The Account or Account Title a term used to record the financial transaction of
a business
1. Real Accounts accounts under the Balance Sheet. These accounts are not
being closed at the end of an accounting period
Assets tangible or intangible items owned and controlled by a business
enterprise and used to generate business benefits
Current Assets those that are being used in the normal operating
activities of a business and which are readily convertible to cash
Cash
Accounts Receivable
(Allowance for Bad Debts)
Prepaid Expenses
Notes Receivable
Inventories
Office Supplies
Marketable Securities
Non-Current Assets or Fixed Assets also known as long-lived assets
that will give future benefit to the business . These are also capital expenditures
(Land, Building, Office Equipment, Vehicles, Furniture and Fixtures)
Land
Building
(Accumulated Depreciation)
Furniture and Fixtures
(Accumulated Depreciation)
Office Equipment
(Accumulated Depreciation)
Transport Vehicles
(Accumulated Depreciation)
Other Assets not classified as Current nor Fixed Assets
Investments (Bonds)
(note: Contra-Assets any allowance that reduces the asset account such as
Accumulated depreciation, Allowance for bad debts
Utilities
Bad Debts
Representation
Transportation
Travel
Miscellaneous
(note: Capital Expenses (expenditures) expense incurred that is assumed and
projected to give benefit to a business over a given period of time (over one year).
3. Profit and Loss (Revenue and Expense Summary ) account being used to
close nominal accounts
The Books of Accounts
Journal (General) is a book of original entry. It is here where the asset, liability
and capital are recorded for the first time
Sales Journal a book to record revenues (fees)
Disbursement Journal a book to record expenditures
Cash Journal a book that records both cash revenue and expenditures (used in
cash method of accounting)
Ledger is a book of final entry . This is where the journal accounts are being
posted and summarized
(note: T account- a method used to summarized the entries posted in the books
of accounts)
ACCOUNTING ASSUMPTIONS
1.
LEDGER
T ACCOUNT
LEDGER
T ACCOUNT
Official Receipt
EXPENSES
Disbursement
journal
Cash Voucher
WORKSHEET (WORKING PAPER FOR FINANCIAL STATEMENTS)
T accounts
WORKSHEET
FINANCIAL
STATEMENTS
ASSETS
Current Assets
Cash
Advances to
Salespersons
Total current
assets
Fixed Assets
Land
Builiding
Accum.
Depreciation
Tripping Vehicle
Accum.
Depreciation
Total non-current
asset
Total Assets
Liabilities
Current Liability
Utilities
Professional fees
Operating Expenses
Salaries
Tripping Expenses
Marketing expenses
Depreciation
Communication
Supples
Rent
Utilities
Miscellaneous
Net Income
Non-Current Liability
Bank loan
Owner's Equity, Juan dela Cruz
Withdrawal, Juan dela Cruz
Net Income
Owner's Equity, Juan dela Cruz
Total Liabilities and Owner's Equity
PROFITABILITY
RATIOS
Net Profit
(or net return on
sales)
LIQUIDITY RATIOS
FORMULA
Current Ratio
Quick Ratio
(acid test ratio)
Current Assets
Current Liabilities
Current Assets-inventory
Current Liabilities
INDICATION
the firm's ability to meet it's
current
financial liabilities
Leverage Ratios
Debt-to-assets
Total debt
Total Assets
CASE STUDY
The ledger accounts of Juan dela Cruz for the year ending
December 31, 2014
have the following
balances:
DEBIT
CREDIT
Cash
47,000.0
0
Advances to
salespersons
250,000.
00
Tripping Vehicle
400,000.
00
Accumulated
Depreciation
50,000.0
0
12,000.0
0
Bank loan
Juan dela Cruz, Capital
240,000.
00
638,000.
00
Juan dela Cruz,
Withdrawal
200,000.
00
Salaries and
wages
250,000.
00
Tripping
Expense
20,000.0
0
Marketing
Expense
300,000.
00
Depreciation
50,000.0
0
Communication
30,000.0
0
Office Supplies
5,000.00
Rent
60,000.0
0
Utilities
25,000.0
0
Miscellaneous
3,000.00
2.
3.
4.
5.
6.
7.
8.
Insurance
Sale
Tax assessment
Zonal valuation
Merger and consolidation
Liquidation
Joint venture
Sample Problem:
1. Mr. John wants to sell a parcel of land he inherited from his parents to
invest in the money market. It is a corner lot and has a good view of Taal
lake, but a portion of the land thereof slopes down slightly. The lot is 600
square meter and the prevailing market price in the area is P2,500 per
sqm. He asked you how much he could sell the property. What price
would you recommend given the following data: A corner influence at
30%; topography disadvantaged at 10% and a plottage advantage at 20%
a. After 5 years the fair market value of the land owned by Mr. Sy is P45M. If
the appreciation value is 1/8 of the value before adjustment, compute the
following:
a. Value before adjustment
b. Appreciation value
c. Appreciation rate
Analysis of the gross income of the property (past, present and future)
Forecast of the operating expenses
Analysis of the past and current operating expense
Computation of the projected net income
Select and justify a capitalization rate
Provide for the recapture of the capital investment on the building
investment
2.
Subtract a vacancy and collection loss figure from potential gross income
This number which is usually in percentage is the appraisers estimate from
the market in the local area and reflects normal loss of income caused by
non-payment of rent and periodic vacancies.
Additional income like parking and ad boards is added at this point to arrive
at effective gross income
3. Estimate all building/rental expenses and subtract them from effective gross
income.
a. Fixed expenses that dont change with the occupancy of the building
like property tax and insurance.
b. Variable operating expenses some of which may vary with the
occupancy of the building
c. Reserves sometimes called replacement fund set aside for items that
have to be periodically replaced but not on annual basis such as lights,
stoves
(note: expenses dont include depreciation)
4.
value of P 4,500,000.00. At how much would Mr. X buys the property using the
income multiplier.
Cost Approach
Based on the concept that the estimate of a land and a building can be added
together to get the estimated value of land and building
Land Residual value real estate valuation that allow us to only value the
land
Building Residual value real estate valuation that allow us to only value
the building of
an improved piece of land
Formula :
Replacement or either reproduction cost-new less accrued depreciation
XX
Add: Estimated land value
Estimated value of land and building
XX
XX
Direct Cost also called hard costs, are those expenses directly associated
with actual construction
2. Indirect Cost also called soft costs , are not directly related such as
permits, professional fees
4. Index the original cost of the building is multiplied by a number that takes
into account the increase in construction cost.
Depreciation - a loss in value from any cause. It is classified in accordance
with the causes such as
1. Physical Deterioration loss in value brought about by wear and tear
Curable must spend for cost of repair
Incurable irreparable
1. Functional obsolescence inability of the structure to perform
adequately the function for which it is used.
2. Economic Obsolescence also called location or external obsolescence;
a loss in value as a result of impairment or desirability caused by factors
outside property boundaries i.e., inadequate public service, lack of
parking, illegal settlers
Accrued Depreciation is the loss in value from reproduction or replacement
cost-new as of the date of appraisal. This differs from accounting depreciation
Book value - the historical value of land and building (what is recorded in the
books of accounts)
Unearned increment an increase in value of the land for which the owner is
no way responsible
Estimated life or Estimated Economic life the amount of time which
income-producing property is about to provide benefits to its owner.
Actual Age the amount of time that has passed since the building was built
Effective Age subjective estimate age of a building based on the condition.
Excessive wear and tear can cause a propertys effective age to be greater than
its actual age
Scrap value or Residual Value estimated value of the asset at the end of
useful life.
Salvage value estimated value that an asset will realized upon its sale at end
of useful life
Method computing depreciation
Straight line method
a. Based on historical cost
Cost
less scrap or salvage value/ estimated life =
depreciation
annual
cost
new
less
scrap
A prospective buyer of a house and 300 sqm. Lot consulted his architect
and advised that the present cost to duplicate the house is P3,000,000.
The architect also estimated that the effective age of the house is 10
years and the economic life for such structure is 50 years. If the buyer is
willing to pay P5,000/sqm for the lot, how much should he buy the
property?
2. Mr. Uy, an appraiser, was hired by ABC Corporation to determine the real
value of its land and building in Manila. The building was built 20 years
ago, 5 years after the land was acquired at a cost of P5,000,000 while the
land was purchased at P500,000.00 . Compute the estimated fair market
value of the land and building based on the following assumptions:
a. Building is to be depreciated at 2% fixed per year; land appreciates at
fix rate of 5% per year
b. The cost to reproduce the building at the time of appraisal is estimated
at P30,000,000
3. ABC Corporation bought a 3-storey concrete building 10 years ago at a
cost of P5,000,000. The building is being depreciated by the companys
accountant on a straight line method using 50 years as its estimated life.
The Board of Directors, in the desire to upgrade the financial report of the
company, hired the services of a competent licensed appraiser to
determine the true fair market value of the building. The appraiser
estimated the reproduction cost-new of the building at P15,000,000.00
and just used or followed the depreciation rate being used by the
company in estimating the building accumulated depreciation for 10
years. Based on the above information, compute the following:
a. Fair market value of the building
b. Unearned increment
TERMS AND DEFINITIONS
ABSORPTION RATE The ratio of the number of properties in an area that have
been sold against the number available. Used to show the volatility of a market.
IMPROVED LAND Any parcel of land which has been changed from its natural
state through the creation of roads, buildings or other structures.
IMPROVEMENTS Any item added to vacant land with the intent of increasing its
value or usability.
INCOME PROPERTY A piece of property whose highest and best use is the
generation of income through rents or other sources.
INVESTMENT PROPERTY Any piece of property that is expected to generate a
financial return. This may come as the result of periodic rents or through
appreciation of the property value over time.
LEASE A contract between a property owner and a tenant specifying the payment
amount, terms and conditions, as well as the length of time the contract will be in
force.
LEASEHOLD ESTATE A type of property ''ownership'' where the buyer actually has
a long-term lease on the property.
LIEN Any claim against a piece of property resulting from a debt or other
obligation.
LIQUID ASSET Any asset which can be quickly converted into cash at little or no
cost, or cash itself.
LOAN-TO-VALUE RATIO (LTV) The comparison of the amount owed on a
mortgaged property to its fair market value.
LOCK-IN An agreement between a lender and a borrower, guaranteeing an interest
rate for a loan if the loan is closed within a certain amount of time.
LOCK-IN PERIOD The amount of time the lender has guaranteed an interest rate
to a borrower.
MARGIN The difference between the interest rate and the index on an adjustable
rate mortgage.
MARGINAL LAND Land whose value has been diminished due to some internal
defect or external condition. In most cases, the cost to correct the flaw or condition
NON-CONFORMING USE The use of land for purposes contrary to the applicable
municipal zoning specifications. Often occurs when zoning changes after a property
is in use.
NONLIQUID ASSET Any asset which can not be quickly converted into cash at
little or no cost.
NOTE A legal document that obligates a borrower to repay a mortgage loan at a
stated interest rate during a specified period of time.
NOTE RATE The interest rate stated on a mortgage note.
OBSOLESCENCE The process of an assets value diminishing due to the
development of more desirable alternatives or because of the degradation of its
capabilities.
OCCUPANCY A physical presence within and control of a property.
OCCUPANCY RATE The percentage of properties in a given area that are occupied.
PLAT A plan or chart of a piece of land which lays out existing or planned streets,
lots or other improvements.
REAL ESTATE A piece of land and any improvements or fixtures located on that
land.
REAL PROPERTY Land, improvements and appurtenances, and the interest and
benefits thereof.
SCARCITY An economic principal that dictates the price of a good or service
through the interaction of supply and demand. When an item is scarce, its price
tends to rise, given a constant demand. Real Estate is a classic example of scarcity.
SECONDARY MORTGAGE MARKET An economic marketplace where mortgage
bankers buy and sell existing mortgages.
SURVEY A specific map of a piece of property which includes the legal boundaries
and any improvements or features of the land. Surveys also depict any rights-ofway, encroachments or easements.
TUDOR A style of architecture typified by exposed stone, wood and brick
construction. Similar in style to English manor homes.
UNDER IMPROVED LAND A piece of land which has been improved, but not to the
full extent of its potential.
UNENCUMBERED PROPERTY Any property which has no outstanding claims or
liens against it.
USEFUL LIFE (ECONOMIC LIFE) The span of time over which a property can be
used or can provide benefits to its owner.
VACANCY RATE The current percentage of vacant properties in a given area,
regardless of why they are vacant.
VARIANCE An exception to municipal zoning regulations granted for a specific time
period to allow for non-conforming use of the land.
ZERO LOT LINE A municipal zoning category wherein a building or other fixture
may abut the property line.
ZONE A specific area within a municipality or other jurisdiction which conforms to
certain guidelines regarding the use of property in the zone. Typical zones include
single-family, multi-family, industrial, commercial and mixed-use.