CHRIST THE KING COLLEGE

ACCOUNTING 1
Advanced Accounting
Module #1

Developed by:
Ray Patrick S. Guangco, CPA

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 INTRODUCTION

MODULE 1: BUSINESS AND ACCOUNTING

This topic discusses the vital role of accounting in business and the principles and the
assumptions where accounting have its foundation. In this part, financial statements
will be introduced, its presentation and information inside in each of the statement.
At the end of the topic, you will understand the importance of accounting, as a tool,
in making decision for business through the financial reporting.

LEARNING OBJECTIVES:
 Give the importance of accounting in business
 Explain Generally Accepted Accounting Principles (GAAP) and the basic assumptions
 Identify the format of the basic financial statements
 Determine accounting classifications and account titles
 Give the different forms of business organization
 Identify the nature of business activities

ACTIVITY: QUESTION AND ANSWER

Answer the following questions:
1. What is accounting?
2. Do you think accounting is important to business?
3. How does accounting help businesses?

WHY DO WE STUDY ACCOUNTING?

People in all walks of life, be it professional of non-professional are living in an era of

accountability. Whether we like it or not, we have to cope up with our budgets in food
clothing and shelter, education for our children, salaries of our house helpers, payment for
telephone, water and electric bills, payment of our income taxes, etc.

Actually, nearly everyone practices accounting in one form or another everyday. Wherever we
go and everything we do which involve decision-making, accounting is present. Accounting is
not for business alone. This makes the study of accounting to have universal existence.

WHY IS ACCOUNTING NEEDED IN BUSINESS?

The primary motive of a person engaged in business is profit. To create job opportunities to
other in terms of providing for employment might only be incidental depending upon the
nature of his business and the amount of capital he invested. Actually, he sometimes manages
his own business. Thus, he becomes a proprietor-manager. As a profit oriented person, he
takes interest of knowing how the day to day transactions affect his capital investments.

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Accounting helps the proprietor to know how much profit that his business makes. By putting
into records the income earned and the expenses paid for is already a simple accounting in
itself. But when the business grows bigger, he can no longer attain to do the recording
especially when he has little knowledge in accounting. It is at this point that he needs the
services of persons who have the technical skills in accounting who are referred to as
bookkeepers or knowledgeable expert professional in this field who are referred to as
accountants. At this point, the bookkeepers and/or accountants enter into the picture in the
world of business.

IMPORTANCE IN KEEPING OF BUSINESS RECORDS

Considering the volume of the day-to-day transactions of the business, it is very difficult for us
to rely on our memory or even recall all the transactions that the business may have entered
into. We should keep a “diary” which will record all the activities for the day and even for a
year. The records that should the business keep for that purpose called “book of accounts”.
What has recorded in the books of accounts are data that are financial in character are
processed and transformed into a report form called “financial statements”.

It is also a government requirement specifically the Bureau of Internal Revenue that all
business establishments should maintain their records for accurate determination of internal
revenue taxes due to the government. In addition, it is done in compliance with municipal or
city ordinances regarding local business taxation.

The Bureau of Internal Revenue requires the preservation of books of accounts and other
business documents for at least five years within which it has to undergo actual examination
and review whether income taxes are correctly computed and paid.

DEFINITION OF ACCOUNTING

According to Accounting Standards Council (ASC) in its old Statement of Financial Accounting
Stantards (SFAS) No. 1 defines accounting as follows:

“It is a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities that intended to be
useful in making economic decisions.”

The most important points of Accounting as:

1. Accounting is about quantitative information
2. The information is of financial in character
3. Usefulness of information in decision making

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The American Institute of Certified Public Accountants (AICPA) defines accounting as follows:

“It is an art of recording, classifying, 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.”
The definition mentions the four (4) phases of accounting: recording, classifying, summarizing,
and interpreting. These are being outlined below:

1. Recording
This phase of accounting involves the routine and mechanical process of writing down the
business transactions and events in the books of accounts in a chronological manner
called Journalizing. Before business transactions and events could be recorded, firstly, the
documents should be identified, analyze and measured.
 Identifying
There should be a basis of determining whether a business transactions and events or
not. As a rule, only transactions and events with financial bearing to the business are
recognized. In other words, a transaction or event that affects the assets, liability,
equity or capital, income or expenses is recognized.

 Analyzing
There should be a “dual effect”, normally the value received and the value parted with
of the transactions.

 Measuring
The assigning of monetary values involved in a transaction.

2. Classifying
This phase of accounting involves sorting or grouping of similar and interrelated
transactions and events into their respective kind and classes. This is actually the process
of transferring the entries from the journal to the ledger called Posting.

3. Summarizing
This phase of accounting involves the completion of the financial statements and the
accounting requirements as well. This starts from striking of a trial balance, plotting down
of adjusting entries in the worksheet and the preparations of closing entries, post-closing
trial balance and reversing entries.

4. Interpreting
This phase of accounting which involves the “analytical and interpretative works”. It is
then, that when financial statements are analyzed, interpreted and are communicated to
those interested parties where these could be of great help to management as a basis for
making a sound decision.

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

The preparation of financial statements is governed and guided by Generally Accepted

Accounting Principles (GAAP). Generally Accepted Accounting Principles are uniform set of
accounting rules, procedures, practices and standards that are followed in preparing the
financial statements. Out of six (6) generally accepted accounting principles, you are only
given three (3) of these principles for you to understand with and these are as follows:

1. Cost Principle
This principle requires that assets should be recorded at original or acquisition cost.

Example:
If we but a land today amounting to P1,000,000 and three years after, the value of the
land is approximately P2,500,000.
What will prevail in the record is the P1,000,000 and not the P2,500,000 because cost is
definite and verifiable. The value exchanged at the time land is acquired generally can be
objectively measured.

2. Matching Principle
This is the combined concept of Revenue Recognition and Expense Recognition Principles.
Revenue should be recognized when earned and corresponding expense should be
recognized when incurred during the same period as revenue is earned.

Example:
Whenever a merchandising business sold a product, it will recognize a sales revenue and
cost of sales, simultaneously.

Sales revenue refers to a product sold at a selling price while cost of sales refers to the
cost of the product sold.

3. Adequate Disclosure Principle

This principle requires that all relevant information that would affect the user’s
understanding and assessment of the accounting entity be disclosed in the financial
statements.

BASIC ACCOUNTING ASSUMPTIONS

Accounting concepts or assumptions are the very foundations of Generally Accepted

Accounting Principles. Without these accounting assumptions, there could be no uniformity in
the practice of accounting which only result to having distorted and meaningless financial
statements.

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They are as follows: Accounting Entity Concept or Separate Entity Assumption, Going-Concern
or Continuity Concept, Time-period Concept, Unit of Measure Concept and Accrual Basis
Concept.

The first accounting assumption that we should learn about is the separation of the owner and
the business or the Accounting Entity Concept

Accounting Entity Concept

This assumes that from the accounting point of view, the business is considered as “ an entity
that is separate and distinct from the owner of management”.

When the owner puts in money, property or both into the business, these becomes “not his
personal assets anymore but rather the assets of the business already”. In other words, the
ownership of the assets is shifted from the owner to the business. For this reason, a clear
distinction between business transactions and personal affairs must be established because
only business transactions are recorded in the books of the business.

Example:
Mr. Driver owns a transportation business named “Gingoog Transport Services”.
All cash and properties that he puts into his business are now owned by “Gingoog Transport
Services” and not by Mr. Driver anymore. The personal ownership has been transferred from
Mr. Driver to Gingoog Transport Services so that all his personal and family expenses should
not mixed-up with business transactions and should be accounted for apart from his business.
We should not allow these personal transactions of Mr. Gingoog to distort the financial report
of Gingoog Transport Services.

FINANCIAL STATEMENTS

In layman’s language, financial statements are the accountant’s report at the end of the period
intended for the owner of business management’s use. These are the means by which the
information accumulated processed in financial accounting are periodically communicated to
various users which are the management, prospective investors, creditors, labor unions,
employees, government for income tax purposes, public, etc.

Usually, financial statements are prepared annual but there are financial statements that
prepared monthly, quarterly, semi-annually, or less than one year are called interim financial
statements.

Financial statements must possess the characteristics of understandability, which means that
the language used in financial reporting could easily be understood by the users. Remember,
not all owners of business are knowledgeable in accounting.

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Financial statements must also possess the characteristics of timeliness. That reports should be
submitted on time in order not to defeat the purpose. What is the use of the financial
statements when submitted late? The financial report must also be prepared in a neutral way.
It must be fairly be presented and free from bias. It must be directed towards the interest of
the users. It is not good to give favor to one party in detriment to the others. This is neutrality
in reporting the financial statements.

Per revised Philippine Accounting Standards (PAS) No. 1, there are six (6) basic financial
statements but we will focus our studies in four (4) statements which are as follows:
1. Statement of Financial Position (Balance Sheet)
2. Statement of Comprehensive Income (Income Statement)
3. Statement of Changes in Owner’s Equity
4. Statement of Cash Flows

These are presented to you at the start of your study in accounting so that you can have an
idea or a clear picture of what are expected to accomplish after the learning the application of
various steps and procedure of the accounting process. We will see then the “why” of
accounting and this will facilitate our learning on the “how” or the mechanics of the financial
statements preparation.

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

A financial statement which shows the financial position of an enterprise as of a particular

date. It consists of three (3) sections which are the Assets, Liabilities and Owner’s Equity
Section and these are known as accounting elements.

Assets
In layman’s language, these are the thing of value or rights that are owned and used by the
business in the conduct of its operations such as cash, land, building, inventories, furniture and
fixtures, machineries and equipment, prepaid expenses, etc. It also includes accounts
collectible by the business which are termed as “ Receivable”. This tells us how much the
business owns.

Liabilities
In layman’s language, these are debts or financial obligation of the business that are payable
in cash or in some kind of assets such as Accounts Payable, Notes Payable, Salaries Payable,
Mortgage Payable, etc. This tells us how much the business owes.

Owner’s equity
In layman’s language, this refers to money or value of property put by the proprietor in the
business to start with which refers to “Initial Investment” Owner’s equity will be increased by
profit or additional investment and decreased by withdrawal, expenses and losses. Most often,

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Owner’s Equity is the residual interest in assets after deducting all other liabilities. This tells us
how much is left for the business. Presented below is a sample of a Statement of Financial
Position:

In the statement of financial position or balance sheet, the accounting equation is evident. The
accounting equation is Assets = Liabilities + Owner’s Capital

STATEMENT OF COMPEHESIVE INCOME OR INCOME STATEMENT

This statement shows the “results of operations” of the business for a given period of time.
The information that was presented in the Statement of Comprehensive Income is usually
considered the most important information provided by financial accounting because
profitability is the paramount concern to those interested in the economic activities of the
enterprise.

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Revenues or Income
It denote money or proceeds from services rendered by a servicing company or income from
use by other entities of the resources of the enterprise such as Rent Income, Royalties, etc.
Servicing companies like Auto Repair Shop, Laundry Shop, Barber Shop, Beauty Parlor, etc. and
Professional Income such as Auditing Fees, Legal Fees, Retainers Fees and others.

Expenses
It denote the benefit received by the business from its use which had helped in carrying out its
operation, like salaries expense, rent expense, repairs and maintenance, taxes and licenses, etc.

Based on the given example, the formula in getting the net income or net loss is:

Revenues – Expenses = NET INCOME

If Revenue is greater than the expense, you will get NET INCOME.
If Revenue is lesser then the expense, you will get NET LOSS.

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STATEMENT OF CHANGES IN OWNER’S EQUITY

This statement summarizes the changes in equity for a given period of time. The beginning
equity of the owner is INCREASED by the additional investment and profit. Correspondingly, it
is DECREASED by withdrawal and loss.

STATEMENT OF CASH FLOWS

A statement that provides information about the causes of change in the company’s cash
balance from the beginning up to the end of specific period. As the Statement of Cash Flows
will tell us in details, what caused the changes in cash balance, we grouped the transactions
into three (3) major activities. These are as follows: Operating, Investing and Financing.

Operating Activities
It shows the inflows and outflows of cash from the normal operating activities. Examples are:

Cash inflows:
1. Cash received from the sale of goods and services
2. Cash received from royalties, fees, commission and other revenues

Cash outflows:
1. Cash paid to suppliers of goods and services
2. Cash paid to employee’s salaries
3. Cash paid to taxes and licenses
4. Cash paid for interest and other operating expenses

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Investing Activities
It shows the inflows and outflows of each arising from the following transactions.
Cash inflows:
1. Cash received from the sale of property and equipment
2. Cash receipts from collections of long-term receivable
Cash outflows:
1. Cash paid for acquisition of property and equipment
2. Cash given to long-term borrowers
Financing Activities
It shows the inflows and outflows of cash arising from the following transactions.
Cash inflows:
1. Cash received from investments by owner
2. Cash receipts from obtaining bank loan
Cash outflows:
1. Cash paid to owner for withdrawal
2. Cash paid to bank for loan obtained
3. Cash paid to shareholders on corporate dividends

ILLUSTRATION
Wedding “R” Us
Statement of Cash Flows
For the Month Ended May 31, 2018

Cash Flows from Operating Activities:

Cash received from clients 60,400
Payments to suppliers (10,000)
Payments to employees (13,800)
Payments for office rent (8,000)
Payments for insurance (14,400)
Payments for utilities (3,000) 11,200

Cash Flows from Investing Activities:

Payments to acquire service vehicle (420,000)
Payments to acquire office equipment (15,000) (435,000)

Cash Flows from Financing Activities:

Cash received as investments by owner 250,000
Cash received from borrowings 210,000
Payments for withdrawals by owner (14,000) 446,000

Net Increase (Decrease) in Cash 22,200

Cash balance at the beginning of the period -___
Cash balance at the end of the period 22,200

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WHEN DOES AN ACCOUNTANT PREPARE FINANCIAL STATEMENTS?

The business has a continuous life of existence. When it starts, it is assumed that it will
continue to operate for an indefinite period of time rather than for it to liquidate soon. This is
the “continuity” or “going concern assumption” in accounting. However, if there is a strong
evidence on the contrary, that the company may not be able to continue its operation because
of persistent losses it incur, could no longer pay its creditors on time and there might be legal
proceeding against the company, then, the going concern concept shall be abandoned. This is
the second accounting assumption that we have studied.

Normally, the accountant prepares financial statements at the end of the accounting period of
one year. Considering the length of time involved in its operations, it is very impractical for the
owner to wait until the business stops to operate before he would be able to know the results
of operations, financial condition an cash flows of the business. The life of business is then
divided into equal periods wherein at the end of each period, financial statements are
prepared. These periods are being referred to as “Accounting Periods”. This is the periodicity
or time-period concept in accounting and the third accounting assumption.

This explain why financial statements are prepared and communicated to the owner of the
business or various users/decision-makers “periodically”.

Speaking of accounting periods, it can be a period of:

1 month Financial statements are prepared at the end of every month. We call this on
a “Monthly” basis.

3 months Financial statements are prepared at the end of every three months. We call
this on a ”Quarterly basis”

6 months Financial statements are prepare at the end of every six months. We call this
on a “Semi-annual basis”

12 moths Financial statements are prepared at the end of every twelve month. We call
this on a “Yearly” or “Annual basis”

The owner or management has two (2) annual accounting periods to choose from as far as
periodic reporting of financial statements are concerned, these are:

Calendar Year The accounting period begins on January 1 and ends on December 31.
Fiscal Year The accounting period begins on first day of any month of the year except
January and will end on the last day of twelfth (12 th) month completing the
one year period.

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ELEMENTS OF FINANCIAL STATEMENTS AND ACCOUNT TITLES USED

The elements that are directly related to measurement of financial condition in the balance
sheet are assets, liabilities, and owner’s equity while the elements that are directly related to
measurement of performance in the income statement are income and expenses.

ASSETS
 Present economic recource
It is right that has the potential to produce economic benefits.
 Economic resources is controlled by the entity as a result of past events.
In layman;s language, assets denote things of value that are owned a
nd used by the enterprise in its operations. Assets are classified into two, namely current
assets and non-current assets.
Current Assets Non-current Assets
All assets that are expected to be realized, All other assets not classified as current
sold or within the enterprise’s normal should be classified as non-current assets.
operating cycle or within 12 months.

Current Assets Non-current Assets

Cash Land
Cash Equivalents Building
Petty Cash Fund Equipment
Notes Receivable Furnitures & Fixtures
Accounts Receivable Accumulated Depreciation
Estimated Uncollectible Accounts Intangible Assets
Accrued Income
Advances to Employees
Inventories
Prepaid Expenses
Unused Supplies

 Definition of Asset Account Titles

 Cash Equivalents
These are short-term, highly liquid instruments (investments) that are readily
convertible into cash and they present insignificant risk of changes in values because
of changes in interest rate.

 Petty Cash Fund

Account title for money placed and set aside for petty or small expenses.

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  Notes Receivable
A promissory note that is received by the business from the customers arising from
rendering of services, sale of merchandise, etc.

 Accounts Receivable
Amounts collectible arising from services rendered to a customer or client on credit or
sale of goods to customers on accounts. This constitutes an oral or verbal promise to
pay by a customer or client.

 Estimated Uncollectible Accounts

This is a contra-asset account. It provides for possible losses from uncollected
accounts. Although this is not actually as asset, it is classified as such because it is
shown as a deduction from the Accounts Receivable which is a Current Asset account.

 Accrued Income
The amount of income earned but not yet collected.

 Advances to Employees
The account title for amount collectible from employees for allowing them to make
cash advances which are deductible against their salaries or wages.

 Inventories
These are assets which are (1) held for sale in the ordinary course of business; (2) in
the process of production for such sale; or (3) in the form of materials or supplies to
be consumed in the production process or in the rendering of services.

 Prepaid expenses
Account title for expense that are paid in advance but are not yet incurred or have
not yet expired such as Prepaid Rental, Prepaid Insurance, Prepaid Interest, Prepaid
Advertising, etc.

 Unused Supplies
Account title for cost of supplies that are left on hand and still unused. The account
title should be specified as to Unused Office Supplies if intended for the office,
Unused Shop Supplies if intended for the shop.

 Equipment
These includes calculators, typewriters, adding machines, computers, steel filing
cabinets and the like. If these are used in the office, the account title is Office
Equipment and if used in the store, Store Equipment. Trucks, jeeps, vans, automobiles
and other kinds of motor vehicles are used exclusively for delivering goods, the
account title is Delivery Equipment.

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  Furniture & Fixtures
These includes chairs, tables, counters, display cases and the like. If these are used in
the office, the account title is Office Furniture & Fixtures and if these are used in store,
the account title is Store Furniture & Fixtures.

 Accumulated Depreciation
A contra-asset account. This is called a Valuation Account which is shown as a
deduction from property, plant and equipment, namely Building, Equipment,
Furniture & Fixtures.
Land is not subject to depreciation. Land increases value overtime.

 Intangible Assets
These are identifiable non-monetary asset without physical existence. Examples are
patents, copyright, franchise, trademarks, etc.

LIABILITIES
 The entity has an obligation.
A duty or responsibility that an entity has no practical ability to
avoid.
 The obligation is to transfer an economic resource.
 The obligation is a present obligation that exists as a result of past event.

In layman’s language, liabilities denote financial obligations of the business to its creditors. It
represent the claim of the creditors over the assets of the enterprise.

Current Assets Non-current Assets

Financial obligations of the enterprise which Financial long-term obligations of the
are (a) expected to be settled in the normal enterprise which are due and payable for
course of the operating cycle; (b) due to be more than one year.
settled within one year from the balance
sheet date.

Current Liabilities Non-current Liabiltiies

Accounts Payable Notes Payable (Long Term)
Notes Payable (Short-term) Mortgage Payable
Accrued Expenses
Unearned Income

 Definition of Liability Account Titles

 Accounts Payable
Account title for a financial obligation of an enterprise that constitutes an oral or
verbal promise to pay.

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  Notes Payable (Short-term)
Similar with Accounts Payable but only the obligation is evidenced by a promissory
note. The enterprise is the one who issued the note.

 Accrued Expenses
These are expenses incurred by enterprise but are not yet paid. This normally occurs
when the accounting period ended, such as rent salaries, interest, taxes payable, etc.

 Unearned Income
This is an account title for an income collected or received in advance and is not yet
considered as earned.

 Notes Payable (Long-term)

Same nature with Notes Payable (Short-term) but only, this requires payment for
more than one year.

 Mortgage Payable
A financial obligation of the enterprise which requires a fixed or tangible property to
be pledged as a collateral to ensure payment.

OWNER’S EQUITY OR CAPITAL

It is the residual interest in the asset of the enterprise after deducting all its liabilities. In
layman’s language, Owner’s Equity or Capital is the amount of money or value of property put
by the proprietor into the business to start with the operation which is referred to as “ Initial
Investment” or “Initial Capital”.
The owner’s capital be given a title by indicating the name, with the word capital written after
the name which is separated by a “ comma”. Thus, if the owner’s name is Ray Patrick Guangco,
the title for his capital is:

Ray Patrick Guangco, Capital or Guangco, Capital

The latter is commonly used as a format for owner’s capital account.

The owner’s withdrawal is likewise indicated by the use of the owner’s name with the word
Drawing or Personal written after the name which is separated by a comma. Thus, if the owner
is Ray Patrick Guangco who made withdrawal, the title for his drawing account is:

Ray Patrick Guangco, Personal or Ray Patrick Guangco, Drawing

It could also be:

Guangco, Drawing or Guangco, Personal

Income & Expense Summary accounts is a temporary account create at the end of the
accounting period where Income and Expenses are temporarily closed to this accounts. This
will discussed in Closing Entries.

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REVENUES
These are items arises in the course of the ordinary regular activities and is referred to by
variety of different names including sales, fees, interest, dividends, royalties and rent.

Revenue is different from gains. Gains includes income from activities and events that do not
form part of the ordinary course of the business operation. Example is gain on sale of property
and equipment.

 Definition of Revenue Account Titles

 Service income
In general, this is the accounting title used for all types of income derived from
rendering of services.

 Professional income
The account title generally used by professional for income earned from the practice
of their profession.

 Rental income
Account title for income earned on buildings, space or other properties owned and
rented out by the business as the main line of its activity.

 Interest income
Account title for income received by the business arising from an amount of money
borrowed by a customer and is usually covered by a promissory note.

EXPENSES
Expenses encompass losses as well as those expenses that arise in the course of the ordinary
regular activities including cost of goods sold, wages and depreciation.

Expense is different from losses. Losses represents decreases in assets or increases in liabilities
arising from that activities or events that are outside the ordinary course of business
operation. Examples are the loss from sale of property and equipment, loss due to theft or
pilferage.

 Definition of Expense Account Titles

 Interest Expense
An expense incurred from borrowed money.

 Rent Expense
The amount paid or incurred for use of property.

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  Repairs and Maintenance
Expenses incurred for repairing or servicing the buildings, machineries, vehicles,
equipment, etc., which are owned by the business.

 Office Supplies Expense

Expenses incurred for envelopes, clips, fasteners, etc.

 Salaries Expense
Expenses for compensation given to employees of a business.

 Uncollectible Accounts
For the anticipated loss that the business may incur arising from uncollectible
accounts.

 Depreciation Expense
The portion of the cost of property and equipment or fixed asset that has expired
based on rational and systematic allocation procedure. In other words, the part of an
equipment or property that has expired or damage that results to the decline of the
overall function of the property.

 Amortization Expense
The expired or expense portion of an intangible asset. Amortization expense is similar
with depreciation expense but with different subject matter.

 Taxes and Licenses

The amount paid for business permits, licenses and other government dues.

 Insurance Expense
Account title for the expired portion of the insurance premium paid.

 Utilities Expense
Account title for telephone, light and water bills.

 Gas & Oil

Account title for gasoline, diesel, lubricants, grease, fluids, lube oils, etc. for use by
company vehicles.

 Miscellaneous Expense
Any amount paid as expense which is not significant enough to warrant a particular
classification.

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FORMS OF BUSINESS ORGANIZATION AND THEIR CAPITAL STRUCTURES

1. Single or Sole Proprietorship

This is the simplest form of business organization where capital is owned and provided by
one person called Proprietor, who may manage the business by himself or hire another
person to do so.

Whatever happens to the business, whether it succeeds or fails, the owner has to bear it
all including any unpaid obligations that the business may have incurred. That is the
reason why the business is reported in the owner’s personal income tax return. The capital
structure of a sole proprietorship business follows:

SINGLE OR SOLE PROPRIETORSHIP

Owner’s Equity

Owner’s Equity, beginning P xx

Add: Profit xx
Total xx
Less: Drawing xx
Owner’s Equity, end xx

2. Partnership
This if formed by two (2) or more persons called “Partners” who set forth agreements
among themselves on how profits and losses are divided. Two or more persons may form
partnership for the exercise of profession. A partner may contribute personal services to
the partnership. Since partnership is merely a contract, it can be terminated anytime. One
cannot be admitted in the partnership without the consent of other partners. The capital
account is called “Partners Equity”.

PARTNERSHIP
Partner’s Equity

Partner A Partner B
Partner’s Equity, beginning P xx P xx
Add: Partners’ share in profit xx xx
Total xx xx
Less: Partner’s drawing xx xx
Partner’s Equity, end xx xx

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3. Corporation
This is the biggest and the most complicated form of business organization. This is
organized by at least 5 but not more than 15 natural persons called Incorporators and the
corporate charter that is being registered with the Securities and Exchange Commission is
called Articles of Incorporation. Its capital is called Share Capital which is divided into units
called shares and each share has a designated value called Par Value. There are (2) classes
of share capital; Ordinary and Preference Share. Owners of the shares of stock are called
Shareholders. Their ownership is evidence by “Share Certificate”. Shares of stocks can be
transferred without dissolving the corporation to exist so it enjoys unlimited life. Although
the maximum number of year that corporations to exist is 50 years, it can extend its life by
amending the “Articles of Incorporation”. This is the reason why there are corporations
that existed for more than 100 years. As there are hundreds if not thousands of
shareholders in a corporate form of business organization, the capital account is called
Shareholders’ Equity.

The capital structure of a corporate business follows:

CORPORATION
Shareholder’s Equity

Contributed Capital:
Share Cpaital
Ordinary share P xx
Add: Retained Earnings xx
Shareholder’s Equity, End xx

This report is to be supported with Statement of Retained Earnings.

Retained Earnings, beginning P xx

Add: Profit for the year xx
Total xx
Less: Dividends declared and paid xx
Retained earnings, end xx

Acctg 1 Advanced Accounting Page 20 of 28

NATURE OF BUSINESS

They are three common nature of businesses and they are as follows:

1. Service concern
The business derived its income from services rendered to clients, in the case of
professional services like that of Accountants, Lawyers, Doctors, Dentists, etc. or to
customers, in the case of non-professional services, like that of a Laundry Shop, Car Repair
Shop, Janitorial Servicing, etc.

2. Merchandising
The business is engaged in buying goods or commodities or any form of finished
products and sells these at a profit. It might be at a retail or wholesale basis. Grocery
stores are typical examples of this nature of business.

3. Manufacturing
The business is engaged in buying of raw materials and supplies to be processed or
manufactured, converting them into finished products for sale at a profit, like that of
furniture shop, a manufacturer of car, and a home appliances and the like.

Acctg 1 Advanced Accounting Page 21 of 28

 ASSESSMENT #1: TRUE OR FALSE
Instruction: Write T if the statement is correct and F if incorrect.

1. In the Philippines, we used peso as common financial denominator.

2. The “dual effect” of transactions is the determination of value received and the value
partied with.

3. The separation of the owner and his business is only an accounting assumption which is
not true in real situation.

4. Revenues and expenses are recognized only when they are earned and incurred in the
same year.

5. Adequate disclosure principle required that financial statements should be free from
material misstatement.

6. From accounting perspective, the business is considered to have a distinct personality

form the owner.

7. Profit of the business cannot be measured when the resources of the owner of the
business are mixed up.

8. Financial statements are the means by which the information accumulated and processes
in financial accounting are periodically communicated.

9. The financial report should be submitted on time, so as not to defeat the purpose why it is
prepared.
s

10. The statement of Financial Position shows the Assets, Liabilities and Owners’ Equity while
the Statement of Comprehensive Income shows the revenues and expenses.

11. When fiscal year is chosen for financial reporting, if the period starts on July 1, 2020, it will
end on June 30, 2021.

12. Land is not subject to depreciation because it is expected to be useful for an indefinite
period of time.

13. One disadvantage of a proprietorship is when the business incurs losses, he has to bear it
all.

14. Partnership business is always formed by two (2) persons called “Partners”.

15. Owners of the shares of stocks are called Shareholders.

Acctg 1 Advanced Accounting Page 22 of 28

 ASSESSMENT #2: IDENTIFICATION OF NATURE OF BUSINESS
Instruction: Classify as to what type of business activities they do belong. Choose
among service, merchandising and manufacturing.

1. Vegetable stall ___________________________________________

2. Beauty parlor ___________________________________________

3. Bag factory ___________________________________________

4. Bookstore ___________________________________________
5. Cigarette factory ___________________________________________

6. Bus company ___________________________________________

7. Airline business ___________________________________________
8. Hotel industry ___________________________________________
9. Toyota car dealers ___________________________________________

10. Isuzu car manufacturers ___________________________________________

11. Shopping centers ___________________________________________
12. Internet café ___________________________________________

13. Drugstores ___________________________________________

14. Bakeshop ___________________________________________

15. Bank institutions ___________________________________________

Acctg 1 Advanced Accounting Page 23 of 28

 ASSESSMENT #3.1: DETERMINATION OF UNKNOWN ACCOUNTING ELEMENTS
Instruction: Compute the missing information.

To answer, use the accounting equation, Assets = Liabilities + Owner’s Capital

Case 1 Case 2 Case 3 Case 4 Case 5

Assets ____________ P250,000 P380,000 ____________ P510,000
Liabilities 180,000 ____________ P120,000 P150,000 ____________
Owner’s Equity P140,000 P175,000 ____________ P400,000 P0

To answer, use the formula in computing profit or loss.

Case 1 Case 2 Case 3 Case 4 Case 5

Revenue P100,000 P190,000 ____________ P120,000 P95,000
Expense 60,000 ____________ P80,000 ____________ ____________
Profit (Loss) ____________ P110,000 (P20,000) P30,000 P0

ASSESSMENT #3.2: DETERMINATION OF UNKNOWN ACCOUNTING ELEMENTS

Instruction: Compute the missing information. SHOW YOUR SOLUTION.

Case 1 Accounts payable P 60,000

Accrued expenses 15,000
Unearned income 10,000
E. Rallos, capital 402,000
How much is assets? __________

Case 2 Cash in bank P340,000

Accounts receivable 100,000
Estimated uncollectible accounts (3,000)
Supplies inventory 30,000
Prepaid expenses 20,000
E. Rallos, capital 402,000
How much is liability? _________

Acctg 1 Advanced Accounting Page 24 of 28

Case 3 Cash in bank P340,000
Accounts receivable 100,000
Estimated uncollectible accounts (3,000)
Supplies inventory 30,000
Prepaid expenses 20,000
Accounts payable 60,000
Accrued expenses 15,000
How much is owner’s equity? _________

Case 4 Unearned income 10,000

Commission income 75,000
Utilities expense 9,000
Interest income 15,000
Accrued income 20,000
Miscellaneous income 5,000
How much is the total revenue? _________

Case 5 Estimated uncollectible accounts P 6,000

Employees’ salaries, wages and benefits 145,000
Uncollectible accounts 15,000
Professional income 150,000
Depreciation expense 8,000
Accrued expense 10,000
Repairs and Maintenance 9,000
How much is the loss from operation? _________

Acctg 1 Advanced Accounting Page 25 of 28

 NOTES

Acctg 1 Advanced Accounting Page 26 of 28

REFERENCE:

 Lopez, Rafael Jr. M. (2018-2019 Revised Edition) Bookkeeping, MS LOPEZ Printing &
Publishing, Davao City, Philippines

ADDITIONAL REFERENCES:

 Ballada, Susan & Ballada, Win (2019) Accounting Fundamentals, DomDane Publishers &
Made Easy Books, Sampaloc, Manila, Philippines

 Millan, Zeus Vernon B. (2018) Financial Accounting and Reporting, Bandolin Enterprises,
Baguio City, Philippines

 Millan, Zeus Vernon B. (2019) Conceptual Framework and Accounting Standards, Bandolin
Enterprises, Baguio City, Philippines

 Valix, Peralta, Valix (2019) Conceptual Framework and Accounting Standards, GIC
Enterprises, Claro M. Recto, Manila, Philippines

 PICPA Metro Manila, PFRS compilation

 Lopez, Rafael Jr. M. (2018-2019) Financial Accounting and Reporting, MS LOPEZ Printing
& Publishing, Davao City, Philippines

Acctg 1 Advanced Accounting Page 27 of 28

 I Will Persist Until I Succeed
by Og Mandino

I was not delivered unto this World in defeat, nor does failure course in my veins. I will hear
not those who weep and complain, for their disease is contagious. The slaughterhouse of
failure is not my destiny.

The prizes of life are at the end of each journey, not near the beginning; and it is not given to
me to know how many steps are necessary in order to reach my goal. Failure I may still
encounter at the thousandth step, yet success hides behind the next bend in the road. Never
will I know how close it lies unless I turn the corner.

I will be likened to the rain drop which washes away the mountain, the ant who devours a
tiger, the star which brightens the earth, the slave who builds a pyramid. I will build my castle
one brick at a time for I know that small attempts, repeated, will complete any undertaking. I
will persist until I succeed.

I will never consider defeat and I will remove from my vocabulary such words and phrases as
quit, cannot, unable, impossible, out of the question, improbable, failure, unworkable,
hopeless, and retreat. I will avoid despair but if this disease of the mind should infect me then I
will work on in despair. I will toil and I will endure.

I will remember, the ancient law of averages and I will bend it to my good. Each frown I meet
only prepares me for the smile to come. Each misfortune I encounter I will carry in it the seed
of tomorrow's good luck. I must have the night to appreciate the day. I must fail often to
succeed only once. I will persist until I succeed.

Never will I allow any day to end with a failure. Thus I will plant the seed of tomorrow's success
and gain an insurmountable advance over those who cease their labor at a prescribed time.
When others cease their struggle, then mine will begin, and my harvest will be full.

Nor will I allow yesterday's success to lull me into today's complacency, for this is the greatest
foundation of failure. I will forget the happenings of the day that is gone, whether they were
good or bad, and greet the new sun with confidence that this will be the best day of my life.

So long as there is breath in me, that long will I persist. For I know one of the principles of
success - if I persist long enough I will win.

I will persist! I will win!

Acctg 1 Advanced Accounting Page 28 of 28