FINANCIAL STATEMENTS FOR A SERVICE

BUSINESS AND THE FUNDAMENTAL

ACCOUNTING EQUATION

Learning Objectives
1. Define and identify the basic elements of accountingassets, Liabilities, and owners equity.
2. Determine the net income through operation.
3. Define and identify revenue, expense, net income, and
net loss.
4. Define and know the components of financial
statements.
5. Prepare properly classified financial statements.

TYPES OF FINANCIAL
STATEMENTS

1. 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- shows the result of operations
for a given period. It consists of the Revenue, Cost,
and Expenses
3. OWNERS EQUITY STATEMENT- shows the changes
in the Capital or Owners Equity as a result of
additional investment or withdrawals by the owner,
plus or minus the net income or net loss for the year.
4. CASH FLOW STATEMENT- summarizes the cash

TYPICAL ACCOUNT TITLES USED

1. BALANCE SHEET
a. Assets -these are economic resources owned by the business
expected for future gain. They are property and rights of value owned
by the business
b. Liabilities -these include debts, obligations to pay, and claims
of the creditors on the assets of the business.
c. Owners Equity or capital- this 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. Owners equity or capital comes from two main
sources- investment of owners and earnings of the business.

THE FUNDAMENTAL
ACCOUNTING EQUATION
ASSETS=LIABILITES+OWNERS EQUITY
Illustration: 1. Assets=Liabilities + Owners Equity
P?

=P40,000

+ P60,000

ASSETS
Classification of Assets
1. Current Assets -Classifies Assets as current assets when it is:
a. expected to be realized in, or is intended for sale or
consumption in, the entitys normal operating cycle;
b. held primarily for the purpose of being traded;
c. expected to be realized within twelve months of the balance
sheet date; or
d. 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.

CLASSIFICATION OF CURRENT
ASSETS
a. CASH includes coins, currencies, checks, bank
deposits, and other cash items readily available for
use in the operations of the business.
b. CASH EQUIVALENTS are short term investments that
are readily convertible to known amount of cash which
are subject to an insignificant risk to changes in value
c. MARKETABLE SECURITIES are stocks and bonds
purchased by the enterprise and are to be held for
only a short span of time or short duration. They are
usually purchased when a business has excess cash

d. ACCOUNTS RECEIVABLE is the amount collectible from

the customer to whom sales have been made or services
have been rendered on account or credit.
e. NOTES RECEIVABLE is a promissory note issued by the
client or the customer in exchange for services or goods
received as evidence of his/her obligation to pay.
f. INVENTORIES represent the unsold goods at the end of
the accounting period. This is applicable only to a
merchandising business.
g. PREPAID EXPENSES are items that will be used in the
operations of the business that have been paid in
advance.

CLASSIFICATION OF NONCURRENT ASSETS

a. LONG TERM INVESTMENT are assets held by
an enterprise for the accretion of wealth through
capital distribution such an interest, 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.

b. PROPERTY, PLANT, AND EQUIPMENT are tangible assets

that are held by an enterprise for use in the production or
supply of goods or services, or for administrative purposes and
which are expected to be used for more than one period.
EXAMPLES OF PLANT, PROPERTY AND EQUIPMENT
1. LAND is a piece of lot or real estate owned by the enterprise
on which a building can be constructed for business purposes.
2. BUILDING is an edifice or structure used to accommodate the
office, store or factory of a business enterprise in the conduct
of its operations.

3. EQUIPMENT includes typewriter, air- conditioner, calculator, filing

cabinet, computer, electric fan, trucks, 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,
Machinery and Equipment.
4. FURNITURE AND FIXTURES include 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.
5. ACCUMULATED DEPRECIATION is a contra-asset account representing
expired cost of plant property and equipment as a result of usage and
passage of time. This is deducted from the cost of the related asset account.
6. INTANGIBLE ASSETS are identifiable, non-monetary assets without
physical substance held for use in the production or supply of goods or
services, for rental to others or for administrative purposes. These include
goodwill, patents, copyrights, licenses, franchise, trademarks, brand names,
secret processes, subscription list and non competition agreements.

LIABILITIES
Liability classifies as a current liability when it is:
a. Expected to be settled in the entitys normal operating
cycle;
b. Held primarily for the purpose of being traded;
c. Due to be settled within twelve months after the
balance sheet date; or the entity does not have an
unconditional right to defer settlement of the liability
for at least twelve months after the balance sheet.

CLASSIFICATION OF CURRENT
LIABILITES
Accounts Payable includes debts arising from purchase
of an asset or acquisition of services on account.
Notes Payable includes debts arising from purchase of
asset or acquisition of services on account evidenced by
a promissory note.
Loan Payable is a liability to pay the bank other
financing institution arising from funds borrowed by the
business from these institutions.
Utilities Payable is an obligation to pay utility
companies for services received from them. Examples of

 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.
Accrued Liabilities include amounts owed
to others for expenses already incurred but
not yet paid. Example of these are salaries
payable, utilities payable, taxes payable
and interest payable.

CLASSIFICATION OF NON-CURRENT
LIABILITIES
NON-CURRENT LIABILITES are long term liabilities or
obligations which are payable for a period of longer than
one year.
Examples:
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 assed to be sold and
the proceeds of the sale be used to settle the obligation.
BONDS PAYABLE is a certificate of indebtedness under
the seal of a corporation, specifying the terms of

OWNERS 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 either in cash or other assets.
INCOME SUMMARY is 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 closed to the capital account.

INCOME STATEMENT
SERVICE INCOME includes revenues earned or
generated by the business in performing services for a
customer or client.
EXPENSES:
Salaries or Wages Expense; Utilities Expense; Supplies
Expense; insurance Expense; Depreciation Expense;
Uncollectible Account Expense/ Doubtful Account
Expense/ Bad Debts Expense; Interest Expense

FORMS OF BALANCE SHEET

ACCOUNT FORM follows the accounting equation where
assets are listed on the left-hand column of the report
with the liabilities and owners equity listed on the on the
right-hand column.
REPORT FORM shows in one straight column the assets,
followed by the liabilities and owners equity.

THE ACCOUNTING EQUATION

LEARNING OBJECTIVES:
1. To know the effects of transactions on the accounting
equation
2. Analyze the different transactions in a service type of
business

TYPES AND EFFECTS OF THE

TRANSACTIONS
Assets Liabilities
1. Owner invest cash

INC

Capital