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Accounting for NonNon-Accountants

Understanding
Accounting and
Financial Statements
July 26, 2014

AHMIELLE D. SALAZAR, CPA, MBM

 Explain the functions and importance of

accounting.
Explain the functions and major components of
the four principal financial statements: statement
of financial position, income statement, statement
of owners equity and statement of cash flows.
To utilize financial reports as guide and aid in
handling business activities efficiently and
effectively.
To know the different users of accounting
information and how they use it.

Why do you need to study accounting when you

are not an Accountant?
Accounting is an activity you will do simply
because it is necessary especially if you
engage in profit-oriented undertaking.
To understand business records to make good
business decision.
3

Accounting is a service activity. Its function is to

provide quantitative information, primarily financial
in nature, about economic entities that is intended to
be useful in making economic decisions, in making
reasoned choices among alternative courses of
action.
Accounting is also defined as the process of
identifying, measuring and communicating
economic information to permit informed judgment
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and decision by the users of the information.

 Service Activity.
A Process, an Art and a Discipline.
The Language of Business.
The Eyes of the Business.

 Primary to prepare financial reports and

provide them to economic decision
makers.
Basic the process of identifying,
measuring and communicating economic
information to permit informed judgment
for an economic decision.
Advance or Critical - audit function to test
reliability of financial reports
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The purpose of accounting is to help

financial users see the true picture of the
business in financial terms.
In order to help them, the financial reports
must be understandable, reliable, relevant
timely and complete.
A well-informed management is vital for the
survival of a business organization. The
management must have the right
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information at the right time.

Over-all objective - to provide useful

information for economic decision making.
Specifically, the objectives of accounting are:
1) To ascertain the results of the business
operation;
2) To ascertain the financial position of the
business;
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3) To assist financial users in predicting the

enterprises financial capacity regarding the
future cash flows, financial conditions and
results of operation.

 Financing activities provide necessary funds to

start a business and expand it after it begins
operating.
Investing activities provide valuable assets
required to run a business.
Operating activities focus on selling goods and
services, but they also consider expenses as
important elements of sound financial
management.
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Accounting process - set of activities involved in

converting information about transactions
into financial statements.

12

 Assets - anything of value owned or leased by a business.

Liability - claim against a firms assets by a creditor.
Owners equity - all claims of the proprietor, partners, or
stockholders against the assets of a firm, equal to the excess of
assets over liabilities.
Basic accounting equation - relationship that states that
assets equal liabilities plus owners equity.

13

 Double-entry bookkeeping - system by which accounting

transactions are entered using the dual aspect concept; each
individual transaction always has an offsetting transaction.

In Accounting, journalizing is the process of

recording transactions.
Journal Entry:
Debit

XXX
Credit

XXX

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A transaction is the act of conducting or negotiating

business affairs.
A transaction is an exchange or transfer of funds,
goods or services.
A transaction is a communicative action or activity
involving two parties or things that reciprocally
affect or influence each other.
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Investing of money for capital purposes.

Selling of goods or services.
Purchase of merchandise inventory.
Collection of receivables.
Paying accounts to suppliers.
16

Accounting uses what we refer to as "accounts".

An account refers to assets, liabilities, revenues,
cost, expenses, and equity, as represented by
individual ledger pages, to which changes in value
are chronologically recorded with debit and credit
entries. These entries, referred to as postings,
become part of a book of final entry or ledger.
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T device form where the debits are recorded on

the left-hand side and the credits are recorded on
the right hand side of the letter T.
To debit is to record the value received in an
economic transaction. To credit is to record the
value parted with in an economic transaction.

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Ledger refers to the accounting book in which the

accounts and their related amounts as recorded in
the journal are posted periodically.
Ledger is called book of final entry.

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General Ledger is a grouping of all accounts used

in preparing the financial statements. It is generally
called the controlling account because it reports in
summarized form the activities that have taken
place as recorded in its subsidiary ledger.
Subsidiary Ledger is a group ff like accounts that
contains the independent data of a specific ledger.
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Examples of common financial accounts are cash,

accounts receivable, inventories, PP&E, common
stock, sales, cost of sales, wages, and payroll.
A chart of accounts provides a listing of all financial
accounts used by particular business, organization,
or government agency.

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Account Name
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Property, Plant & Equipment
Accumulated Depreciation
Other Assets
Accounts Payable
Accrued Expenses
Income Tax Payable
Common Stock
Retained Earnings
Sales
Cost of Sales
Salaries & Wages
Rent Expense
Supplies Expense
Depreciation Expense
Utilities Expense
Provision for Income Tax

Assets

Liabilities
Equity
Revenue & Cost
Expenses
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Trial Balance is a device used to periodically test

the equality of debits and credits as recorded in
the ledger accounts.
A trial balance is useful to an accountant whenever
periodic financial statements are to be prepared.

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1.
2.
3.
4.

Balance Sheet (Statement of Financial Position)

Income Statement (Profit and Loss Statement)
Statement of Changes in Owners Equity
Statement of Cash Flows

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Balance sheet - statement of a firms financial

positionwhat it owns and the claims against its
assetsat a particular point in time.

Photograph of firms assets together with its liabilities
and owners equity

Follows the accounting equation

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Income Statement - financial record of a companys

revenues and expenses, and profits over a period of
time.

Firms financial performance in terms of revenues,
expenses, and profits over a given time period.

Reports profit or loss.

Focus on revenues and costs associated with
revenues.
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Statement of Owners Equity - is designed to show

the components of the change in equity from the end
of one fiscal year to the end of the next.

Begins with the amount of equity shown on the
balance sheet.

Net income is added, and cash dividends paid to
owners are subtracted.

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Statement of cash flows - a firms cash receipts and

cash payments that presents information on its
sources and uses of cash.

Accrual accounting - method that records revenue
and expenses when they occur, not necessarily when
cash actually changes hands.

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Whole Accounting Cycle

Exercises

33

1/2/2013 Received cash and issued 100,000

shares of common stock with a par value
of P10 per share.
Journal Entry:

Dr.
Cr.

Cash

1,000,000
Common Stock
1,000,000

34

1/3/2013 Purchased kitchen equipment worth

P600,000. P300,000 was paid in cash and the
balance on account. The equipment has a 5
year estimated useful life.
Journal Entry:

Dr.
Cr.
Cr.

Property, Plant & Equipment 600,000

Cash
300,000
Accounts Payable
300,000
35

1/4/2013 Paid P100,000 as deposits for telephone

and water lines.
Journal Entry:

Dr.
Cr.

Other Assets
Cash

100,000
100,000

36

1/4/2013 Paid in advance one year advance rental

amounting to P240,000.
Journal Entry:

Dr.
Cr.

Prepaid Expenses
Cash

240,000
240,000

37

1/5/2013 Purchased inventory worth P300,000 on

account.
Journal Entry:

Dr.
Cr.

Inventory
300,000
Accounts Payable

300,000

38

1/7/2013 Bought supplies for one month

consumption worth P400.
Journal Entry:

Dr.
Cr.

Supplies Expense
Cash

400
400

39

1/8/2013 Sold inventory for P210,000 on account.

The inventory cost is P150,000.
Journal Entries:

Dr.
Cr.

Accounts Receivable 210,000

Sales

210,000

Dr.
Cr.

Cost of Sales
Inventory

150,000

150,000
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1/24/2013 Collected P100,000 from its receivable.

Journal Entry:

Dr.
Cr.

Cash

100,000
Accounts Receivable 100,000

41

1/29/2013 Paid P150,000 to the supplier of

inventory.
Journal Entry:

Dr.
Cr.

Accounts Payable
Cash

150,000
150,000

42

1/31/2013 Record amortization for one month

rental.
Journal Entry:

Dr.
Cr.

Rent Expense 20,000

Prepaid Expenses

20,000

43

1/31/2013 Record one month depreciation of

kitchen equipment.
Journal Entry:

Dr.
Cr.

Depreciation Expense 10,000

Accumulated Depreciation

10,000

44

1/31/2013 Record one month accrued salary of the

staff amounting to P5,000.
Journal Entry:

Dr.
Cr.

Salaries and Wages 5,000

Accrued Expenses
5,000

45

1/31/2013 Record telephone bill for January

amounting to P1,500 and water amounting to
P500.
Journal Entry:

Dr.
Cr.

Utilities Expense
2,000
Accrued Expenses
2,000

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1/31/2013 Record income tax expense for the

month of January amounting to P6,780.
Journal Entry:

Dr.
Cr.

Income Tax Expense

Income Tax Payable

6,780
6,780

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JUNGLE COFFEE CORPORATION

TRIAL BALANCE
January 31, 2013
(In PhP)
Account Name
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Property, Plant & Equipment
Accumulated Depreciation
Other Assets
Accounts Payable
Accrued Expenses
Income Tax Payable
Common Stock
Retained Earnings
Sales
Cost of Sales
Salaries & Wages
Rent Expense
Supplies Expense
Depreciation Expense
Utilities Expense
Provision for Income Tax

Debit

Credit

309,600
110,000
150,000
220,000
600,000
10,000
100,000
450,000
7,000
6,780
1,000,000
210,000
150,000
5,000
20,000
400
10,000
2,000
6,780

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Total

1,683,780

1,683,780

JUNGLE COFFEE CORPORATION

INCOME STATEMENT
FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013
(In PhP)
Sales

210,000

Less: Cost of Sales

150,000

Gross Profit
Operating Expenses:
Salaries & Wages
Rent Expense
Supplies Expense
Depreciation Expense
Utilities Expense
Income Before Income Tax
Provision for Income Tax (30%)
Net Income

60,000

5,000
20,000
400
10,000
2,000

37,400
22,600
6,780
15,820

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Sales
210,000
Cost of Sales
Salaries & Wages
Rent Expense
Supplies Expense
Depreciation Expense
Utilities Expense
Provision for Income Tax
Retained Earnings

150,000
5,000
20,000
400
10,000
2,000
6,780
15,820

210,000

210,000

To close nominal accounts to Retained Earnings

50

JUNGLE COFFEE CORPORATION

POST CLOSING TRIAL BALANCE
January 31, 2013
(In PhP)
Account Name

Debit

Cash
Accounts Receivable
Inventory
Prepaid Expenses
Property, Plant & Equipment
Accumulated Depreciation
Other Assets
Accounts Payable
Accrued Expenses
Income Tax Payable
Common Stock
Retained Earnings

309,600
110,000
150,000
220,000
600,000

Credit

10,000
100,000
450,000
7,000
6,780
1,000,000
15,820
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Total

1,489,600

1,489,600

JUNGLE COFFEE CORPORATION

BALANCE SHEET
January 31, 2013
(In PhP)
ASSETS
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Total Current Assets

LIABILITIES
309,600
110,000
150,000
220,000
789,600

Accounts Payable
Accrued Expenses
Income Tax Payable
Total Current Liabilities

450,000
7,000
6,780
463,780

STOCKHOLDERS' EQUITY
Property, Plant and Equipment
Accumulated Depreciation
Property, Plant and Equipment-Net
Other Assets
Total Long Term Assets
Total Assets

600,000
(10,000)
590,000 Capital Stock
100,000 Retained Earnings
690,000 Total Stockholders' Equity
1,479,600

Total Liabilities and Stockholders' Equity

1,000,000
15,820
1,015,820
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1,479,600

JUNGLE COFFEE CORPORATION

STATEMENT OF CHANGES IN EQUITY
FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013
Common Stock
(Par Value P10)
Retained
No. of Shares Amount Earnings
Total
Balances at January 1, 2013
100,000
1,000,000
1,000,000
Profit for the month
Balances at January 31, 2013

100,000

1,000,000

15,820

15,820

15,820

1,015,820
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JUNGLE COFFEE CORPORATION

STATEMENT OF CASH FLOWS
FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013
Cash flows from operating activities
Income before income tax
Adjustment for depreciation
Operating income before working capital changes
Changes in working capital:
Decrease (increase) in:
Accounts receivable
Inventory
Prepaid expenses
Increase (decrease) in:
Accounts payable
Accrued expenses
Income tax payable
Net cash from operations
Income tax paid
Net cash from operating activities
Cash flows from investing activities
Additions to property, plant & equipment
Increase in other assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of common stock
Net increase in cash
Cash at the beginning of the month
Cash at the end of the month

22,600
10,000
32,600

(110,000)
(150,000)
(220,000)
450,000
7,000
6,780
16,380
(6,780)
9,600

(600,000)
(100,000)
(700,000)

1,000,000
309,600
309,600

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Ratio analysis - tool for measuring a firms liquidity, profitability,

and reliance on debt financing, as well as the effectiveness of
managements resource utilization.

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Total current assets

Current ratio compares

current assets to current
liabilities.

Current Ratio =

Current Assets
Current Liabilities

789,600
= 1.70
463,780

Total current liabilities

Acid-test (or quick)

ratio measures the
ability of a firm to meet
its debt payments on
Acid Test Ratio =
short notice.

Cash +accounts receivable

+ Prepaid Expenses
Current Assets-Inventory
Current Liabilities

Total current liabilities

(789,600 - 150,000)
= 1.38
463,780

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Inventory turnover
ratio indicates the
number of times
merchandise moves
through a business.

Inventory Turn Over =

Total asset turnover ratio

indicates how much in
sales each Peso invested
in assets generates.

Asset Turn Over =

Cost of Sales
Inventory

Sales
Total Assets

150,000
150,000

= 1.00
(12X)

210,000 = 0.14
1,479,600 (1.68)

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Profitability ratios measure the organizations overall financial

performance by evaluating its ability to generate revenues in excess of
operating costs and other expenses.

Gross Profit Ratio =

Net Income Ratio =

Return on Equity =

Gross Profit
Sales

60,000
210,000

Net Income

15,820

Sales

210,000

Net Income
Equity

= 29%

= 7.53%

15,820
= 1.56% (18.72%)
1,015,820
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 Leverage ratios measure the extent to which a firm relies on

debt financing.

Total liabilities to total assets ratio > 50 percent indicates that a

firm is relying more on borrowed money than owners equity.
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