Introduction to Accounting and Accounting Concepts and Principles 2023-2024 PDF

INTRODUCTION TO ACCOUNTING AND ACCOUNTING CONCEPTS AND PRINCIPLES Module #1 of 6 Modules Accounting for Merchandising Business Prepared...

INTRODUCTION TO ACCOUNTING AND ACCOUNTING CONCEPTS AND PRINCIPLES Module #1 of 6 Modules Accounting for Merchandising Business Prepared by: Nestor A. Mataag Course Facilitator: Daniela W. Paspas Accountancy and Business Education Cluster 1st Semester, School Year 2023-2024 MPSPC-QMS-F-032c/02/September 12, 2023 Page 0 of 19  INTRODUCTION Accounting is relevant in all walks of life, and it is absolutely essential in the world of business. Accounting is called the language of business because it is the system that measures business activitties, processess information into report and communicats the result to decisions makers. As Accountancy Students, it is essential for you to learn the subject because a sound understanding of this language will bring about a better management of the financial asspects of living. The task of learning accounting is similar to the task of learning a new language. How to study accounting successfully Studying accounting is not like reading some trivial topic. You need to commit your time, passion and effort whole heartedly. The following suggestions are proven as effective methods on how to study accounting successfully. 1. Read AHEAD Be sure to read the chapter assigned before they are discussed in class. Almost every sentence is important. Scan reading will just give you a blurred idea of the subject matter. 2. READ to understand “WHY” In studying and solving accounting problems, you should always ask for the reason behind it and what accounting principle is applicable to certain situations. Accounting is a technical and very logical subject. It requires reasoning if you can understand why. 3. WORK on problems to understand “HOW” Accounting is a do-it-yourself course. Do not just rely on your understanding of why. Even if you understand why they do that, you still must be able to do it yourself. Work on the problems in the reading materials. Do not copy or parrot the book. 4. INTERNALIZE Always recall the principles you have learned. Interrelate. Always be ready to give a correct answer supported by the applicable rules. Make notes while reading every chapter. Refresh your memory by going back to the previous chapters and your notes. Rework problems that were difficult for you. Outline important principles and procedures. Try to work on extra problems that are similar to the assigned homework. Do your homework with understanding. Finally, never wait until the examination time comes to review accounting subjects. Review as you go. MODULE OUTLINE To give you a picture on what lessons are expected from this module, here is a summary of the lessons: Lesson I: Introduction of Accounting and Accounting Concepts and Principles LEARNING OUTCOMES At the end of the module, you should be able to: 1. apply the accounting concepts and principles of accounting in identifying accurately the accounting elements and its components. MPSPC-QMS-F-032c/02/September 12, 2023 Page 1 of 19  Let us test your initial knowledge on the concepts to be discussed. Independently work on the pre-test below. Goodluck. MULTIPLE CHOICE Instruction: Choose the letter that best describe your answer. Write your answer beside each number. I know you can answer this test for 5 minutes. You may proceed answering in 3, 2, 1, go. 1. Which of the following is not an appropriate description of accounting? a. Accounting is an information system b. Accounting is an exact science and an art c. Accounting is the language of business d. Accounting is a process that leads to understandable information. 2. The following information is provided by the basic accounting reports, except a. Profitability b. Liquidity c. Feasibility d. Stability 3. This is a form of business organization in which the ownership is evidenced by shareholdings. a. Corporation b. Partnership c. Joint venture d. Sole proprietorship 4. It refers to the professional value and ethics that a CPA should not offer services which he is not capable to perform. a. Competence b. Due care c. Objectivity d. Reputation 5. The following are considered as specialized branches of accounting under CMO 3 of 2007, except a. Private accounting b. Public accounting c. Accounting education d. Socio-economic accounting 6. This refers to a more specific idea of doing accounting work. a. Accounting principles b. Accounting procedures c. Accounting concepts d. Accounting assumptions MPSPC-QMS-F-032c/02/September 12, 2023 Page 2 of 19  7. An accounting concept applied when the cash drawn by the owner from the business is recorded as owner’s personal drawings. a. Accounting entity b. Going concern c. Monetary unit d. Accounting periods 8. Which of the following is not an expense account? a. Prepaid supplies b. Advertising expense c. Salary expense d. Bad debt expense 9. The following are ingredient of reliability, except a. Faithful representation b. Substance over form c. Materiality d. Neutrality 10. Which of the following is a financing activity of a business? a. Cash received from sales of merchandise inventory b. Payment of employees’ salaries c. Cash received from business owners d. Purchase of equipment for business use Well, probably you encountered difficulty in answering some of the questions. But do not worry, you will be clarified during the presentation of the topics below and during the face to face discussion. Now, let us begin then with our first lesson for this module. MPSPC-QMS-F-032c/02/September 12, 2023 Page 0 of 19  Introduction of Accounting and Accounting Concepts and Principles Learning Objectives: At the end of the lesson, you should be able to: 1. identify the accounting concepts and principles, and the importance of accounting; 2. distinguish properly the difference between business organizations and their activities according to their nature of establishment; and, 3. articulate completely the relationships among the financial statements You are planning to establish the biggest mall to be located at the heart of Mountain Province. So your contemplating what form of business organization are you going to put up? What are the assets needed? What are the liabilities to be incurred? What book are you going to record your sales, purchases and expenses? LET’S EXPORE! To answer the burning questions above, were going to explore the different forms of business and its advantage and disadvantage to suit your business. Were also going to look into the accounting concepts and principles that will aid you in your endeavor and the Financial Statement that will be prepare to reflect all the transaction during the period. I. WHAT IS ACCOUNTING? Accounting is defined in 3 ways under different governing bodies of accounting. You need to understand and internalize the relationship between these 3 definitions. 1. “The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof.” ❖ This was the definition presented by the American Institute of Certified public Accountants (AICPA). ❖ As an art because accountants apply practical knowledge, experience and skills guided by accounting principles and rules in the efficient preparation of financial reports. ❖ Accounting demands critical thinking and creative skills. Accountants gather relevant data of business and convert them into organized financial reports then draw certain economic meanings from them. ❖ Accounting gives due importance to the measurement of business activities that have monetary value. Business activities that do not have monetary value are not recorded in the books of accounts. MPSPC-QMS-F-032c/02/September 12, 2023 Page 3 of 19  2. “A service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.” ❖ This was the definition presented by the Accounting Standards Council (ASC). ❖ Accounting connects the economic activities to the economic decision- makers. As a service, accounting intends to supply financial reports to be used by economic-decision makers. ❖ Accountants choose an acceptable accounting method, the amounts and types of information to disclose, and the format in which to present. ❖ Financial reports derived from accounting are “not an end in itself.” As accountants choose which alternative reporting method provides the most useful information for the decision-making purposes, the financial information also allows the decision-makers make reasoned choices among alternative uses of scarce resources in the conduct of economic activities. 3. “The process of identifying, measuring, and communicating economic information to permit informed judgement and decisions by users of the information.” ❖ This was the definition presented by the American Accounting Association (AAA). ❖ As a process because accounting goes through an accounting cycle to summarize the voluminous and repetitive business transactions into organized and understandable financial report. ❖ Therefore, accounting is an information system for business decisions. It ascertains the value of business transactions and events, converts them into financial reports, and imparts the meanings of these financial reports to the interested parties. ❖ The definition is further illustrated in the figure below. ACCOUNTING PROCESS DECISION MAKERS External: FINANCIAL INFORMATION Investors Internal: Communicated Assets= Liabilities + to Creditors Managemen Owner’s equity t Customers Profit or Loss= Revenue - Expenses Government MPSPC-QMS-F-032c/02/September 12, 2023 Page 4 of 19  II. NATURE OF ACCOUNTING The most common descriptions when accountants portray the nature of accounting are as follows: 1. A Discipline ❖ Accounting is a discipline that observes professional standards and professional ethics as other fields of profession. Accounting practice is guided by distinctive accounting standards, rules, methods, and procedures to come up with reliable general-purpose financial reports. 2. A Service Activity ❖ Accounting profession is not involved in selling of goods. Instead, it is involved in providing professional services particularly in performing tasks by making financial reports regarding the financial activities of economic entities. 3. An Art and Science ❖ As an art because it encompasses a body of techniques that is commonly used in a certain profession. It demands thorough knowledge, good experience and deep interest in the field of accountancy to achieve this goal. ❖ Others believe that accounting is not only an art but also a science as well because it is regulated by accounting rules, principles, postulates and theories. 4. The Language of Business ❖ Accounting serves as a means of communication. It communicates the results of business operations to various parties who are directly or indirectly interested on the economic affairs of the business. It informs the economic status of the business. For example, the owner may know how much is the increase in his capital as a result of the business operations. This information is all about the profitability of the business. 5. The Eyes of the Business ❖ accounting information describes both management and employees’ performance, and possibly eliminates the commission of frauds and thefts within the enterprise. Just consider complete accounting records as a CCTV camera. III. FUNCTIONS OF ACCOUNTING The primary function of accounting is “to provide financial reports to various end-users for economic decision-making." (PAS no. 1) This is achieved through the use of the accounting functions as follows: 1. Recording ❖ This accounting function is employed to ensure that all business transactions are recorded in a systematic manner in the books of accounts. The recording is done in the “Journal Book” and subsidiary books such as cash journal, purchase journal, and sales journal. You may go to a school supply store and ask to see a sample of these journals. MPSPC-QMS-F-032c/02/September 12, 2023 Page 5 of 19  2. Classifying ❖ It is concerned with systematic analysis of recorded transactions and events, with a view to group those similar in nature as one cluster in an accounting element called Assets, Liabilities, or Capital. The classifying work of accounting is done in the “Ledger Book.” 3. Summarizing ❖ This involves presenting the classified data in a manner which is understandable and useful to the end-users. This process leads to the preparation of the trial balance, statement of comprehensive income, and statement of financial position. 4. Analyzing and Interpreting ❖ This is the final function of accounting. The recorded financial data are analyzed and interpreted in a manner that the end-users can make a meaningful judgement about the financial condition and profitability of the business operations. The data is also used for preparing the future plan and framing of business policies. 5. Communicating ❖ After being meaningfully analyzed and interpreted, the accounting information has to be communicated to the intended end-users. This is done through the distribution of accounting reports such as Statement of Financial Position, Comprehensive Income, and additional information such as Financial Ratios. 6. Protecting the Property of Business ❖ Accounting evaluates the usefulness of business resources. It provides internal control to secure them and ensure that unauthorized use of business property shall not be made. 7. Preparing Legal Requirements ❖ Accounting facilitates the preparation of governmental reportorial requirements and ensures compliance of reporting on time. The accounting records and supporting documents serves as a proof of real transactions as contained in the financial accounting reports. IV. OBJECTIVES OF ACCOUNTING The overall objective of financial reporting is to provide general-purpose financial statements about the reporting entity that is useful to present potential user groups, especially stockholders and creditors to assist them in making sound economic decisions as capital providers. This objective underscore the fact that financial reporting is not an end in itself. Instead, the output of the financial accounting process serves as useful input for making rational investment, and other similar decisions. To achieve this accounting objective, a business entity must prepare general-purpose financial statements. General-purpose financial reporting helps users who lack the ability to demand all the financial information they need from an entity and therefore, must rely, at least party, on the information provided in the financial statements. MPSPC-QMS-F-032c/02/September 12, 2023 Page 6 of 19  Specific Objectives Particularly, the objectives of accounting can be summarized in the following manner: 1. To ascertain the results of operations during a period ❖ The main objective of the business is to determine the overall profitability of the business over a set period of time. ❖ For example, a financial report called Statement of Comprehensive Income (SCI) is prepared for this purpose to describe the overall results of business operations whether the business earned profit or suffered loss during an accounting period (ex. Year 2020). 2. To ascertain the financial position ❖ For financial statement users, it is also important to know the financial health or financial condition of the firm ❖ For example, a statement called Statement of Financial Position (SFP) is prepared for this purpose to show the business’ financial condition (assets, liabilities and owner’s contribution) on a particular day and is usually prepared once a year on the last day of the financial period. 3. To maintain control over assets ❖ Accounting implements internal control- the systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to: a. Conduct its business in an orderly manner; b. Safeguard its assets and resources; c. Deter and detect errors, frauds, and theft; d. Ensure accuracy and completeness of its accounting data; e. Produce reliable and timely financial management information; and f. Ensure adherence to its policies and plans. 4. To aid management in planning and performance evaluation ❖ Financial reports serve as basis for budget by forecasting cash flows, sales, production, expenses, etc. these forecasted financial reports serve as references that help management evaluate the overall performance of the enterprise. ❖ Accounting also provides significant information to management to carry out its daily tasks and operations properly and efficiently. Such information helps management in planning, organizing, and controlling its various activities. 5. To provide information to government agencies and other legal purposes Accounting information facilitates the work of tax authorities by analyzing the financial statement of business organizations, financial statements will expose any fraud or any wrong business practice of an organization. Financial reports also serve as good evidence to attest the truthfulness of financial reports in any legal investigation or court of law. MPSPC-QMS-F-032c/02/September 12, 2023 Page 7 of 19  V. USERS OF ACCOUNTING INFORMATION USERS OF ACCOUNTING INFORMATION INTERNAL USERS EXTERNAL USERS FINANCING PUBLIC GROUP MANAGEMENT GROUP GROUP Government Sole proprietors Investors Regulatory Partners Potential agencies Board of directors investors Taxing Officers Trade creditors authorities Managers Potential creditors Labor unions Supervisors Banks and other Employees financial Retirees institutions Economic planners Internal Financial Reports External Financial Reports A. The Management Group Internal users are those who own and/or manage and control the business entity. To help them make relevant economic decisions in achieving the goal of the firm, the management group needs more detailed accounting information. Internal reports are then prepared exclusively for their use for the efficient operation and control of business activities. These reports are not governed by generally accepted accounting principles. The area of accounting that is concerned with internal reporting is referred to as management accounting. B. The Financing Group and Public Group 1. Investors To assess the risk of investment portfolio, investors need information to help them determine whether they should buy, hold or sell investments. They need accounting information to assess their return on investment. 2. Employees Workers are interested in the financial statements to determine employer’s stability and profitability. Moreover, enterprise’s capability to provide MPSPC-QMS-F-032c/02/September 12, 2023 Page 8 of 19  remuneration, retirement benefits, and employees’ opportunities may be evaluated through financial reports. 3. Lenders Financial statements are used by lenders to determine whether borrowers can pay their loans and interest attached to them when due. 4. Suppliers and other trade creditors Suppliers use the financial statement of their customers to determine the continuity of their customer’s business. They are interested in the information that enables them to determine whether debts owed to them will be paid when due. 5. Customers Customers use the financial statement of their suppliers to assess the latter’s continuity in business because some customers are dependent on the existence of their suppliers to ensure the availability of supplies that will sustain their business operation. 6. Government and its agencies In allocating the national resources, the government is interested in the financial reports of an enterprise for statistics, income taxes, and other regulatory policies. 7. Public Financial reports may assist the people by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. VI. SPECIALIZED FIELDS OR BRANCHES OF ACCOUNTING A. Public Accounting (Practice in Public Accountancy) Examples are Sysip, Gorres, Velayo and Company (SGC & Co.) and TFF Fangasan Accounting and Auditing Firm. 1. External Auditing Primarily centers on the critical examination of financial statements by an independent CPA to express an opinion regarding the fairness of the contents of the financial statements. 2. Tax Services Deals with the accountant’s preparation of the client’s income tax returns, business and transfer taxes. 3. Management Advisory Services This field provides assistance to the management by providing industrial advice regarding accounting, finance, budgeting, business policies, etc. MPSPC-QMS-F-032c/02/September 12, 2023 Page 9 of 19  B. Private Accounting (Practice in Commerce and Industry) Accountants are said to be in private accounting when they are employed in private enterprise or in a non-profit organization. 1. Financial Accounting This field is primarily concerned with the recording and classifying of business transaction culminating in the preparation of general-purpose financial statement reports in accordance with Generally Accepted Accounting principles (GAAP). 2. Internal Auditing A company may hire internal auditors as employees or outsourced auditors for internal auditing function. They do not report to an accounting or financial auditor because that arrangement would destroy the element of independence critical to their work. Instead, they report directly to an audit committee of the corporation’s board of directors. 3. Tax Accounting Embraces the preparation of various tax returns and tax planning necessary to minimize the impact of taxes in the firm. Tax accountants are thus specialists in both tax compliance and tax planning. 4. Cost Accounting Has something to do with determining the inventory costs and/or product costs of the manufactured goods and assisting in product pricing activities of the company. Cost accounting data are generally used by the management for planning and controlling purposes. 5. Budgeting Covers the efficient management of cash by anticipating or predicting monetary objectives in the future periods. 6. Accounting Systems Design Primarily includes the evaluation of the company’s control system to find out any area of improvement. It includes the establishment of a computerized accounting system. C. Government Accounting (Practice in the Government) Government accounting mainly focuses on the proper custody of government funds and their purposes. It is generally used in accounting for the national government and its political instrumentalities like provinces, cities, municipalities, and barangays. D. Accounting Education (Practice in Education/Academe) Accounting education involves teaching accounting, taxation, and some business subjects. A CPA who intends to teach in college is required to have master’s degree. Faculty members of some universities are encouraged to finish doctorate degree and required to engage in research work. MPSPC-QMS-F-032c/02/September 12, 2023 Page 10 of 19  VII. BUSINESS ORGANIZATIONS SERVED BY ACCOUNTANTS ❖ Below are the most common forms of businesses served by accountants. 1. Sole or Single Proprietorship ❖ A business entity owned by one person called a sole proprietor. ADVANTAGES DISADVANTAGES ▪ Easiest to start and set up; only ▪ Unlimited liability- owner is legally liable few legal requirements. for all business debts. ▪ Only one (owner) decides for the ▪ Limited resources (capital, managerial business. skills, etc.) o Many is better that one you know. ▪ All profits are for the owner. ▪ All losses are borne by the owner. ▪ The owner, not the business is ▪ Limited life- business is automatically taxed. terminated due to owner’s death, insanity or imprisonment. Easy to dissolve ❖ This means that when needed to terminate the business, it is much easier to do so than other business forms. 2. Partnership ❖ A business entity owned by two or more persons called partners who have agreed to contribute money, property and industry to a common fund with the intention of dividing profits among themselves. ADVANTAGES: DISADVANTAGES: ▪ Easy to form- a mere ▪ Unlimited liability- a general agreement can organize a partner is legally liable for the partnership unpaid debts of the partnership ▪ There is a joint resource of ▪ All partners may be held liable for partners (capital, skills, etc.) the action of one partner ▪ Lesser government ▪ Consensual and restricted transfer supervision of ownership ▪ Tax exempt if professional ▪ Limited life- disagreement or partnership, but subject to change of partner may dissolve the corporate tax if commercial partnership. Incapacity, insanity, partnership. or death of a partner terminates the partnership. 3. Corporations ❖ A business registered as an artificial person under the operation of the law. Its existence is evidenced by its Articles of Incorporation and Corporate By-laws registered with the Securities and Exchange Commission (SEC). MPSPC-QMS-F-032c/02/September 12, 2023 Page 11 of 19  ADVANTAGES: DISADVANTAGES: ▪ Limited liability- shareholders are not legally ▪ Most costly and difficult to organize- for a liable for the corporate unpaid corporation to be formed, it should liabilities. undergo many processes under different ▪ Power of succession- it can continue to regulatory bodies. exist despite of death, withdrawal or ▪ Only the board of directors and other changes of officers and shareholders. authorized officers can bind the ▪ Unrestricted transfer of ownership- the corporation in contracts. shareholder may sell his share without ▪ Shareholders have limited access and the control over management and operations. consent of other shareholders. ▪ More stringent government supervision ▪ Greater source of resources than sole and restrictions. and partnership. ▪ Corporations are taxed at a flat rate of ▪ Renewable and perpetual life- a 30% income tax rate and taxed at 2% on corporation the fourth year of operation based from may renew its registered life every 50 gross income even if it incurs net loss. years. VIII. PRIMARY ACTIVITIES OF A BUSINESS A business may be classified based on its primary activities. The most common types of business as to their nature or main activities are as follows: 1. Servicing ❖ To earn revenue, this business renders services to clients in exchange for a fee. Therefore, the primary product of this business is service. Examples are barber shops, restaurants offering dine in, pedicures, tricycle operations, etc. 2. Merchandising ❖ This business engages in the buying and selling of goods. Its earnings are primarily derived from the mark-up it adds to the cost of the goods it sells to the customers. Examples are grocery stores, hardware stores, etc. 3. Manufacturing ❖ The business converts raw materials into finished goods that are going to be sold. Examples are the Sagada Weaving, Toyota Inc., etc. IX. DEFINITION, CLASSIFICATION AND EXAMPLES OF ACCOUNTS REAL ACCOUNTS are ASSETS, LIABILITIES, and OWNERS EQUITY. They are reported in Statement of Financial Position (SFP) and are not closed at the end of the accounting period THE ASSET ACCOUNTS There are two classification of asset, this are: 1. CURRENT ASSETS is expected to be realized, or is held for sale or consumption in the normal course of business of the enterprise’s operating cycle. It is held primarily for trading purposes or for short-term, and it is expected to be realized within 12 months of the SFP date. MPSPC-QMS-F-032c/02/September 12, 2023 Page 12 of 19  The Asset Accounts- Current a. Cash. Cash is any item on hand with monetary value that a bank will accept for deposit and all amounts currently on deposit with the bank in the name of the business. b. Cash Equivalents. These are short-term, highly liquid investments that are readily convertible to known amount of money on a certain date. c. Accounts Receivable. These are claims against customers arising from sale of goods on credit. This type of receivable offers less security than a promissory note. e.g. The store owner will record your “utang of sardinas” as his/her accounts receivable. d. Notes Receivable. A note receivable is written a written pledge that the customer will pay the business a fixed amount of money on certain date. This is also a promissory note received by the business from the debtors/and or customer. e. Accrued Interest Receivable is the interest earned on note receivable but not yet received in cash. f. Inventories. This are assets (a) held for sale in the normal operation of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. e.g. Merchandising (Familys Saving Mart)- oil, soap, four, canned goods etc… Manufacturing (Sagada Weaving) - thread, finished and unfinished products g. Prepaid Supplies are various materials which remains unused at the end of the accounting period. h. Prepaid Expenses. These are expenses paid for the business in advance. It is an asset because the business avoids having to pay cash in the future for a specific expense. e.g. Insurance and rent 2. NONCURRENT ASSETS are assets that do not meet the criteria of a current asset. Classification of Non-Current Assets Long Term investments are assets held by an enterprise for the accretion of wealth through capital distributions such as interest, royalties, dividend and rentals, for capital appreciation or for other benefits to the investing enterprise such those obtained through trading relationships. Property plant and Equipment are tangible assets that re held by an enterprise for use in the production or supply of goods or services, or for administrative purposes and which are expected to be used for more than one period. Example of Property, Plant and Equipment MPSPC-QMS-F-032c/02/September 12, 2023 Page 13 of 19  a. Land is the site owned by the business on which the business building is constructed or any unused real property. b. Building are structured owned by the business used in the operation of business c. Furniture and Fixture are long-lived items used by the business. d. Equipment consists of which generally might be called machinery. Contra-Valuation Accounts Allowance for Doubtful Accounts is a contra asset account and it is the amount estimated uncollectible on receivable in compliance with the principle of conservatism. Also called “Allowance for uncollectible accounts” and “Allowance for bad debts”. This is deducted to the receivables. e.g. if you cannot pay your utang of sardinas because of financial constraint or bankruptcy the store owner will provide an allowance for bad debts. e.g. If a person cannot pay his/her loan in the cooperative due to bankruptcy or death the cooperative will record and allowance for doubtful account for your unpaid balance. Accumulated Depreciation is a contra-asset account representing the expired cost of plant, property and equipment as a result of usage and passage of time. This is deducted from the cost of the related asset account. THE LIABILITY ACCOUNT 1. CURRENT LIABILITY. The standard classifies a liability as current when it is: a. It is expected to be settled in the normal course of the enterprise’s operating cycle b. It is due to be settled w/in 12 months of the Statement of Financial Position date. The Liability Account- Current a. Accounts Payable is an obligation or debt to creditors for money borrowed or merchandise and other assets bought on credit. e.g. You’re going to record your utang of sardines in your book as Accounts payable. Mrs. Josephine Dumalsin Store will record her utang of goods in her book as Accounts payable from her supplier b. Note Payable is a promissory note issued by the business to its creditors for money borrowed or merchandise and other assets bought on credit. c. Accrued Interest Payable is the interest incurred in the current period but not yet paid. d. SSS Premium Payable is the representative of the amount of employee and employer contribution to SSS which are not yet remitted to SSS. e. Withholding Tax Payable is the amount of income tax withheld from the salary of employee in behalf of BIR that the employer has to remit to BIR on the specified due date. MPSPC-QMS-F-032c/02/September 12, 2023 Page 14 of 19  2. NONCURRENT LIABILITY is one that does not meet the criteria of a current liability. it comprises the portion payable beyond one year of long-term liability. 1. Mortgage payable is a long-term debt of the business with security or collateral in the form of real property. 2. Bonds Payable is a certificate of indebtedness under the seal of corporation, specifying the terms or repayment and the rate on interest to be charged. 3. THE OWNER’S EQUITY is the residual amount after deducting liabilities from assets. It comprises the capital contribution and withdrawals by the owner. It is Increase by capital contribution of the owner and net income of the business and Decrease by the owner’s withdrawal and net losses of the business. NOMINAL ACCOUNTS comprises the elements of the Statement of Comprehensive Income. THE REVENUE AND EXPENSE ACCOUNTS These are called temporary because they are closed or put to zero balance at the end of the accounting period. THE REVENUE ACCOUNTS this represents the earning of the business from sale of goods or service rendered. Common revenue account Sales are an account used to summarize sales of goods of a trade or a merchandising business. Service Income is the earnings derived from service rendered by a servicing business to its customers. Professional Fees is the earnings derived from services rendered by a professional or professional servicing firm which could be in cash or on collectible to its clients. Interest Income is the earnings representing the time value of money derived from the promissory notes received by the business, whether in cash or collectible in the future. Rent Income is the income earned allowing others to use the property or facility of the business. Gain on Sale of Other Assets is the income derived from the sales of assets used in business operation. THE EXPENSE ACCOUNTS is the cost incurred in conducting the business activities. An expense involves the outflow of money, the use of other assets, or the incurring of a liability. Cost of Sales. The cost incurred to purchase or to produce the products sold to the customer during the period; also called cost of goods sold. MPSPC-QMS-F-032c/02/September 12, 2023 Page 15 of 19  Supplies expense is the amount of supplies consumed or used by the business during the period. Salaries and Wages Expense is the amount paid to services rendered by the employees in the operation of the business. Insurance expense is the amount of insurance policy incurred during the current period. Taxes and Licenses Expense- the cost of local as well as national taxes are incurred and required to be paid in connection with the conduct of business. Estimated Expenses are Doubtful Accounts expense is the estimated amount of losses from uncollectible accounts. Depreciation Expense represents the current periodic cost for using depreciable plant assets. For this subject, we will concentrate more on servicing. It covers the accounting for service businesses. MPSPC-QMS-F-032c/02/September 12, 2023 Page 16 of 19  When answering the given items below, REMEMBER THIS FIRST!!! do not flip pages to look for the answer in the discussion section of the module. It is important to have sufficient understanding of the concepts first before answering any activity. Answer all activities based from what you understand from the module/lesson. Answers will be given during our face to face meetings including discussion of supporting concepts that will support the suggested correct answers. Part 1: True or False Instruction: Write “True” if the statement is correct and write “False” if the statement is incorrect. Write your answer in your activity notebook. 1. The objective of accounting underscores the fact that financial reporting is the end in itself. 2. External users of accounting information need more detailed information than the management group. 3. A corporation like the partnership has unlimited life. 4. Tax-exempt businesses are not required to prepare accounting reports. 5. Profitability answers the question regarding the increase of equity as a result of business operations. 6. Management accounting provides reports for internal users. These financial reports observe generally accepted accounting principles. 7. An accountant is forbidden to advertise his professional attainments or services. 8. An accountant who engages in public practice is not an employee of a client company. 9. Inventories is an asset held for sale in the normal operation of business 10. Examples of equipment are typewriters, store or factory, filing cabinet, computer, cars and trucks. REFERENCE Valencia, Edwin G et al. (2015). Basic Accounting: Concepts, Principles, Procedures and Applications. Baguio City: Valencia Educational Supply Horley photo [image] (n.d.). Retrieved on July 25,2020 at https://m.facebook.com/ LetsExploreHorley/photos/?tab=album&album_id=1682918701737753&mt_n av=1 Cartoon stock [image] (n.d.). Retrieved on July 25,2020 at https://www.cartoonstock.com/cartoonview.asp?catref=bve0061 Lets engage [image] (n.d.). Retrieved on July 25,2020 at https://www.letsengage.co.uk/ Rochemamabolo Word Press [image] (n.d.). Retrieved at https://rochemamabolo. wordpress.com/2017/09/18/startup-tip-132-now-its-your-turn/amp MPSPC-QMS-F-032c/02/September 12, 2023 Page 17 of 19