FUNDAMENTALS

OF ABM 2
GERLIE D. BORNEA
Master Teacher 1
 DIAGNOSTIC TEST (1/2 LW)

1. Another name for the balance sheet is

(Statement Of Operation Statement Of Financial Position)
2. The balance sheet heading will specify
( Period Of Time b. Point In Time)
3. Which of the following is a category or element of the balance sheet?
(Expenses Gains Liabilities Losses)
4. Which of the following is an asset account?
(Accounts Payable, Prepaid Insurance , Unearned Revenue)
5. Which of the following is a contra account?
(Accumulated Depreciation , Mary Smith, Capital)
 DIAGNOSTIC TEST (1/2 LW)

6. What is the normal balance for an asset account? A. Debit b. Credit

7. What is the normal balance for liability accounts? Debit Credit
8. What is the normal balance for stockholders' equity and owner's equity accounts? Debit
Credit
9. What is the normal balance for contra asset accounts? DebiT Credit
10. Client Jay pays ABC Co. $1,000 in December for ABC to perform services for Jay in 45 days.
ABC uses the accrual basis of accounting. In December ABC will debit Cash for $1,000. What
will be the other account involved in the December accounting entry prepared by ABC (and
what type of account is it)?
Accounts Receivable (asset) Prepaid Services (asset)
Service Revenues (revenue) Unearned Revenues (liability)
 DIAGNOSTIC TEST (1/2 LW)
 
11. ABC Co. performed services for Client Kay in December and billed Kay $4,000 with terms of net 30
days. ABC follows the accrual basis of accounting. In January ABC received the $4,000 from Kay. In
January ABC will debit Cash, since cash was received. What account should ABC credit in the January
entry? Accounts Receivable Service Revenue Owner's Equity

12. ABC Co. follows the accrual basis of accounting and performs a service on account (on credit) in
December. The service was billed at the agreed upon amount of $3,500. ABC Co. debited Accounts
Receivable for $3,500 and credited Service Revenue for $3,500. The effect of this entry on the balance
sheet of ABC is to increase assets by $3,500 and to Decrease Assets By $3,500
Increase Owner's (Stockholders') Equity By $3,500
 DIAGNOSTIC TEST (1/2 LW)

13. Which of the following would not be a current asset?

Accounts Receivable Land Prepaid Insurance Supplies
14. Which of the following would normally be a current liability?
Note Payable Due In Two Years Unearned Revenue
15. When an owner draws $5,000 from a sole proprietorship or when a corporation declares and
pays a $5,000 dividend, the asset Cash decreases by $5,000. What is the other effect on the
balance sheet?
Owner's/Stockholders' Equity Decreases None
DIAGNOSTIC TEST (1/2 LW)
The learners shall be able to…
1.identify the elements of the SFP and describe each of
them.
2.classify the elements of the SFP into current and non
current items.
3.prepare the SFP of a single proprietorship. 
4.prepare an SFP using the report form and the account
form with proper classification of items as current and
noncurrent.
 ACCOUNTING
Accounting can be defined as an information system that
provides reports to users about the economic activities and
condition of a business.

• Financial accountants follow generally accepted accounting

principles (GAAP) in preparing financial statements.
 FINANCIAL STATEMENTS

• Statement of Financial Position

• Income Statement/Statement of Comprehensive Income
• Statement of Changes in Equity
• Statement of Cash Flows
• Notes comprising a significant accounting policies and
other explanation Information
ELEMENTS OF SFP
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources
owned by a Rights or claims to the assets
business
•Assets are things that the company owns. They are
 
the resources of the company that have been acquired
through transactions, and have future economic value
that can be measured and expressed in dollars. Assets
also include costs paid in advance that have not yet 
expired, such as prepaid advertising, prepaid insurance,
prepaid legal fees, and prepaid rent. 
Take note!
Usually asset
accounts will
have debit balances
.
Contra assets are asset accounts with credit balances. (A
credit balance in an asset account is contrary—or contra
—to an asset account's usual debit balance.)
Examples of contra asset accounts include:
• Allowance for Doubtful Accounts
• Accumulated Depreciation-Land Improvements
• Accumulated Depreciation-Buildings
• Accumulated Depreciation-Equipment
• Accumulated Depletion
FOLLOW MY EXAMPLE 1-2

Accounting Equation

a. Assets = Liabilities + Owner’s Equity

$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000

Copyright © 2014 by Nelson Education Ltd. 24

Classifications Of Assets On The Balance Sheet
Accountants usually prepare classified balance sheets. "Classified" means that the
balance sheet accounts are presented in distinct groupings, categories, or
classifications. The asset classifications and their order of appearance on the
balance sheet are:

§Current Assets
§Investments
§Property, Plant, and Equipment
§Intangible Assets
§Other Assets
current assets definition
Cash and other resources that are expected to turn to cash or to be
used up within one year of the balance sheet date. (If a company's
operating cycle is longer than one year, an item is a current asset if it will
turn to cash or be used up within the operating cycle.) Current assets
are presented in the order of liquidity, i.e., cash, temporary investments,
accounts receivable, inventory, supplies, prepaid insurance.

investments definition
The long term asset category of a classified balance sheet which
appears immediately after the current assets. Listed in this category
would be a bond sinking fund, funds held for construction, the cash
surrender value of a life insurance policy owned by the company, and
long term investments in stocks and bonds.
property, plant, and equipment definition
A major classification on the balance sheet. It is the second long
term asset section after current assets. Included are land, buildings,
leasehold improvements, equipment, furniture, fixtures, delivery
trucks, automobiles, etc. that are owned by the company

intangible assets definition

Some examples of intangible assets include copyrights, patents, goodwill, trade
names, trademarks, mail lists, etc. These assets will be reported at cost (or lower) on
the balance sheet after property, plant and equipment. Trade names and trademarks
that were developed by a company (as opposed to buying them from another
company at a significant cost) may not appear on the balance sheet, even though they
might be a company's most valuable asset.
Liabilities
Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and
they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be
thought of as a source of the company's assets. They can also be thought of as a claim against a
company's assets. For example, a company's balance sheet reports assets of $100,000 and Accounts
Payable of $40,000 and owner's equity of $60,000. The source of the company's assets are
creditors/suppliers for $40,000 and the owners for $60,000. The creditors/suppliers have a claim against
the company's assets and the owner can claim what remains after the Accounts Payable have been
paid.

Liabilities also include amounts received in advance for future services.

Since the amount received (recorded as the asset Cash) has not yet been
earned, the company defers the reporting of revenues and instead reports a
liability such as Unearned Revenues or Customer Deposits. (For a further
discussion on deferred revenues/prepayments see the 
Explanation of Adjusting Entries.)
Liability accounts will normally have credit balances.
Contra liabilities are liability accounts with debit balances. (A debit
balance in a liability account is contrary—or contra—to a liability
account's usual credit balance.) Examples of contra liability accounts
include:
•Discount on Notes Payable
•Discount on Bonds Payable

Classifications Of Liabilities On The Balance Sheet

Liability and contra liability accounts are usually classified (put into distinct
groupings, categories, or classifications) on the balance sheet. The liability
classifications and their order of appearance on the balance sheet are:
•Current Liabilities
•Long Term Liabilities
Owner's (Stockholders') Equity
Owner's Equity—along with liabilities—can be thought of as a source of the company's
assets. Owner's equity is sometimes referred to as the book value of the company
, because owner's equity is equal to the reported asset amounts minus the reported
liability amounts.

Owner's equity may also be referred to as the residual of assets minus liabilities. These
references make sense if you think of the basic accounting equation:

Assets = Liabilities + Owner's Equity

and just rearrange the terms:

Owner's Equity = Assets - Liabilities

• "Owner's Equity" are the words used on the balance sheet when the company is
a sole proprietorship. If the company is a corporation, the words Stockholders'
Equity are used instead of Owner's Equity. An example of an owner's equity
account is Mary Smith, Capital (where Mary Smith is the owner of the sole
proprietorship). Examples of stockholders' equity accounts include:

§Common Stock
§Preferred Stock
§Paid-in Capital in Excess of Par Value
§Paid-in Capital from Treasury Stock
§Retained Earnings
§Accumulated Other Comprehensive Income
• Contra owner's equity accounts are a category of owner
equity accounts with debit balances. (A debit balance in
an owner's equity account is contrary—or contra—to
an owner's equity account's usual credit balance.) An
example of a contra owner's equity account is 
Mary Smith, Drawing (where Mary Smith is the owner
of the sole proprietorship). An example of a contra
stockholders' equity account is Treasury Stock
An outline of a balance sheet using the balance sheet classifications is shown here:
 Account Form

The account form of a balance sheet lists the

assets on the left and the liabilities and owner’s
equity on the right—similar to the format of the
accounting equation.

Copyright © 2014 by Nelson Education Ltd. 40

Account Format Balance Sheet-
Sole Proprietorship
 Account Format
Balance Sheet-
MERCHANDISING
Account Format Balance
Sheet- Manufacturing
Account Format Balance
Sheet- Corporation
 Interrelationships Among Financial Statements

• The income statement and the statement of

owner’s equity are interrelated.

Net income or net loss appears on

both statements.

Copyright © 2014 by Nelson Education Ltd. 46

 Interrelationships Among Financial Statements

• The statement of owner’s equity and the balance

sheet are interrelated.

The owner’s capital at the end of the

period on the statement of owner’s
equity also appears on the balance
sheet as owner’s capital.
Copyright © 2014 by Nelson Education Ltd. 47
 Interrelationships Among Financial Statements

• The balance sheet and the cash flow statement

are interrelated.

The cash reported on the balance

sheet is also reported as the end-of-
period cash on the cash flow
statement.

Copyright © 2014 by Nelson Education Ltd. 48

 The End

Copyright © 2014 by Nelson Education Ltd. 53