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Gomez Discussion and Illustrations Basics of Financial Statements & the Accounting Equation
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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Basics of Financial Statements & the Accounting Equation
REMEMBER: Under the business entity concept, the business has a personality separate and distinct from the business owner. Hence, if Bill Gates owns Microsoft, the assets of Microsoft (cash, equipment, etc.) do not belong to Bill Gates; these assets belong to Microsoft as a separate entity. In the corollary, Bill Gates luxury cars and mansions are not assets of Microsoft. These properties are owned by Bill Gates alone.
What is a Liability?
It is a present obligation of the entity: a. arising from past events, b. the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Examples of liabilities:
Accounts Payable Unearned Revenue Notes Payable Accrued Liabilities
REMEMBER: Going back to Bill Gates and Microsoftif Microsoft owes rent to the landlord of the building where its head office is located, under the business entity concept, this rent payable is a liability of Microsoft alone. The landlord shall collect from Microsoft, the business, and not from Bill Gates, its owner. So if, on the other hand, Bill Gates owes his car dealer for a Ferrari he had just purchased, this is not a liability of Microsoft, but a separate and distinct liability of Bill Gates.
What is Equity?
It is the residual interest in the assets of the entity after deducting all its liabilities. Since the owner of the entity does not own the entitys assets, what he/she (owner) actually owns is represented by the entitys equity. Equity accounts:
Owner, Capital Owner, Withdrawals
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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Basics of Financial Statements & the Accounting Equation
Illustration
ASSETS P25,000 P100,777 P89,000 LIABILITIES P5,300 P48,825 P92,000 EQUITY P5,250 P15,250
What is Revenue?
It is a the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Example of revenue: Sales (of goods or services) If, for example, Talyer Co. is engaged in the business of vehicle repairs and John, a customer, pays Talyer P4,000 to replace his cars fan belt, Talyer will have a revenue from the sale of service (repairs) amounting to P4,000. Applying the revenue recognition concept under accrual accounting, the P4,000 will be recorded in the books of Talyer not ______________________________, but at the time ________________________________ __________________________________________.
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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Basics of Financial Statements & the Accounting Equation
Illustration
ASSETS LIABILITIES
Owner, Capital
P0 P100,000 P0
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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Basics of Financial Statements & the Accounting Equation
Illustration
In its first year of operations, Mr. Mal E. Nis, owner of Mr. Clean Janitorial Services, made an investment in his business amounting to P50,000. During the year, revenues and expenses amounted to P105,000 and P79,000, respectively. Also, he made a withdrawal amounting to P5,000. At the end of the first year, how much is total Nis, Equity? _____________________ Will your answer change if expenses for the year amounted to P110,000 instead of P79,000? _____________________ If yes, what will your answer be? _____________________
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