FUNDAMENTALS OF

ACCOUNTANCY,
BUSINESS AND
MANAGEMENT 2
Crisly Mae L.Villarin
FABM 2 Teacher
WHAT IS ACCOUNTANCY?

It is the practice of It provides feedback to

recording, classifying, management regarding
and reporting on the financial results
business transactions and status of an
for a business. organization.
WHAT IS BUSINESS?

It is the activity of
making one's living or
making money by The practice of making
producing or buying one's living by engaging
and selling products in commerce.
(such as goods and
services).
WHAT IS MANAGEMENT?

It is the administration of The organization and

an organization, whether coordination of the
it is a business, a not-for- activities of a business in
profit organization, or order to achieve defined
government body. objectives.
 LISTA LISTA LANG! (REVIEW)
1. Get a ¼ sheet of paper.
2. List all the things that you own and indicate
its prices.
3. List all the things that you owe from your
family, friends and classmates. (Indicate its
prices too)
4. Compare the amount of all the things that
you own and owe.
 STATEMENT OF FINANCIAL POSITION
•Define the STATEMENT OF
FINANCIAL POSITION.
•Explain the objective of SFP.
•Identify and explain the elements of SFP.
STATEMENT OF FINANCIAL POSITION
• Classify the elements of SFP into current and
non-current items.
• Prepare the SFP of a single proprietorship.
• Prepare SFP using the report form and the
account form with proper classification of
items as current and non-current.
 WHAT IS A STATEMENT OF FINANCIAL
POSITION?
• It is the summary of the financial balances of an individual
or an organization.
• It is described as the “SNAPSHOT” of a company’s
financial condition.
• It reports the entity’s assets, liabilities and difference in
their totals as of the final moment of an accounting
period.
• It is also known as the BALANCE SHEET.
OBJECTIVES OF HAVING AN SFP:
• to provide information about the results of
operations, financial position, and cash flows of an
organization. This information is used by the readers
of financial statements to make decisions regarding
the allocation of resources.

• The purpose of the balance sheet is to inform the reader

about the current status of the business as of the date
listed on the balance sheet. This information is used to
estimate the liquidity, funding, and debt position of an
entity, and is the basis for a number of liquidity ratios.
ASSET- something that is owned by a person, company, etc.
(Merriam Webster)
• Current Assets- assets that can be realized (collected, sold,
used up) one year after year-end date.
Ex: Cash, Accounts Receivable, Accrued income, Inventory,
Notes receivable,Accounts receivable, prepaid expenses etc.

• Noncurrent Assets- assets that cannot be realized (collected,

sold, used up) one year after year-end date.
Ex: Intangible assets, Property, Plant and Equipment (equipment,
furniture, building, land), Long Term investments, Intangible assets
etc.
• ACCOUNTS RECEIVABLE- represents money owed by entities
to the firm on the sale of products or services on credit.

• ACCRUED INCOME- Accrued income refers to amounts that

have been earned, but the amounts have not yet been received.
For example, a corporation may have its excess cash invested in
an investment security that pays interest every six months.
• It is income earned during a particular accounting period but
not received until the end of that period.

• INVENTORY-A current asset whose ending balance should

report the cost of a merchandiser's products awaiting to be
sold.
• NOTES RECEIVABLE - Notes receivable is
an asset of a company, bank or other organization that
holds a written promissory note from another party.
(The other party will have a note payable.)

• PREPAID EXPENSES- are future expenses that have

been paid in advance.You can think of prepaid
expenses as costs that have been paid but have not yet
been used up or have not yet expired.
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.
Current Liabilities- Liabilities that fall due (paid,
recognized as revenue) within one year after yearend date.
Examples include Notes Payable, Accounts Payable, Accrued
Expenses (example: Utilities Payable), Unearned Income, etc.
Noncurrent Liabilities – Liabilities that do not fall due
(paid, recognized as revenue) within one year after year-end
date. Examples include Loans Payable, Mortgage Payable, etc.
• NOTES PAYABLE- an account in which a borrower's written
promise to pay a lender is recorded. Generally, the written note
specifies the principal amount, the date due, and the interest to be
paid.
- For most companies, if the note will be due within one year, the
borrower will classify the note payable as a current liability. If the note
is due after one year, the note payable will be reported as a long-term
or noncurrent liability.

ACCOUNTS PAYABLE- are moneys that are owed to outside

individuals and other businesses for goods and services provided.
Accounts payable are usually due in 30-60 days, and companies are
usually not charged interest on the balance sheet if paid on time.
UNEARNED INCOME- Unearned income or deferred income is a
receipt of money before it has been earned.
Example: A company informs a new customer that a $5,000 deposit is
required before it will begin work on the customer's special order. The
customer gives the company $5,000 on December 28 and the company
will begin work on the special order on January 3. On December 28 the
company will debit Cash for $5,000 and will credit a liability account,
such as Customer Deposits (or Unearned Revenues or Deferred
Revenues) for $5,000. No revenue is reported in December for this
special order since the company did not perform any work in December.
When the special order begins and is completed in January, the company
will debit the liability account for $5,000 and will credit a revenue
account.
• ACCRUED EXPENSES- An accrued
expense is an expense that has been incurred,
but for which there is not yet any expenditure
documentation. In place of the expenditure
documentation, a journal entry is created to
record an accrued expense, as well as an
offsetting liability (which is usually classified as a
current liability in the balance sheet).
LOANS PAYABLE- A loan is an arrangement under which the
owner of property (usually cash) allows another party the use of the
property in exchange for an interest payment and the return of the
property at the end of the lending arrangement. The loan is
documented in promissory note. If any portion of the loan is still
payable as of the date of a company's balance sheet, the remaining
balance on the loan is called a loan payable.

MORTGAGE PAYABLE- A mortgage payable is the liability of a

property owner to pay a loan that is secured by property. From
the perspective of the borrower, the mortgage is considered a
long-term liability.
Equity- is the sum of the assets or investments of
a business after liabilities have been subtracted.

Owner’s Equity- is defined as the proportion of

the total value of a company's assets that can be
claimed by its the owners (sole proprietorship or
partnership.
NOTE:

Current assets and current liabilities are also

called short term assets and short term
liabilities.
Noncurrent assets and noncurrent liabilities
are also called long term assets and long term
liabilities.
 BALANCE SHEET
ASSETS LIABILITIES
EQUITY

CURRENT ASSETS

• Cash CURENT NONCURRENT

• Accounts Receivable LIABILITIES
• Accrued income NONCURRENT LIABILITIES
• Notes Payable • Loans Payable • COMPANY’S
• Inventory ASSETS
• Notes receivable • Accounts • Mortgage EQUITY
• Intangible assets
• Accounts receivable Payable Payable • OWNER’S
• Property, Plant and
• prepaid expenses • Accrued • Long-term EQUITY
etc. Equipment
Expenses debts
• Long Term
• Unearned etc.
investments
Income,
• Intangible assets
E\Etc.
etc.
 DO YOU REMEMBER?

Accounting Equation- Assets= Liabilities + Equity

Assets- Cash,Accounts Receivable
Liabilities- Accounts Payable, Loan Payable
Equity- Capital
Single-Sole proprietorship- AS LONG AS THERE IS
ONLY ONE OWNER
 REPORT FORM
• An SFP that shows asset accounts first and then liabilities and owner’s equity accounts
after. (Haddock, Prince, and Farina, 2012).
EXAMPLE:
 ACCOUNT FORM
- A form of the SFP that shows assets on the left
side and liabilities and owner’s equity on the right
side just like the debit and credit balance of an
account. (Haddock, Price, and Farina, 2012).

Emphasize that the two are only formats and will yield
the same amount of total assets, liabilities and equity.
 Emphasize that assets should always be equal to liabilities
and equity.
 STATEMENT OF COMPREHENSIVE
INCOME
OBJECTIVES:

• identify the elements of the SCI and describe each of

these items for a service business and a merchandising
business
• prepare an SCI for a service business using the single-
step approach
• prepare an SCI for a merchandising business using the
multi-step approach
 WHAT IS AN SCI (STATEMENT OF COMPREHENSIVE
INCOME ?
Also known as the income statement. Contains
the results of the company’s operations for a
specific period of time which is called net income
if it is a net positive result while a net loss if it is a
net negative result. This can be prepared for a
month, a quarter or a year. (Haddock, Price, &
Farina, 2012)
TEMPORARY ACCOUNTS – Also known as
nominal accounts are the accounts found under the
SCI. They are called such because at the end of the
accounting period, balances under these accounts are
transferred to the capital account, thus having only
temporary amounts and resulting to zero beginning
balances at the beginning of the following year.
(Haddock, Price, & Farina, 2012) Examples of
temporary accounts include revenues, sales, utilities
expense, supplies expense, salaries expense,
depreciation expense, interest expense among others.
2 FORMATS OF STATEMENT OF COMPREHENSIVE
INCOME

SINGLE- STEP MULTI-STEP

APPROACH APPROACH
WHERE DO WE USE SCI FORMATS?

SERVICE COMPANY
AND
MERCHANDISING
COMPANY
The main difference of the Statements of the
two types of business lies on how they
generate their revenue. A service
company provides services in order to
generate revenue and the main cost
associated with their service is the cost
of labor which is presented under the
account Salaries Expense.
Merchandising company sells
goods to customers and the main
cost associated with the activity is
the cost of the merchandise
which is presented under the
line item Cost of Goods Sold.
• In presenting these items on the Statement of
Comprehensive Income, a service company will
separate all revenues and expenses (as seen in the
single-step format) while a merchandising company
will present total sales and cost of goods sold on
the first part of the statement which will net to
the company’s gross profit before presenting the
other expenses which are classified as either
administrative expenses or selling expenses (as
seen in the multi-step format).
 SINGLE STEP APPROACH

Single-step – called single-step because all

revenues are listed down in one section while all
expenses are listed in another. Net income is
computed using a “single-step” which is Total
Revenues minus Total Expenses. (Haddock, Price,
& Farina, 2012)
 MULTI-STEP APPROACH

Multi-step – called multi-step because there

are several steps needed in order to arrive at
the company’s net income. (Haddock, Price, &
Farina, 2012)
 PARTS of a MULTI-STEP SCI
1. Sales. This is the total amount of revenue
that the company was able to generate from
selling products.
2. Contra revenue – called contra because it
is on the opposite side of the sales account. The
sales account is on the credit side while the
reductions to sales accounts are on the debit
side. This is “contrary” to the normal balance of
the sales or revenue accounts. (Haddock, Price,
& Farina, 2012)
2.1 Sales returns – This account is debited in order to record
returns of customers or allowances for such returns.(Haddock,
Price, & Farina, 2012) Sales returns occur when customers
return their products for reasons such as but not limited to
defects or change of preference.

2.2 Sales discount – This is where discounts given to

customers who pay early are recorded. (Haddock, Price, &
Farina, 2012) Also known as cash discount. This is different from
trade discounts which are given when customers buy in bulk.
Sales discount is awarded to customers who pay earlier or
before the deadline.
“Sales less – (Sales returns + Sales discount) = Net Sales”
3. Cost of Goods Sold – This account represents the actual
cost of merchandise that the company was able to sell during
the year. (Haddock, Price, & Farina, 2012)
3.1 Beginning inventory – This is the amount of inventory at
the beginning of the accounting period. This is also the amount
of ending inventory from the previous period.
3.2 Net Cost of Purchases = Purchases + Freight In
3.3 Net Purchases = Purchases – (Purchase discount and
purchase returns)
Purchases – amount of goods bought during the current
accounting period.
Contra Purchases –An account that is credited being
“contrary” to the normal balance of Purchases account.
Purchase discount – Account used to record early payments
by the company to the suppliers of merchandise. (Haddock,
Price, & Farina, 2012)
Purchase returns – Account used to record merchandise
returned by the company to their suppliers.
Freight In – This account is used to record transportation
costs of merchandise purchased by the company. (Haddock,
Price, & Farina, 2012) Called freight in because this is recorded
when goods are transported into the company.
Beginning inventory + Net cost of Purchases =
Cost of Goods Available for Sale.

Ending inventory – amount of inventory presented in

the Statement of Financial Position. Total cost of inventory
unsold at the end of the accounting cycle.

Sales - Cost of Goods Sold =Gross Profit

4. General and Administrative Expenses –These expenses are not
directly related to the merchandising function of the company but are
necessary for the business to operate effectively. (Haddock, Price, &
Farina, 2012)

5. Selling Expenses – These expenses are those that are directly

related to the main purpose of a merchandising business: the sale and
delivery of merchandise. This does not include cost of goods sold and
contra revenue accounts. (Haddock, Price, & Farina, 2012)
 In SFP – “AS OF”

In SCI- “FOR THE”

the amounts in the SCI are temporary
meaning that each period (month,
quarter, year) amounts go back to
being zero to start all over.
1.The teacher can ask learners to group themselves into groups
of 5.
2. Each group can be asked to identify a business establishment
in their area (example: sari-sari store, canteen, laundry shop)
3. The other groups should be able to identify the different
accounts that the businesses can use in preparing their
Statement of Comprehensive Income
4. Teacher should point out whether the learners answers are
correct or not (example: a laundry shop does not have sales,
sales returns and discounts because it is a service company)
5. Teacher can provide hypothetical amounts and ask learners to
actually prepare the statements of their chosen companies
 ACTIVITY
Activity on Classification of accounts
1. Materials needed: Sheets of Paper (teacher can decide the number) Scissors (optional)
2. Learners should be grouped into 3 groups
3. 1st group is given a scissor and sheets of paper
4. Ask the group to cut the sheets of paper to produce 5 paper boats (can vary) with a
hypothetical cost of 5 pesos each (can be prepared beforehand – teacher can ask the learners
to prepare this at home)
5. The other 2 are given sheets of paper and transform the sheets into play money (can be
prepared beforehand – teacher can ask the learners to prepare this at home)
6. The groups with the paper boats will “sell” them to the other group with the play money at
an amount that the group will decide. In turn, the group who bought from the boats from the
first group will sell these boats to group 3. Only one member will sell the boats. Others can
do admin tasks (if any).
7. After the sale, the 2nd group will distribute the cash to each member as salary. 8. The
discussion will focus on the 2nd group. Teacher can ask them how they classify the cost of the
boats, the salary of the one selling the boats and the salary of those doing admin tasks.
Activity on Understanding Cost of Goods Sold
1. Materials needed: Pencils
2. 2. Teacher brings 10 pencils to class and ask 9 learners to hold one each. The last pencil is
held by the teacher.
3. Teacher asks the learners “As of now, how many pencils do I have?” Learners answer, “One”
4. Teacher asks one of the learners to give his/her pencil to him/her
5. Teacher asks the learners again “As of now, how many pencils do I have?” Learners answer,
“Two”
6. Repeat steps 4 and 5 to get all pencils
7. Teacher gives 5 pencils to one learner and repeats step 5.
8. Teacher now relates the first pencil to beginning inventory, step 4 as purchases, total pencils as
cost of goods available for sale, remaining pencils as ending inventory and the pencils given to
cost of goods sold