Chapter 2 Business Transactions & Accounting Values PDF

Business Transactions and the Related Accounting Values or Elements Chapter 2 Financial Accounting & Reporting 1 (2022 Edition) Baldevaron...

Business Transactions and the Related Accounting Values or Elements Chapter 2 Financial Accounting & Reporting 1 (2022 Edition) Baldevarona, Grande, & Munar CPU College of Business and Accountancy Prepared by: ATTY. MELODY R. PO  Chapter Overview Business Transactions and the related values acquired and values given up by the entity Accounting Elements (Assets, Liabilities, Equity, Income and Expenses)  Define business transaction  Record the value received and value parted with for every business transaction  Identify the different accounting elements.  Enumerate the characteristics of assets, liabilities, equity, income and expenses.  Distinguish assets, liabilities, equity, income or expense  BUSINESS TRANSACTIONS  Business activities that are accountable are called economic activities or transaction.  In a transaction there is an exchange of assets or services for a certain sum of money or assets.  It involves exchange of monetary values between two or more parties  In a business transaction, for every value received there is a corresponding value parted with.  Business transactions should be authenticated by genuine business forms like sales invoices, purchase invoice and official receipts.  External & Internal Transactions are economic events involving the enterprise and other entities. These External events or transactions may involve Transaction transfer of resources or obligation to or from the entities. are economic events in which only the Internal Transaction enterprise participates. External Transactions Merchandise Store Buyer Cash Cash Compa Laborer ny Services Internal Transactions  VALUES RECEIVED AND VALUES PARTED WITH Transactions Value received Value parted with 1. Cute invested money to Cute Store Money or cash Right of ownership 2. Cute invested equipment to Cute Store Equipment Right of ownership 3 CS paid rental for the store space Right to use the property Cash 4. CS purchased merchandise for cash Merchandise Cash 5. CS purchased merchandise on credit Merchandise Debt or obligation to pay the seller 6. CS sold merchandise for cash Cash Merchandise 7. CS sold merchandise on credit Debt collectible Merchandise 8. CS received cash as payment of debt owing to Cute Cash Release of a debt Store collectible from a debtor 9. CS paid transportation of goods delivered to Transportation services Cash customers 10. CS borrowed money from the bank Cash Debt or Obligation to pay the bank 11. CS paid the bank Cancellation of debt or amount Cash owed 12. CS paid the services rendered by employees Services rendered by employees Cash 13. The owner withdrew cash Decrease in the value of the Cash right of ownership  ACCOUNTING ELEMENTS  The accounting elements are the quantitative information reported in the statement of financial position and income statement. These elements are considered as the building blocks of the financial statements. Financial Position Financial Performance assets income liabilities expenses equity  ACCOUNTING ELEMENTS  Assets  Liabilities Statement of Financial Real  Equity Position Accounts  Income Statement of Comprehensive Nominal Income Accounts  Expense ASSETS Assets in a layman’s point of view are properties or rights of properties owned by the business. These items of value are used by the enterprise in their day to day activities. The enterprise has a control over their uses. In accounting, these properties under the control of the enterprise may be recorded as assets in their accounting books.  ASSETS  Under the Revised Conceptual Framework, an asset is defined as 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. The essential characteristics of an asset are: 1. The asset is a present economic resource 2. The economic resource is a right that has the potential to produce economic benefits 3. The economic resource is controlled by the entity as a result of past events  example  XYZ Trading purchased land and building for P10,000,000.00. the company made a P5,000,000.00 down-payment and issued a note for the balance which is payable on two equal installments over a period of two years. The legal title passes to XYZ Trading upon full payment.  During the two year period, the company is using the land and the building as site of its merchandising business. These assets are used in order to generate profits. Since the enterprise has a control over the use of the land and building, they are considered as assets of the enterprise.  Current Assets The revised PAS 1 provides that an asset shall be classified as current when it satisfies any of the following criteria: The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. The entity holds the asset primarily for the purpose of trading. The entity expects to realize the asset within twelve months after the reporting period. The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle.  Current Assets  The Operating Cycle is the time between acquisition of assets for processing and their realization in cash or cash equivalents. The concept of the normal operating cycle is needed in the classification of items as current or non-current.  The Operating Cycle of a trading enterprise is the average period of time that it takes for an enterprise to acquire the merchandise inventory, sell the inventory to customers and ultimately collect cash from the sale.  The Operating Cycle of a manufacturing company is the period of time that it takes to acquire materials, convert then into finished goods, sell the finished goods, convert them into receivables and collect the receivables.  When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months.  Current Assets Cash Cash equivalents Trading securities includes currency or cash items on hand are short term highly investments which (such as items liquid investments that are readily awaiting deposit and are readily convertible marketable and cash in working funds to known amounts of represent temporary cash and so near their as well as peso or investment of funds maturity that they foreign currency present insignificant available for current deposits in banks operations and are risk of changes in which are unrestricted intended to meet value because of and immediately working capital changes in interest available for use in the requirements. rates. current operations.  Current Assets Allowance for Accounts Notes doubtful receivable receivables accounts are open accounts a contra-asset account or those that are which is provided for amount not supported by possible losses from collectible that promissory notes. Other names used uncollected accounts. are evidenced This valuation by a promissory are charge allowance is actually accounts, not an asset. It is a note or a customer’s written promise deduction from the accounts or trade debtors accounts receivable. to pay  Current Assets Merchandise Finished goods, goods in Inventory or process, raw materials Prepaid rent merchandise and factory or manufacturing supplies goods held rent paid in for sale by Inventories advance trading held by concern manufacturi ng firms  Current Assets Prepaid insurance Unused supplies stationary and other supplies purchased for insurance paid in use and are still unused. advance Specific account titles such as Office supplies unused or Store supplies unused may be used.  Non-Current Assets All other assets except current assets are non-current assets. These include tangible, intangible, operating and financial assets of a long-term nature.  Non-Current Assets A.Property, Plant and These are tangible assets which are held by the enterprise in Equipment or production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used Fixed Assets during more than one period (PAS No. 16) Investments are assets held by an enterprise for the Long Term accretion of wealth through capital distribution, such as Investments interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those obtained through trading relationship. Intangibles PAS 38 defines intangible assets as identifiable non-monetary assets without physical substance. Non-Current Assets (Property, Plant and Equipment or Fixed Assets) Land a piece of lot or real estate used by the business a structure or a building owned or Building controlled and used as office, store or factory of the enterprise Office equipment include typewriters, adding machines, calculators, computers Store equipment include cash register, calculators Non-Current Assets (Property, Plant and Equipment or Fixed Assets) include delivery truck or jeep used for Delivery equipment transporting merchandise Machineries machines, motors Furniture and fixtures tables, chairs, showcases, counters contra-account used to accumulate expired Accumulated depreciation cost of fixed assets. It is a deduction from property, plant and equipment.  Non-Current Assets (Long Term Investment) An investment may either be current or non-current. A current investment is readily realizable and is intended to be held for not more than one year. A long-term investment is intended to be held for more than one year. Examples of long-term investments are: Cash Surrender Investment in Investment in Value of Life Bonds Subsidiaries Insurance  Non-Current Assets (Intangibles) right granted to authors, composers, playwrights, artists, publishers or distributors to Copyright publish and dispose of their works for a limited time. right granted to operate a utility or to Franchise manufacture or to market a product of another company within a specified area right granted to an inventor to manufacture Patent or produce his inventions or products.  Non-Current Assets (Intangibles) is an intangible advantage that increases Goodwill earnings over what is normal. It is the excess of agreed value over contributed value. a symbol, sign, slogan or name used to mark a Trademark or product or to distinguish it from other products brand name Computer software, fishing rights, leasehold rights  Non-Current Assets Other non-current assets include assets that do not fit in into the definition of the above-mentioned non- current assets. These include long-term advances to officers or employees, abandoned property, and long-term refundable deposits. LIABILITIES Liabilities are debts or obligations of the business. If the company purchased table and chairs on credit for P 5,000, the company has a debt or obligation to pay the amount in the future. Liabilities of the enterprise may include loans from the bank, salaries due to workers who have already rendered services and taxes due but not paid to the government.  LIABILITIES Under the Revised Conceptual Framework, a liability is defined as the present obligation of an entity to transfer an economic resource as a result of past events. The essential characteristics of liability are: The entity has an obligation The obligation is to transfer an economic resource The obligation is a present obligation that exists as a result of past event  Current liability A liability shall be classified as current when it satisfies any of the following criteria: The entity expects to settle the liability within the entity’s normal operating cycle The entity holds the liability primarily for the purpose of trading The liability is due to be settled within twelve months after the reporting period The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.  Current liability Accounts payable amounts due to suppliers for the purchase of goods or services on credit Notes payable amounts due to other parties when it is evidenced by a promissory note Accrued expenses expenses incurred but not yet paid such as salaries, rent, interest and taxes. Accounts like salaries payable, rent payable, interest payable and taxes payable may be used  Current liability Interest payable unpaid interest on borrowings Salaries payable services rendered by employees but still unpaid Bank loans payable obligations due to banks for loans obtained (current portion) Deferred revenue income received but not yet earned  Current liability SSS premium payable amount due and payable by the enterprise to Social Security System Philhealth premium payable amount due and payable by the enterprise to Philippine Health Insurance Corporation Withholding tax payable amount due and payable by the enterprise to BIR for the tax withheld from employees  Non-Current Liabilities  All liabilities that do not fit into the definition of current liabilities are classified as non-current liabilities. Mortgage Notes payable Deferred revenue payable those debts income received in advance economic but not yet earned and which supported by obligations will be realized as income over notes and secured by a period of more than one payable beyond year or the normal operating collateral one year cycle if it exceeds one year.  EQUITY Equity represents residual interest in the assets of the enterprise after deducting all liabilities. It is equal to total assets minus liabilities. It is otherwise known as Net Asset or Net Worth. If the business owns or control asset worth P 20,000,000.00 and has debts worth P 15,000,000.00, the capital or owner’s equity is P 5,000,000.00. For a corporation, equity accounts are ordinary share or common stock and preference share or preferred stock.  EQUITY For a sole proprietorship and partnership, the equity and withdrawal accounts are presented as: Owners’ capital – This includes the capital contribution of the owner made at the formation of the business or subsequent thereto. Ex. Adoracion Grecia, Capital Owner’s Drawing - This is used for recording the withdrawal of capital by the owner. Ex. Adoracion Grecia, Drawing or Adoracion Grecia, Personal  INCOME Income refers to the earnings of the enterprise. These include sales of merchandise, income due to performance of services or other type of income realized in the operation of the business. These items increase the equity of the owners. For example, Company AA sold canned goods worth P3,000.00 and rice worth P5,000.00. It also earned P20,000.00 for renting an extra space to Donuts Company. These amounts are considered as income of the enterprise.  Income accounts in a service concern represents charges to clients or Service income customers for services rendered. Professional fees or charges to clients by professionals for professional income services rendered. represent charges for the use of assets Rent income like equipment and spaces in buildings represents charges to customers for Repair income repair services rendered  Income accounts in a service concern represent charges to customers for laundry Laundry income services rendered Transportation income represents charges to passengers for or fares earned transportation services rendered represent amount of tickets sold to watchers Ticket sales of games, shows or movies income earned by the business coming from Miscellaneous income other sources which is not the main line of business and could not be clearly identified  Income accounts in a merchandising firm represent income from the sale of Sales merchandise represent deduction from sales due to Sales returns merchandise returned by customers represent deductions from selling price of Sales allowances goods with defects or goods sent to customers but not as ordered. The goods are retained by customers. deductions from the selling price due to Sales discounts payments of the customers within the discount period.  EXPENSES The company has to spend in order to earn. These spending which include costs of the merchandise bought and sold and other spending incident to the operations of the business, will normally reduce income. They are often referred to as expenses. In Accounting, EXPENSE is defined as decrease in assets or increase in liabilities that results in decreases in equity, other than those relating to distributions to equity holders  EXPENSES  Cost Accounts – these accounts represent the value of the goods sold. These include: 1. Purchases – represent the original acquisition price of the goods for resale 2. Purchase returns – represent the cost of goods purchased but returned to suppliers because they are either damaged, defective or unacceptable 3. Purchase allowances – represent the reduction in the cost of defective or damaged goods bought but nor returned to the supplier 4. Purchase returns and allowances – is usually used for the two accounts 5. Purchase discounts – represent the reduction in the amount to be paid to the supplier due to payment of account within the discount period 6. Freight in – represent the cost of transporting goods purchased from the suppliers to the store or the warehouse of the business  EXPENSES  Expense Accounts other than cost accounts: 1. Salaries and Wages – represents the value of services rendered by employees and laborers. Account titles like office salaries, sales salaries and the like may be used. 2. Advertising expense – includes advertising or promotional expenses. This includes cost of publication in print media and propaganda in radio and television 3. Rent expense – amount paid or incurred for the use of properties 4. Repairs and Maintenance – amount paid to maintain company assets in good working conditions 5. Transportation expense – amount paid for services of conveyance or means of transportation of goods to customers  EXPENSES 6. Taxes and licenses – amount of taxes and other licenses paid to the government 7. Depreciation expense – is the portion of the cost of a fixed asset that is charged or allocated as expense for the period 8. Insurance expense – premiums on insurance policies charged to expense 9. Supplies expense – amount of supplies used. Specifically termed as office supplies expense or store supplies expense 10. Utilities expense – cost of light and water consumed by the business. An account title Water and Electricity or Heat, Light and Water may be used  EXPENSES 11. Representation and Entertainment – represent value placed on activities that will promote goodwill and increase customers’ patronage. 12. Postage and Communications – amount paid for postage, telephone and other forms of communication 13. SSS Premiums – contributions of employer to the Social Security System 14. Miscellaneous expense – relatively small amount paid for items or services which do not fall under the above accounts. Account titles like Miscellaneous selling expense or Miscellaneous office expense may be used.  Exercise A-Asset L-Liabilities E-Equity I-Income Ex-Expense ____ Delivery Truck ____ Copyright ____ Notes Receivable ____ Notes Payable ____ ABS Capital ____ Unused Supplies ____ Ticket Sales ____ Purchases ____ Taxes/Licenses ____ Interest Payable Thank you