ASSETS, LIABILITIES,

CAPITAL, REVENUE, AND

EXPENSES OF THE
FINANCIAL STATEMENTS
January 25, 2021
The Financial Statements
Types of Financial Statements
 
The key product or the end product of the accounting process is a set of documents called the financial statements
comprised of the following:
1. STATEMENT OF FINANCIAL POSITION or BALANCE SHEET – shows the financial condition/position of a business as of
a given period. It consists of the assets, liabilities, and capital.
2. INCOME STATEMENT or STATEMENT OF COMPREHENSIVE INCOME or STATEMENT OF FINANCIAL PERFORMANCE – It
shows the result of operations for a given period. It consists of the revenue, cost, and expenses. The statement of
comprehensive income consists of the revenue, cost and expenses and also contains components of other
comprehensive income (including reclassification adjustments) as follows: changes in revaluation surplus, gains and
losses on benefit plans, gains and losses from investments in equity instruments, finance costs, share of associates,
and joint ventures under the equity method, tax expense, gain or loss from discontinued operations, gain or loss on
realization of assets from discontinued operations, gain and loss from foreign operations, and all other operating and
financial events affecting the owner’s equity in the business. International Accounting Standards 1 defines Total
Comprehensive Income as the “change in equity during a period resulting from transactions and other events, other
than those changes resulting from transactions with owners in their capacity as owners.” For purposes of lessons in
single proprietorship, the activities will consist of the usual revenue, cost, expense, and transactions with owners in
their capacity as owners. Hence, the Income Statement will be used to show the results of operations since there is
no activity beyond regular profit and loss items.
3. STATEMENT OF CHANGES IN OWNER’S EQUITY or STATEMENT OF
OWNER’S EQUITY – shows the changes in the capital or owner’s
equity as a result of additional investment or withdrawals by the
owner, plus minus the net income or net loss for the year.

4. STATEMENT OF CASH FLOWS – summarizes the cash receipts and

cash disbursement for the accounting period. It summarizes the cash
activities of the business by classifying cash inflows (receipts) and
cash outflows (payments) into operating, investing, and financing
activities. It shows the net increase or decrease of a cash given period
and the cash balance at the end of the period. This allows
management to assess the business’ ability to generate cash and
project future cash flows.
 STATEMENT OF
FINANCIAL
POSITION or
BALANCE SHEET
 INCOME STATEMENT or
STATEMENT OF
COMPREHENSIVE INCOME or
STATEMENT OF FINANCIAL
PERFORMANCE
 STATEMENT OF
CHANGES IN OWNER’S
EQUITY or STATEMENT
OF OWNER’S EQUITY
STATEMENT OF
CASH FLOWS
Typical Account Titles Used
 
Balance Sheet accounts, namely, assets, liabilities, and owner’s equity, are
classified as real and permanent accounts.

ASSETS – economic resources owned by the business expected for future

gain. They are property and rights of value owned by the business.
LIABILITIES – include debts, obligations to pay, and claims of the creditors
on the assets of the business.
OWNER’S EQUITY or CAPITAL – includes the interest of the owners on the
business; claims of the owners on the assets of the business; and the
investment of the owner plus or minus the results of operations. Owner’s
Equity or capital comes from two main sources – investment of owners
and earnings of the business.
THE FUNDAMENTAL ACCOUNTING EQUATION
 
ASSETS = LIABILITIES + OWNER’S EQUITY
 
Illustration
 
1. Given liabilities of Php 50,000 and the owner’s equity of Php 150,000, find the value of assets.
Solution:
Assets = Liabilities + Owner’s Equity
= 50,000 + 150,000
= 200,000
2. Given assets of Php 180,000 and the owner’s equity of Php 110,000, find the liabilities.
Solution:
Liabilities = Assets – Owner’s Equity
= 180,000 – 110,000
= 70,000
3. Given assets of Php 250,000 and liabilities of Php 90,000, find the owner’s equity.
Solution:
Owner’s Equity = Assets – Liabilities
= 250,000 – 90,000
= 160,000
Fill in the table with the missing amounts.

Assets Liabilities Owner’s Equity

650,000 340,000  

  295,000 305,000

967,000   660,000

788,000 345,000  

845,000   533,000
ACTIVITY
1. If the owner’s equity is Php250,000.00 which is 40% of the total assets, how much is the
total liabilities of the business?

2. If the economic resources of a business amount to Php4,800,000.00 and its residual interest
amounts to Php2,995,000.00, what is the amount of economic obligations?

3. The economic resources of the business amount to Php3,200,000.00 and its economic
obligations amount to Php1,888,000.00, what would be its residual interest?

4. If the total owner’s equity of Ace Studio is Php960,000.00 which is ¾ of the total assets,
what would be the total liabilities of the business?

5. If the economic obligations of a business amount to Php169,000.00 and its residual interest
amounts to Php284,000.00, what would be the amount of the economic resources of the
business?
 ASSETS
 
Classification of Current Assets
 
Improvements to International Accounting Standards 1 (December 2003)
classify an asset as current asset when it is:

1. Expected to be realized in, or is intended for sale or consumption in the

entity’s normal operating cycle;
2. Held primarily for the purpose of being traded;
3. Expected to be realized within twelve months of the balance sheet date; or
4. Cash or cash equivalent unless it is restricted from being exchanged or used
to settle a liability for at least twelve months after the balance sheet date.
Examples of current assets are as follows:
 
1. Cash includes coins, currencies, checks, bank deposits, and other cash items readily available for use in
the operations of the business.
2. Cash equivalents are short-term investments that are readily convertible to known amounts of cash
which are subject to an insignificant risk to changes in value (per SFAS No. 22, revised 2000).
3. Marketable securities are stocks and bonds purchased by the enterprise and are to be held for only a
short span of time or duration. They are usually purchased when a business has excess cash.
4. Trade and other receivables include the amounts collectible from any of the following accounts:
a. Accounts receivable – amount collectible from the customer to whom sales have been made or services
have been rendered on account or credit.
b. Notes receivable – promissory note issued by the client or the customer in exchange for services or goods
received as evidence of his/her obligation to pay.
c. Interest receivable – amount of interest collectible on promissory notes received from customers and
clients.
d. Advances to employees – certain amount of money loaned to employees payable in cash or through
salary deductions.
e. Accrued income - income already earned but not yet received.
5. Inventories represent the unsold goods at the end of the accounting period. This is
applicable only to a merchandising business.
6. Prepaid Expenses include supplies bought for use in the business or services and
benefits to be received by the business in the future paid in advance.
7. Contra-Asset Accounts are accounts deducted from the related asset accounts.
a. Allowance for Bad Debts – losses due to uncollectible accounts. This is deducted
from the accounts receivable account get the net realizable value. This is in line with
the financial statements’ qualitative characteristic of conservatism wherein no profits
would be anticipated but all probable or estimable losses should be provided.
b. Accumulated Depreciation – represents the expired cost of property, plant and
equipment as a result of usage and passage of time. This is deducted from the cost of
the related asset account to get the carrying value or book value of the asset.
Classification of Non-Current Assets
 
1. Long-term Investments are assets held by an enterprise for the accretion of wealth through capital
distribution such as interests, royalties, dividends, and rentals, for capital appreciation or for other
benefits to the investing enterprise such as those obtained through trading relationships. Investments
are classified as long-term when they are intended to be held for an extended period of time (IAS No.
25)
2. Property, Plant and Equipment are tangible assets that are held by an enterprise for use in production
or supply of goods or services, or for administrative purposes. These assets are expected to be used for
more than one period (IAS No. 16). Examples of property, plant and equipment are the following:
a. Land – a piece of lot or real estate owned by the enterprise on which a building can be
constructed for business purposes.
b. Building – edifice or structure used to accommodate the office, store, or factory of a business
enterprise in the conduct of its operations.
c. Equipment – includes typewriter, air-conditioner, calculator, filing cabinet, computer, electric fan,
trucks, and cars used by the business in its office, store, or factory. Specific account titles may be
used such as office equipment, store equipment, delivery equipment, transportation equipment,
and machinery equipment.
d. Furniture and Fixtures – includes tables, chairs, carpets, curtains, lamp and lighting fixtures, and
wall decors. Specific account titles may be used such as office furniture and fixtures, and store
furniture and fixtures.
e. Intangible Assets – identifiable, non-monetary assets without physical substance held for use in
the production or supply of goods and services, for rental to others, or administrative purposes.
These include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret
processes, subscription lists, and non-competition agreements (IAS No. 38).
LIABILITIES
 
Classification of Current Liabilities
 
Improvements to International Accounting Standards 1 (December 2003) classify liability as a current liability
when:
 
1. It is expected to be settled in the entity’s normal operating cycle;
2. It is held primarily for the purpose of being traded;
3. It is due to be settled within twelve months after the balance sheet date; or
4. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months
after the balance sheet date.
Trade and Other Payables – include payables from any of the following accounts:
 
1. Accounts Payable includes debts arising from the purchase of an asset or the acquisition of services on account.
2. Notes Payable include debts arising from the purchase of an asset or the acquisition of services on account
evidenced by a promissory note.
3. Loan Payable is a liability to pay the bank or other financing institution arising from funds borrowed by the
business from these institutions payable within twelve months or shorter. (Note: If the loan is payable beyond
twelve months, then it is classified under non-current liabilities.)
4. Utilities Payable is an obligation to pay utility companies for services received from them. Examples of this are
telephone services to PLDT, electricity to Meralco, and water services to Maynilad.
5. Unearned Revenues represent obligations of the business arising from advance payments received before goods
or services are provided to the customer. This will be settled when certain goods or services are delivered or
rendered.
6. Accrued Liabilities include amounts owed to others for expenses already incurred but are not yet paid. Examples
of these are salaries payable, utilities payable, taxes payable, and interest payable.
Classification of Non-Current Liabilities
 
Non-Current liabilities are long term liabilities or obligations which are payable for a period longer than
one year. Examples of non-current liabilities are as follows:

1. Mortgage Payable is a long-term debt of the business with security or collateral in the form of real
properties. In case the business fails to pay the obligation, the creditor can foreclose or cause the
mortgaged asset to be sold and use the proceeds of the sale to settle the obligation.
2. Bonds Payable is a certificate of indebtedness under the seal of a corporation, specifying the terms of
repayment and the rate of interest to be charged.
OWNER’S EQUITY
 
Capital is an account bearing the name of the owner representing the original and additional investment of the
owner of the business increased by the amount of net income earned during the year. It is decreased by the cash
or other assets withdrawn by the owner as well as the net loss incurred during the year.
 
Drawing represents the withdrawals made by the owner of the business in cash or other assets.
 
Income Summary is a temporary account used at the end of the accounting period to close income and expense
accounts. The balance of this account shows the net income or net loss for the period before it is closed to the
capital account.
ACTIVITY
. Below are the classifications commonly found on a classified balance sheet. On
the blank provided before each number, write the classification to where it
belongs.
 
a. Current Assets
b. Property, Plant and Equipment
c. Current Liabilities
d. Non-Current Liabilities
e. Owner’s Equity
f. Not a Balance Sheet item
 
_____ 1. Land _____ 6. Supplies Used
_____ 2. Rent Expense _____ 7. Supplies on Hand
_____ 3. L, Capital _____ 8. Accounts Payable
_____ 4. Accounts Receivable _____ 9. Mortgage Payable
_____ 5. Unearned Rent _____ 10. Equipment
I. Answer the following questions. Show your computations in good form.

The following accounts are taken from the books of Mr. Dane Cruz Cleaning Services.

Cash 100,000.00 Prepaid Insurance 20,000.00

Accounts Receivable 55,000.00 Accounts Payable 175,600.00
Notes Receivable 15,000.00 Notes Payable 30,400.00
Prepaid Rent 18,000.00 Bonds Payable 10,000.00
Office Equipment 28,500.00 Mortgage Payable 100,000.00
Furniture and Fixtures 19,500.00 Service Income 30,000.00
Land 800,000.00 Utilities Expense 5,000.00 Supplies 5,040.00
Salaries and Wages 8,000.00
 
a. How much is the current assets of the company?
b. How much is the non-current assets of the company?
c. How much is the current liabilities of the company?
d. How much is the non-current liabilities of the company?
e. How much is the total assets of the company?
INCOME AND EXPENSES
 
INCOME STATEMENT
 
Income statement accounts, namely revenue and expense, are classified as nominal or temporary accounts.
 
a. Service Income includes revenues earned or generated by the business in performing services for a customer or
client. The following are different examples of income and the accounting term used to describe the income:
 Laundry services by a laundry shop (Laundry Income)
 Medical services by a doctor (Medical Fees)
 Dental services by a dentist (Dental Fees)
 Legal services by a lawyer (Legal Fees)
 Advisory services by a consultant (Consultancy Fees)
 Accounting or auditing services by a certified public accountant (Audit Fees)
a. Salaries and Wages include all payments made to employees or workers for rendering services to the company.
Examples are salaries and wages, 13th month pay, cost of living allowances, and other related benefits given to the
employees.
b. Utilities Expense is an expense related to the use of electricity, fuel, water, and telecommunication facilities.
c. Supplies Expense covers office supplies used by a business in the conduct of its daily operations.
e. Insurance Expense is the expired portion of premiums paid on insurance coverage
such as premiums paid for health or life insurance, motor vehicles, or other
properties.
f. Depreciation Expense is the annual portion of the cost of tangible assets such as
buildings, machineries, and equipment charged as expense for the year.
g. Uncollectible Accounts Expense/Doubtful Accounts Expense/ Bad Debts Expense
means the amount of receivables charged as expense for the period because they
are estimated to be doubtful of collection.
h. Interest Expense is the amount of money charged to the borrower for the use of
borrowed funds.
 
 
THE SINGLE-STEP INCOME STATEMENT
 
Presented below is the format of the income statement of a service business. Expenses are simply deducted from
the total revenue to arrive at the net income.
 
Name of the Company
Income Statement
For Period Ended xxx
 
Service Revenue Php xxx
Other Income xxx
Total Income Php xxx
Expenses
Salaries Php xxx
Depreciation xxx
Supplies xxx
Rent xxx
Insurance xxx
Other Expenses xxx
Finance Cost xxx xxx
Net Income Php xxx
Illustration
 
Below are accounts taken from the books of Luffy’s Ship Repair Services for
the month of August. Prepare an income statement from the given data.
 
Repairs Revenue Php 200,000
Rent Income 10,000
Salaries and Wages 35,000
Utilities Expense 14,000
Supplies Expense 11,000
Depreciation Expense 2,000
Miscellaneous Expense 3,000
 Luffy’s Ship Repair Services
Income Statement
For the Month Ended August 31, 2016
 
Repairs Revenue Php 200,000
Other Income 10,000
Total Income Php 210,000
Expenses
Salaries and Wages Php 35,000
Utilities Expense 14,000
Supplies Expense 11,000
Depreciation Expense 2,000
Miscellaneous Expense 3,000 Php 65,000
Net Income Php 145,000
ACTIVITY
 
Below is a list of accounts of Green Grass Services. Prepare an Income
Statement for year ended December 31, 2021.
 
Service Income Php 940,000
Accounts Receivable 60,000
Salaries and Wages 96,000
Rent Expense 240,000
Utilities Expense 124,960
Supplies Expense 4,320
Advertising Expense 1,200