BCC-FAR-Chapter-2-Elements-in-the-Financial-Position.pdf

FINANCIAL ACCOUNTING and REPORTING CHAPTER 2: Elements in Financial Statement  Normal Operating cycle / Ordinary course of business - defined. Ito yung mga activities ng entity/business/company na kung saan routinary or day-to-day na ginagawa ng business to incur an expense or to generat...

FINANCIAL ACCOUNTING and REPORTING CHAPTER 2: Elements in Financial Statement  Normal Operating cycle / Ordinary course of business - defined. Ito yung mga activities ng entity/business/company na kung saan routinary or day-to-day na ginagawa ng business to incur an expense or to generate an INCOME from buying of product/goods to selling these goods/productives or performing services. Example: a.) Purchase of Raw Materials Normal Day to day activities b.) Delivery of Goods/Products Operating Cycle ng company from YES c.) Selling of Goods/Products or Ordinary course of incurring an expense up to generating an Example: business a.) Lent a certain amount to INCOME NO employee b.) a bakery buying a new delivery truck Not in the ordinary course of business  Asset – pag mamay-ari mo. Liability – utang. Owner’s Equity – Residual/Tira ng Asset minus Liability Six (6) Basic Accounts Sales/Income/Revenue (SIR) – Kita o benta. Expense - Gastos Withdrawal/Drawing – Personal Expenses ng Owner Ang na-K-raan: Statement of a.k.a PROFIT/ LOSS STATEMENT FINANCIAL PERFORMANCE/ Steps in Statement of Binubuo ng Revenue Accounting COMPREHENSIVE and Expenses Process INCOME Summarizing Statement of Binubuo ng: Beg. Changes in Capital + Add’l Investment +/- Net FINANCIAL Owner’s Equity Income /Net Loss – STATEMENTS Withdrawal Statement of (FS) FINANCIAL POSITION Binubuo ng: Assets (Current & Non- Current), Liablities Statement of Cash (CL &NCL), and Flow Owner’s Equity  Financial Position OWNER’ S EQUITY ASSETS LIABILITIES WITHDRAWAL or DRAWING ACCOUNT REVENUE and INCOME EXPENSES SUMMARY Current Assets (CA) Current Liabilities (CL) - Less than a year - Less than a year or or 12 months Changes in 12 months Owner’s Financial Performance Equity Non-Current Assets (NCA) Non Current Liabilities (NCL) - More than a year - More than a year - Long term - Long term 1. Asset Is 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. There are three aspects to these definitions: "right"; "potential to produce economic benefits"; and "control". Rights that correspond to an obligation of another party, (i) rights to receive cash. (ii) rights to receive goods or services. (iii) rights to exchange economic resources with another party on favorable RIGHT terms. (iv) rights to benefit from an obligation of another party to transfer an economic resource if a specified uncertain future event occurs. (a) receive contractual cash flows or another economic resource; Asset POTENTIAL TO (b) exchange economic resources with another party on favorable PRODUCE terms; ECONOMIC (c) produce cash inflows or avoid cash outflows by, (d) receive cash or other economic resources by selling the BENEFITS economic resource; or (e) extinguish liabilities by transferring the economic resource. a.) present ability to direct the use of the economic resource and obtain the economic CONTROL benefits that may flow from it. b.) Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it 2. Liability A liability is a present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria must ALL be satisfied: An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation is always owed to another party (or parties). The other party (or parties) could be a person or another entity, a group of OBLIGATION people or other entities, or society at large. If one party has an obligation to transfer an economic resource, it follows that another party (or parties) has a right to receive that economic resource. (a) obligations to pay cash. Liability OBLIGATIONS (b) obligations to deliver goods or provide services. TO TRANSFER (c) obligations to exchange economic resources with another party on unfavorable terms. AN ECONOMIC (d) obligations to transfer an economic resource if a specified RESOURCE uncertain future event occurs. (e) obligations to issue a financial instrument if that financial instrument will oblige the entity to transfer an economic resource. RESULT OF (a) the entity has already obtained economic benefits or taken an action; PAST EVENTS and (b) as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer. 3. Equity Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. In other words, they are claims against the entity that do not meet the definition of a liability. There is only one owner's equity Sole Proprietorship account because there is only one owner. Equity may pertain to any of the following depending on the Partnership An owner's equity account exists for form of business each partner. organization Owners' equity or stockholders' equity consists of share capital, retained earnings Corporation and reserves representing appropriations of retained earnings among others.  Financial Performance REVENUE EXPENSES The total amount that the business generated from rendering services or The total amount of money spent or selling goods/products/merchandise/ incurred by a business to generate income. inventory to the customers. K-ragdagdang notes: Financial Performance a.k.a Financial Position a.k.a Balance Sheet Income Statement ASSET OWNER’S EQUITY LIABILITIES REVENUE EXPENSES HINDI po kino-close ang laman ng Statement of Financial Position every end of the period. Nagpapatuloy na gumalaw kada period ang mga laman nito. Kaya nga other Net Income/Net Loss name sya is “Balance” Sheet kase kapag tiningnan ng user/s of FS ito ay makikita agad nila yung balanse ng kada accounts ng entity. Kino-close ang laman ng Statement of Financial Performance With this, ang nakalagay na phrase na mababasa mo rito every end of the period. Itong Net Income/Net Loss ay ay “As of the year ended 20xx “ mapupunta sa Capital Account na under ng Owner’s Equity section na nasa Statement of Financial Position. Kaya ang nakalagay na phrase dito ay “For the year ended 20xx “. Kase nga masasara o mawala na yung laman dito sa katauhan ng Net Income/Net Loss. K-ragdagdang notes: Financial Position a.k.a Balance Sheet Financial Performance a.k.a Income Statement ASSET OWNER’S EQUITY LIABILITIES REVENUE EXPENSES REAL ACCOUNTS (Permanent accounts) - Dahil ang mga balanse ng accounts na ito NOMINAL ACCOUNTS ay nagpapatuloy sa movement nila kada (Temporary accounts) period. Hindi sila sinasara unlike ng Revenue - Kase itong mga accounts na ito ay at Expenses. sinasara/kino-closed every end of the period. THE ACCOUNT The basic summary device of accounting is the account. A separate account is maintained for each element that appears in the balance sheet (assets, liabilities and equity) and in the income statement (income and expenses). Thus, an account may be defined as a detailed record of the increases, decreases and balance of each element that appears in an entity's financial statements. The simplest form of the account is known as the "T" account because of its similarity to the letter "T". Account Title Debit side (Left side) Credit side (Right side) THE ACCOUNTING EQUATION Financial statements tell us how a business is performing. They are the final products of the accounting process. But how do we arrive at the items and amounts that make up the financial statements? The most basic tool of accounting is the accounting equation. This equation presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets. It states that assets must always equal liabilities and owner's equity. The basic accounting model is: Assets = Liabilities + Owner’s Equity Note that the assets are on the left side of the equation opposite the liabilities and owner's equity. This explains why increases and decreases in assets are recorded in the opposite manner ("mirror image") as liabilities and owner's equity are recorded. The equation also explains why liabilities and owner's equity follow the same rules of debit and credit. DEBITS AND CREDITS-THE DOUBLE-ENTRY SYSTEM Accounting is based on a double-entry system which means that the dual effects of a business transaction is recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must be one or more accounts debited and one or more accounts credited. Each transaction affects at least two accounts. The total debits for a transaction must always equal the total credits. An account is debited when an amount is entered on the left side of the account and credited when an amount is entered on the right side. The abbreviations for debit and credit are Dr. (from the Latin debere) and Cr. (from the Latin credere), respectively. NORMAL BALANCE - Dito tumataas, nadadagdagan, at lumalakas ang isang partikular na balanse ng isang Account. (Assets, Liabilities, Owner’s Equity/Capital, Revenue, Expense, Drawing) K-ragdagdang notes: ACCOUNTS: (Mnemonics – ALOE-CREW= Normal Balance A,L,OE,C,R,E,W) ACCOUNT TITLES: Debit (Dr.) Credit (Cr.) e.g. Cash, A/R, A/P, Utilities Expense etc.. REVENUE ASSET EXPENSE LIABILITIES OWNER’S EQUITY WITHDRAWALS CAPITAL TYPES AND EFFECTS OF TRANSACTIONS It will be beneficial in the long-term to be able to understand a classification approach that emphasizes the effects of accounting events rather than the recording procedures involved. This approach is quite pioneering. Although business entities engage in numerous transactions, all transactions can be classified into one of four types, namely: 1. Source of Assets (SA). An asset account increases and a corresponding claims (liabilities or owner's equity) account increases. Examples: (1) Purchase of supplies on account; (2) Sold goods on cash on delivery basis. 2. Exchange of Assets (EA). One asset account increases and another asset account decreases. Example: Acquired equipment for cash. 3. Use of Assets (UA). An asset account decreases and a corresponding claims (liabilities or equity) account decreases. Example: (1) Settled accounts payable; (2) Paid salaries of employees. 4. Exchange of Claims (EC). One claims (liabilities or owner's equity) account increases and another claims (liabilities or owner's equity) account decreases. Example: Received utilities bill but did not pay. Every accountable event has a dual but self-balancing effect on the accounting equation. Recognizing these events will not in any manner affect the equality of the basic accounting model. The four types of transactions above may be further expanded into nine types of effects as follows: 1. Increase in Assets = Increase in Liabilities (SA) 2. Increase in Assets = Increase in Owner's Equity (SA) 3. Increase in one Asset = Decrease in another Asset (EA) 4. Decrease in Assets = Decrease in Liabilities (UA) 5. Decrease in Assets = Decrease in Owner's Equity (UA) 6. Increase in Liabilities = Decrease in Owner's Equity (EC) 7. Increase in Owner's Equity = Decrease in Liabilities (EC) 8. Increase in one Liability = Decrease in another Liability (EC) 9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC)  CURRENT ASSETS PREPAID EXPENSES CASH NOTES INVENTORIES CASH EQUIVALENTS RECEIVABLE These are expenses ACCOUNTS paid for by the business in advance. RECEIVABLE It is an asset Per PAS No. 7, these are Per PAS No. 2, these because the Cash is any A note business avoids short-term, highly liquid are assets which are medium of receivable is a having to pay cash investments that are (a) held for sale in exchange that a readily convertible to written the ordinary course in the future for a pledge that These are claims bank will accept known amounts of cash of business; (b) in specific expense. the customer against These include for deposit at and which are subject to the process of an insignificant risk of will pay the customers arising insurance and rent. face value. It production for such changes in value. business a from sale of sale; or (c) in the These prepaid items includes coins, Notes Receivable. A services or goods form of materials or represent future currency, fixed amount economic benefits- note receivable is a of money on on credit. This supplies to be checks, money written pledge that the type of receivable consumed in the assets-until the orders, bank customer will pay the a certain production process time these start to date. offers less deposits and business a fixed amount or in the rendering contribute to the security than a earning process; drafts. of money on a certain of date. promissory note. these, then, services. become expenses  NON-CURRENT ASSETS INTANGIBLE PROPERTY, PLANT ASSETS. AND EQUIPMENT (PPE) ACCUMULATED DEPRECIATION Per PAS No. 38, these are identifiable, nonmonetary assets Per PAS No. 16, these are tangible without physical substance held assets that are held by an enterprise for use in the for use in the production or supply production or supply of goods or It is a contra account that of goods or services, for rental to services, or for rental to others, or contains the sum of the periodic others, or for administrative for administrative purposes and purposes. These include goodwill, which are expected to be used depreciation charges. The during more than one period. balance in this account is patents, copyrights, licenses, Included are such items as land, deducted from the cost of the franchises, trademarks, brand building, machinery and related asset-equipment or names, secret processes, equipment, furniture and fixtures, subscription lists and non- motor vehicles and equipment. buildings-to obtain book value. competition agreements.  CURRENT LIABILITIES CURRENT ACCOUNTS NOTES ACCRUED PORTION OF PAYABLE PAYABLE LONG-TERM LIABILITIES UNEARNED REVENUES DEBT This account represents the A note payable is like a When the business entity note receivable but in a These are reverse Amounts owed to receives payment before reverse sense. In the portions of relationship of others for unpaid providing its customers with case of a note payable, mortgage notes, the accounts expenses. This goods or services, the the business entity is bonds and other receivable. By the maker of the note; account includes amounts received are long-term accepting the that is, the business salaries payable, recorded in the unearned indebtedness goods or entity is the party who utilities payable, revenue account (liability which are to be services, the promises to pay the interest payable and method). When the goods or other party a specified paid within one buyer agrees to taxes payable. services are provided to the amount of money on a year from the pay for them in customer, the unearned specified future date. balance sheet the near future. revenue is reduced and date. income is recognized.  NON-CURRENT LIABILITIES MORTGAGE BONDS PAYABLE PAYABLE This account records long-term debt of the Business organizations often obtain business entity for which the business substantial sums of money from lenders to entity has pledged certain assets as finance the acquisition of equipment and security to the creditor. In the event that other needed assets. They obtain these funds the debt payments are not made, the by issuing bonds. The bond is a contract creditor can foreclose or cause the between the issuer and the lender specifying mortgaged asset to be sold to enable the the terms of repayment and the interest to entity to settle the claim. be charged.  OWNER’S EQUITY INCOME SUMMARY CAPITAL WITHDRAWALS (from the Latin capitalis, meaning It is a temporary account used at "property"). This account is used to the end of the accounting period to record the original and additional close income and expenses. This investments of the owner of the When the owner of a account shows the profit or loss for business entity. It is increased by the business entity withdraws the period before closing to the amount of profit earned during the cash or other assets, such capital account. year or is decreased by a loss. Cash are recorded in the or other assets that the owner may drawing or withdrawal withdraw from the business account rather than ultimately reduce it. directly reducing the This account title bears the name of the owner. owner's equity account.  INCOME STATEMENT EXPENSES INCOME The cost incurred to purchase or to produce the products sold t0 customers during the Cost of Sales period; also called cost of goods sold. Salaries or Wages Expense. Includes all payments as a result of an employer-employee relationship such as salaries or wages, 13th month pay, cost of living allowances and other related benefits. Telecommunications, Electricity, Expenses related to use of telecommunications facilities, consumption Fuel and Water Expenses. of electricity, fuel and water. Rent Expense. Expense for space, equipment or other asset rentals. Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct of daily business. Portion of premiums paid on insurance coverage (e.g. on motor vehicle, health, life, fire, Insurance Expense. typhoon or flood) which has expired. Depreciation Expense The portion of the cost of a tangible asset (e.g. buildings and equipment) allocated or charged as expense during an accounting period. Uncollectible Accounts Expense The amount of receivables estimated to be doubtful of collection and charged as expense during an accounting period. Interest Expense An expense related to use of borrowed funds.  INCOME STATEMENT EXPENSES INCOME Revenues earned by Cost of Sales performing services for a Salaries or Wages Expense. customer or client; for Service Income example, accounting services Telecommunications, Electricity, by a CPA firm, laundry services Fuel and Water Expenses. by a laundry shop Rent Expense. Supplies Expense. Revenues earned as a result of sale of merchandise; for Insurance Expense. Sales example, sale of building materials by a construction Depreciation Expense supplies firm. Uncollectible Accounts Expense Interest Expense K-ragdagdang notes: Mnemonics: “ReSa-IG” REVENUE: GAIN: Kita sa LAHAT ng Business Activities Kita from non- operational activities kunyare nagbenta ka ng lumang asset mo. SALES: Kita sa good/service sold. INCOME: Kita after all expenses are deducted  K-buuan: Cash on Hand Ang Petty Cash Fund Cash in Bank Cash 3-month Treasury Bill Cash 3-month Time Deposit Equivalent 3-month Money Market or Commercial Paper Current Notes Receivable Customer + on account ft. Promissory note ASSETS Accounts Receivable Customer + on account Prepaid Other Supplier’s Debit Balance & LAD to-to-from ( see next slide) Expenses Receivable Merchandising entity Merchandise Inventory Inventories Manufacturing entity Raw Materials (RM) Inventory Non-current Equipment Work-In-Process (WIP) Inventory Machinery Finished Goods (FG) Inventory PPE Furnitures & Fixture Subject for Vehicle DEPRECIATION Building Patent Subject for Land Trademark AMORTI- Intangible Assets Copyright ZATION Franchise Ang K-buuan: Accounts Payable Written pledge/commitment Notes Payable Salaries Utilities Current Accrued Liabilities Interest Other Taxes LIABILITIES Payables Customer’s Credit Balance & LAD from-from-to (see next slide) Unearned Revenue Current Portion of Long-Term Debt Non-current Bonds Payable Portion within 12 mos. – Current Liability Loans Payable Portion payable beyond 12 mos. – Non-Current Liability Mortgage Payable Lease Liability Portion within 12 mos. – Current Liability Deferred Tax Liability Portion payable beyond 12 mos. – Non-Current Liability  K-ragdagdang notes: RECEIVABLE (Assets) PAYABLE (Liabilities) Mnemonics: LAD to-to-from Mnemonics: LAD from-from-to ▪ Loans to _____ ▪ Loans from _____ ▪ Advances to _____ ▪ Advances from _____ ▪ Due from _____ ▪ Due to _____ Ang K-buuan: Beginning Capital  Additional Investment  STATEMENT OF Capital CHANGES IN OWNER’S EQUITY Net Income  / Net Loss  (SCOE) OWNER’S EQUITY Withdrawal  Temporary account Income Summary Lilitaw lang ang account na ito sa Capital account kapag “Closing Entries” na Revenue – Expenses Net Income/Net Loss vs. Income Summary Revenue - Expenses Account na ginagamit pang sarado ng Net Income/Net Loss papuntang Capital Account K-ragdagdang notes: OWNER’S EQUITY:  Owner's equity represents the residual interest in the assets of a business after deducting liabilities. CAPITAL: 1. It records the initial and additional contributions made by the owner(s) and may also include adjustments for withdrawals. 2. The capital account focuses specifically on investments, net income/net loss and withdrawals made by the owner.