the users to develop meaningful conclusions about the trends in an entity's financial performance and position over time. Comparability of financial statements over different accounting periods can be ensured by the application of similar accountancy policies over a period of time. Financial statements of one (1) entity must also be consistent with other entities within the same line of business. It should aid users in analyzing the performance and position of one (1) company relative to the industry standards. Therefore, entities must adopt accounting policies that best reflect the existing industry practice. a. Example: If a company that retails leather jackets valued its inventory based on First-in, First-out (FIFO) method in the past, it must continue to do so in the future to preserve consistency in the reported inventory balance. A switch from FIFO to a Weighted Average basis of inventory valuation may cause a shift in inventory value between the accounting periods primarily due to seasonal fluctuations in price. Understandability. Transactions and events must be accounted for and presented in the financial statements in a manner that is easily understandable by a user who possesses a reasonable level of knowledge of the business, economic activities, and accounting in general, provided that such a user is willing to study the information with reasonable diligence. a. Example: One of the main problems with the financial statements of ENRON Corporation was that they contained a highly complex structure of unique purpose entities that were presented in a manner that concealed the financial risk exposure of the company. The accounting treatments of ENRON were not understandable by the capital market participants who consistently overvalued its worth until the inevitable collapse of its share price in 2001 upon the news of its bankruptcy. Materiality Concept Information is material if its omission or misstatement could influence the economic decisions of users taken based on the financial statements (IASB Framework). Materiality then relates to the significance of financial statement transactions, balances, and errors. Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision-making needs of the users. Therefore, information in the financial statements must be complete in all material respects for them to present an accurate and fair view of the entity's affairs. 01 Handout 1 *Property of STI Page 7 of 15  BM2409 a. Example: A nonpayment by a customer who owes only P1,000 to a company with net assets worth P10 million is immaterial to the company's financial statements. However, if the amount of nonpayment were P2 million, the information would have been material to the exclusion of the financial statement, which could cause users to make incorrect business decisions. Going Concern Assumption. Going concern is one (1) of the fundamental assumptions in accounting where the preparation of financial statements is based. Financial statements are prepared to assume that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to limit its operational activities significantly. Accrual Concept. Financial statements are prepared under the Accrual Concept of accounting, which requires that income and expense be recognized in the accounting periods to which they relate rather than on a cash basis. An exception to this general rule is the cash flow statement, whose main purpose is to present the cash flow effects of a transaction during an accounting period. Under the Accrual basis of accounting, income must be recorded in the accounting period earned. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received. Conversely, prepaid income must not be shown as income in the accounting period it is received. Still, it must be presented as such in the subsequent accounting periods in which the services or obligations in respect of the prepaid income have been performed. Business Entity Concept. Financial accounting is based on the premise that the transactions and balances of a business entity are to be accounted for separately from its owners. The business entity is therefore considered to be distinct from its owners for accounting. Therefore, any personal expenses incurred by business owners will not appear in the entity's income statement. Similarly, if any personal expenses of owners are paid out of assets of the entity, it would be considered to be drawings to account much in the same way as cash drawings. Realization Concept. The realization concept, also known as the revenue recognition principle, refers to applying the accruals concept toward the recognition of revenue (income). Revenue is recognized by the seller when it is earned, regardless of whether cash from the transaction has been received or not. a. Example: A car dealer receives orders from customers in advance, contrary to a 20% down payment. The company delivers the cars to the respective customers within 30 days, upon which it receives the remaining 80% of the list price. Following the revenue realization principle, the company must not recognize revenue until the cars are delivered to the customers. That is when the risks and rewards incidental to the ownership of the vehicles are transferred to the buyers. Dual Aspect Concept. Also known as the Duality Principle, it is a fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction. The dual aspect concept is the underlying basis for the double-entry accounting system. Historical Cost. Assets need to be assigned some value in the accounting books. Recognizing these values can be at their historical cost, market value, replacement value, or potential business value. Historical Cost is the most objective, reliable, and verifiable value of the lot. Historical Cost Convention requires assets to 01 Handout 1 *Property of STI Page 8 of 15  BM2409 be recorded at their historical value unless it is prudent to recognize a lower value (e.g., due to impairment). Historical Cost is, therefore, the default value assigned to assets. Verifiability Concept. Verifiability means that the accounting information presented in financial statements must be verifiable by independent accountants. Accounting information presented in the financial statements is considered verifiable if two (2) independent accountants (e.g., auditors) can reasonably conclude, based on their verification, that it is a fair reflection of the underlying transactions and circumstances. Cost-Benefit. The cost of reporting financial information should not exceed the benefits to be derived from using the financial information. The Financial Statements Financial statements are the primary means of communicating accounting information about a business to interested parties. They model the business enterprise in financial terms. The income Statement reports the revenues and expenses for a specific period (For the month ended xxx). The income statement lists revenues first, followed by expenses. Finally, the report shows net income (or net loss). Net income results when revenues exceed expenses. A net loss occurs when expenses exceed revenues. The income statement does not include investment and withdrawal transactions between the owner and the business in measuring net income. Statement of Changes in Owner’s Equity reports the changes in owner’s equity for a specific period. The time period is the same as that covered by the income statement. The statement's first line shows the beginning owner’s equity amount (which was zero at the start of the business). Then come the owner’s investments, net income (or loss), and the owner’s drawings. This statement indicates why owner’s equity has increased or decreased during the period. If the owner makes any additional investments, the company reports them as investments in the owner’s equity statement. The Balance Sheet shows the financial position of a business on a specific date, usually the end of the month or year. For this reason, it is often called the statement of financial position. It’s important to note that the date on the balance sheet is a single date, whereas the dates on the other three (3) statements cover a period, such as a month, quarter, or year. The balance sheet presents a view of the business as the holder of resources, or assets, equal to the claims against those assets. The claims consist of the company’s liabilities and the owner’s equity. Statement of Cash Flows provides information on the cash receipts and payments for a specific period. The statement of cash flows reports (1) the cash effects of a company’s operations during a period, (2) its investing activities, (3) its financing activities, (4) the net increase or decrease in cash during the period, and (5) the cash amount at the end of the period. 01 Handout 1 *Property of STI Page 9 of 15  BM2409 Financial Statement Relationships Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows For year ended 12/31/22 For year ended 12/31/22 As of 12/31/22 For year ended 12/31/22 Owner’s Capital, beginning Assets Liabilities Cash from operating activities + Net Income (Loss) Cash Payables d Cash from investing activities Revenues Cash from financing activities - Costs and Expenses - Withdrawals s Receivables Total Liabilities Increase (decrease) in cash Net Income (Loss) Owner’s Capital, ending Inventory Cash, beginning d Building Owner’s Equity Cash, ending Equipment Owner’s Capital d Total Assets Total Owner’s Equity Total Assets = Total Liabilities + Equity The Accounting Equation The most basic tool of accounting is the accounting equation. It shows the resources of a business (Assets), the claims to those resources (Liabilities), and the business owners’ residual interest (Equity/Capital). Assets are economic resources expected to benefit the business in the future. The business owns these things with a value that includes cash, merchandise inventory, furniture, land, etc. Liabilities are the business's financial obligations, the settlement of which will result in an outflow of economic resources from the business. The business owes these, including accounts payable, notes payable, and salary payable. Equity is the residual interest of the business owners. Depending on the company's organization, this is also called owner’s equity (Sole Proprietorship and Partnership) or shareholders’ equity (Corporation). It is calculated by deducting the total liabilities from the business's total assets. The accounting equation shows how assets, liabilities, and owner’s equity are related. Assets appear on the left side of the equation, and the liabilities and owner’s equity appear on the right. Expressed as an equation form as follows: (Economic Resources) (Claims to Economic Resources) ASSETS = LIABILITIES + EQUITY P5,000 P2,000 + P3,000 The accounting equation must always be equal or “balanced.” Assets must equal the sum of liabilities and owner’s equity. Liabilities appear before the owner’s equity in the basic accounting equation because they pertain to the business's creditors and should be paid before the owners. The accounting equation applies to all economic entities regardless of size, nature of the business, or form of business organization. It applies to a small proprietorship such as a corner grocery store and a giant corporation such as PepsiCo. The equation provides the underlying framework for recording and summarizing economic events. Also, increases and decreases in an owner’s equity must be considered and would result in an expanded accounting equation. Though these items are included, the two (2) sides of the accounting equation should always be equal. 01 Handout 1 *Property of STI Page 10 of 15  BM2409 Owner’s Owner’s Assets = Liabilities + - + Revenues - Expenses Capital Drawings Drawings decrease the owner’s equity and are recorded in a category called owner’s drawings. Revenues are the gross increase in owner’s equity resulting from revenue-producing activities. Expenses are the cost of assets consumed or services used to earn revenue. These are the owner’s equity decreases resulting from operating the business. Transactions (business transactions) are a business’ economic events that affect its financial position and can be measured reliably. External Transactions involve economic events between the company and some outside enterprise. Internal Transactions – These transactions are economic events that occur entirely within one (1) company. The accountant analyzes these business transactions, processes that information into reports, and communicates the results to decision-makers. The key products of an accounting information system are the financial statements that allow people to make informed business decisions. Each transaction must have a dual effect on the accounting equation. For example, if an asset is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a specific liability, or (3) increase in owner’s equity. Illustration: Sample business transactions and their effects on the accounting equation are provided. TRANSACTION (1) The owner invested P750,000 cash in starting the business, Mac Co. The asset (Cash) increases by P750,000, and the owner’s equity (Capital) increases by BASIC ANALYSIS P750,000. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Cash Owner’s Capital (1) + P750,000 + P750,000 TRANSACTION (2) Mac Co. purchases store equipment for P350,000 cash. The asset (Cash) decreases by P350,000, and the asset (Equipment) increases by BASIC ANALYSIS P350,000. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Cash + Equipment Owner’s Capital P750,000 P750,000 (2) - P350,000 + P350,000 P400,000 + P350,000 P750,000 P750,000 01 Handout 1 *Property of STI Page 11 of 15  BM2409 Mac Co. purchases store supplies worth P80,000 from Ian Co. The company agrees to TRANSACTION (3) allow Mac Co. to pay the bill next month. The asset (Supplies) increases by P80,000, and the liability (Accounts Payable) BASIC ANALYSIS increases by P80,000. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Cash + Supplies + Equipment Accounts Payable + Owner’s Capital P400,000 P350,000 P750,000 (3) + P80,000 + P80,000 P400,000 + P80,000 + P350,000 = P80,000 + P750,000 P830,000 P830,000 TRANSACTION (4) Mac Co. receives P60,000 cash from customers for the services it has performed. The asset (Cash) increases by P60,000, and the owner’s equity increases by P60,000 BASIC ANALYSIS due to Service Revenue. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Accounts Owner’s Cash + Supplies + Equipment + + Revenues Payable Capital P400,000 P80,000 P350,000 P80,000 P750,000 (4) + + P60,000 P60,000 P460,000 + P80,000 + P350,000 = P80,000 + P750,000 + P60,000 P890,000 P890,000 TRANSACTION Mac Co. receives a bill for P12,500 from a TV 22 Clan for advertising on its TV shows but (5) postpones payment until later. The liability (Accounts Payable) increases by P12,500, and the owner’s equity decreases BASIC ANALYSIS by P12,500 due to Advertising Expenses. 01 Handout 1 *Property of STI Page 12 of 15  BM2409 EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Accounts Owner’s Cash + Supplies + Equipment + + Revenues - Expenses Payable Capital P460,000 P80,000 P350,000 P80,000 P750,000 P60,000 (5) + P12,500 + P12,500 P460,000 + P80,000 + P350,000 = P92,500 + P750,000 + P60,000 - P12,500 P890,000 P890,000 Mac Co. performs services for customers amounting to P175,000. The company receives TRANSACTION (6) cash of P75,000 from customers, and it bills the balance on the account, P100,000. The asset (Cash) increases by P75,000, another asset (Accounts Receivable) increases by BASIC ANALYSIS P100,000 and the owner’s equity increases by P175,000 due to Service Revenue. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Cash + Accounts + Supplies + Equipment Accounts + Owner’s + Revenues - Expenses Receivable Payable Capital P460,000 P80,000 P350,000 P92,500 P750,000 P60,000 P12,500 (6) + + P75,000 + P100,000 P175,000 P535,000 + P100,000 + P80,000 + P350,000 = P92,500 + P750,000 + P235,000 - P12,500 P1,065,000 P1,065,000 TRANSACTION Mac Co. pays the following expenses in cash: office rent, P30,000; salaries and wages of (7) employees, P45,000; and utilities, P10,000. The asset (Cash) decreases by P85,000, and the owner’s equity decreases by P85,000 due to BASIC ANALYSIS specific expense categories (Rent Expense, Salaries Expense, and Utilities Expense). EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Accounts Accounts Owner’s Cash + Receivable + Supplies + Equipment Payable + Capital + Revenues - Expenses P535,000 P100,000 P80,000 P350,000 P92,500 P750,000 P235,000 P12,500 (7) + P30,000 + P45,000 - P85,000 + P10,000 P450,000 + P100,000 + P80,000 + P350,000 = P92,500 + P750,000 + P235,000 - P97,500 P980,000 P980,000 TRANSACTION Mac Co. pays its P12,500 bill from TV 22 Clan. (8) The asset (Cash) decreases by P12,500, and the liability (Accounts Payable) decreases by BASIC ANALYSIS P12,500. 01 Handout 1 *Property of STI Page 13 of 15  BM2409 EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Accounts Accounts Owner’s Cash + Receivable + Supplies + Equipment Payable + Capital + Revenues - Expenses P450,000 P100,000 P80,000 P350,000 P92,500 P750,000 P235,000 P97,500 (8) - - P12,500 P12,500 P437,500 + P100,000 + P80,000 + P350,000 = P80,000 + P750,000 + P235,000 - P97,500 P967,500 P967,500 TRANSACTION Mac Co. receives P30,000 in cash from billed customers. (9) The asset (Cash) increases by P30,000, and another asset (Accounts Receivable) BASIC ANALYSIS decreases by P30,000. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Accounts Owner’s Accounts Receivable Cash + + Supplies + Equipment Payable + Capital + Revenues - Expenses P437,500 P100,000 P80,000 P350,000 P80,000 P750,000 P235,000 P97,500 (9) + - P30,000 P30,000 P467,500 + P70,000 + P80,000 + P350,000 = P80,000 + P750,000 + P235,000 - P97,500 P967,500 P967,500 TRANSACTION Mac, the business owner, withdraws P65,000 cash for his personal use. (10) The asset (Cash) decreases by P65,000, and the owner’s equity decreases by P65,000 due BASIC ANALYSIS to the owner’s withdrawal. EQUATION ANALYSIS Assets = Liabilities + Owner’s Equity Accounts Owner’s Owner’s Accounts Receivable + Supplies + Equipment Payable + Capital - Drawing + Cash + Revenues - Expenses P467,500 P70,000 P80,000 P350,000 P80,000 P750,000 P235,000 P97,500 (1 P65,000 - P65,000 0) P402,500 + P70,000 + P80,000 + P350,000 = P80,000 + P750,000 - P65,000 + P235,000 - P97,500 P902,500 P902,500 01 Handout 1 *Property of STI Page 14 of 15  BM2409 Summary of Transactions Assets = Liabilities + Owner’s Equity Accounts Accounts Owner’s Owner’s Cash + Receivable + Supplies + Equipment Payable + Capital - Drawing + Revenues - Expenses (1) +P750,000 +P750,000 (2) -P350,000 +P350,000 (3) +P80,000 +P80,000 (4) +P60,000 +P60,000 (5) +P12,500 +P12,500 (6) +P75,000 +P100,000 +P175,000 (7) -P85,000 +P30,000 +P45,000 +P10,000 (8) -P12,500 -P12,500 (9) +P30,000 -P30,000 (10) - P65,000 P65,000 P402,500 + P70,000 + P80,000 + P350,000 = P80,000 + P750,000 - P65,000 + P235,000 - P97,500 P902,500 P902,500 The summary of transactions illustrates the following significant facts: 1. Each transaction is analyzed in terms of its effect on (a) the three (3) components of the basic accounting equation and (b) specific items within each component. 2. The two (2) sides of the equation must always be equal. References Accounting. (2022). Retrieved from Philippine Accounting Updates: http://philcpa.org/accounting-auditing- standards/accounting/ Accounting Concept and Principles. (2020). Retrieved from Accounting Concept and Principles: http://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/ AccountingVerse. (2022). Retrieved from What is Accounting: http://www.accountingverse.com/accounting- basics/what-is-accounting.html Ballada, Win. (2023). Basic Financial Accounting and Reporting. DomDane Publishers. Cabrera, E. (2022). Financial accounting & reporting fundamentals. Reader's Knowledge Bookstore. Horngren, C. T., Harrison Jr., W. T., & Oliver, M. S. (2020). Accounting (12th Edition). Prentice Hall. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Accounting Principles (14th Edition). John Wiley & Sons, Inc. Valix, C. (2021). Practical Financial Accounting Volume 1. Reader's Knowledge Bookstore. 01 Handout 1 *Property of STI Page 15 of 15