Lesson 2 Accounting Elements PDF

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LESSON IITHE ELEMENTS OF ACCOUNTINGA. Objectives: Define transactions, events, double-entry system, assets, liabilities, and other terms defined in the lesson. Identify the basic elements of accounting and their use. Determine if an event is a business transaction, personal, or not a transaction. B....

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LESSON II

THE ELEMENTS OF ACCOUNTING

A. Objectives: 1. Define transactions, events, double-entry system, assets, liabilities, and other terms defined in the lesson. 2. Identify the basic elements of accounting and their use. 3. Determine if an event is a business transaction, personal, or not a transaction. B. Concepts:

Business Transactions Business transactions are events which involve the exchange of values between two or more parties. Alternatively, business transactions occur in the business, causing at least two changes in accounts. These are always expressed in terms of money. Examples are: payment of salaries, purchase of an equipment, receipt of income on services rendered, or obtaining loans from the bank. All these constitute completed action and not mere intention. Thus, they should be entered in the accounting records, and recognized as affecting the accounting equation. Lastly, these transactions are analyzed from the various business documents such as official receipts, sales, invoices, payroll, vouchers, promissory notes, contracts, etc. Business Entity Concept In recording business transactions, the business entity concept is observed. Under this concept, the business is assumed to have a personality distinct and separate from the personality of its owner or owners. Accordingly, a bookkeeper analyzes business transactions from the point of view of the business and not from those of the owner or owners. Business assets, liabilities, revenue and expenses are treated separately from those of the owner. Example: John Santos invests cash of P20,000 in a barber shop. From the point of view of the business, it receives cash, P20,000, from the owner, John Santos. In return, it gives John Santos an equity or interest in the business. If the owner withdraws P5,000 cash from the business, the bookkeeper records it from the point of view of the business as follows: P5,000 cash given to the owner and reduction in owner’s equity by P5,000.

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Double-Entry Accounting Financial accounting is based on a double-entry system which means that every transaction has a dual effect (two-sided) on the accounting records. This system provides a logical method for recording transactions and it offers a means of proving the accuracy of the recorded amounts. Accounting Periods The results of operations and financial position of a business are measured periodically. For this purpose, a twelve-month period is generally used. It may coincide with the calendar year or it may be a fiscal year. If starts with January lst and ends with December 31st, it follows the calendar year. If it starts with any other date, it is called a fiscal year. Basic Elements of Accounting The basic elements of accounting are assets, liabilities, proprietorship, income, expenses. They are also being referred to as the accounting values. 1. Assets - These refer to the property or rights on property owned by the business or upon which the business as a vested equitable interest. Categories of Assets: a. Current Assets – include cash and other assets that are reasonably expected to become cash or sold, or consumed during the normal operating cycle of the business or one year. 1. Cash - This includes coins, currencies, money orders, bank checks, bank deposits, and such other cash accounts that are readily available for use by the business in its operations. If cash is in the office premises they are termed as cash on hand. If cash are deposited in the bank, they are termed cash in bank. 2. Accounts Receivable - Sometimes, services rendered or merchandise is sold to clients/customers on credit basis. Therefore, these are rights or claims of the business to collect from third parties, which are evidenced by formal promise to pay. 3. Notes Receivable – When clients/customers issue promissory notes in exchange of goods/services received, and as evidence of their obligation to pay the business.

-34. Merchandise Inventory – These are goods purchased for sale to customers and are classified as current asset because these goods when sold will either become cash if sold on a cash basis, or accounts receivable if sold on credit basis. 5. Office Supplies on Hand – Coupon bond, carbon paper, ledgers, worksheets, ballpens, erasers, envelopes, journals, and many others used in the office. 6. Store Supplies on Hand – Plastic bags, tapes, stapler, fillers, adding machine tapes, and many others used in the store. 7. Prepaid Expenses – Items that are acquired and paid for in advance are considered current assets because they use up cash resources, the amount of which would have been bigger hand. These pre-payments have not been made because they are expected to be consumed within the normal operating cycle of the business. Examples are: Prepaid Insurance, Prepaid Rent, Prepaid Supplies, Prepaid Interest, etc. These are already paid but which are applicable to future periods. b. Fixed Assets – Assets are classified fixed if they meet the following requirements: 1. 2. 3. 4.

they must be more or less permanent in nature they must not be for sale they must be intended for use in the business they must have physical existence

a. Land – Land acquired by the business for its use. b. Building – Structures or edifices acquired for use of the business. c. Equipment – This will include typewriters, computers, filing cabinets, adding machines, calculators, cash registers, and such other equipment that are used in the office. If used in the store - store equipment. d. Furniture and Fixtures – This will include tables, chairs, desks, counters, show cases, cabinets, and the like. e. Transportation Vehicles – These will include trucks, cars, jeeps, motorcycles, motorbikes, bicycles, and any other transportation vehicle. 2. Liabilities. This refers to the debts or obligations of the business to other individuals or organizations due to various reasons such as acquisition of goods or services. Liabilities usually classified as either current or long term.

-4a. Current Liabilities – These are a measure of that portion of the firm’s total assets in which short-term creditors have an interest or equity. 1. Accounts Payable – These are obligations or debts by the business to other parties or services or merchandise acquired on account and are not supported by promissory notes. On account means “on credit.” 2. Notes Payable - These are obligations or debts by the business to other parties or services or merchandise acquired on account and are supported by promissory notes issued in favor of the creditor/seller. 3. Salaries Payable – These are amounts owed to employees for service they have already rendered. 4. Interest Payable – This is the interest incurred in the current period but not yet paid. 5. Taxes and Licenses Payable – These taxes, licenses and other fees are expenses of the current period but are still unpaid to the government. 6. Unearned Rent – This is income from rent which has already been received in cash, but for which the business has not yet rendered the corresponding services. b. Long-Term Liabilities – These are long-term debts of the business for which property has been given as security or collateral known as mortgage payable. If the business fails to pay the debt at maturity date, the creditor can take the necessary legal action to force the sale of the asset pledged so that he can be paid from the proceeds. 3. Proprietorship – It is the residual interest derived after deducting the total liabilities from the total assets of the business. Proprietorship is variedly referred to as capital or owner’s equity. The capital account is stated as (Name of owner), Capital. This account is increased when additional investment is made by the owner. On the other hand, withdrawal of capital from the business, which decreases capital or investment, is effected with the use of an account name stated as (Name of Owner), Withdrawals or Drawing. Other accounts affecting the capital of the owner: 4. Income – These are accounts used to record transactions involving earning of income from the rendering of services or from sales. It increases the capital.

-5a. Professional Fees – These are income derived in the proactive of profession for the professional services rendered, whether received in cash or in kind. b. Service Income – This refers to revenue realized by providing services to customers. c. Fare Income – This is the income derived from transportation services provided to others, whether received in cash or not. d. Rent Income – This is the income derived by lessors engaged in the business of renting apartment, building, condominium, market stalls, automobile, machines, etc. whether received in cash or not. e. Interest Income – This is the income derived from lending money to others, whether received in cash or not. 5. Expenses – These are the accounts used to record transactions involving payment for expenses incurred. They decrease the capital. a. Salaries and Wages Expense – Amount incurred/paid for the services rendered by employees and workers in the business. b. Commission Expense – Compensation granted to employees are usually computed or based on the amount of their sales. c. Postage and Communication Expense – Expenses of postage and other means of communication. d. Taxes and Licenses Expense – Taxes, licenses, and other government fees paid or incurred. e. Transportation Expense – Amount incurred/paid as transportation allowance of executives or staff entitled to it. f. Utilities Expense – Amount incurred/paid for the use of light, water, and telephone for the business. g. Insurance Expense – Premiums or insurance policies paid and incurred by the business. h. Repair and Maintenance Expense – Amount incurred/paid for repairing or servicing the buildings, machineries, and equipment of the business.

-6i. Rent Expense – Amount incurred/paid for the use of space for the office, store and/or factory area. j. Interest Expense – The cost of money used by the business. k. Advertising Expense – Payments made in the promotion of the business merchandise/goods and/or services such as publications in the newspapers, announcements through radios and televisions, billboards, etc. l. Office Supplies Expense – Office-related materials used by the business such as coupon bonds, carbon papers, worksheets, ledgers, ballpens, erasers, envelopes, etc. m. Store Supplies Expense - Store-related materials used by the business such as plastic bags, tapes, stapler fillers, etc. n. Depreciation Expense – Cost allocation of certain fixed assets owned by the business such as building, furniture and fixtures, office equipment, etc. over the life of the business or the asset, whichever is shorter. o. Miscellaneous Expense – Expenses incurred/paid by the business for which separate account is not advisable as they are immaterial, uncommon, and infrequent.

Use of Account Titles Account titles are the terms used to identify the specific elements of accounting to be used in the recording process. Proper identification is necessary right at the recording phase because they are to be brought forward to account reports. When wrong account titles are used, the users of account reports are apt to be misled. As a consequence, they make wrong decisions....