Module 4

Owner’s Equity

Owner’s Equity

• The success or failure of a business depends on how it performs.

• This information is provided by the income statement which summarizes the operating activities of the business.

Inputs include:
Owner’s Capital
Owner’s Drawings

Revenues
Expenses

Revenues

It is the result from business activities entered into for the purpose of earning income.

Assets will increase or the liabilities will decrease with a corresponding increase in owner’s equity.

Common sources of this are:

• Sales

• Fees Services

• Commissions

• Interest

• Dividends

• Royalties

• Rent

Expenses

These are the costs of assets used or consumed in the process of earning revenues such as: rent utilities, salaries.

This will decrease an asset (IF PAID IN CASH) or increase a liability (IF UNPAID) with a corresponding decrease in owner’s equity.

It is a decrease in economic benefit may be in the form of OUTFLOW OF CASH or DEPLETION OF ASSET or INCREASE IN LIABILITIES.

Examples:

• Salaries

• Rent

• Utilities

Venetian Model

• also known as double-entry bookkeeping

• is a system where every financial transaction affects at least two accounts, ensuring that debits equal credits and maintaining the balance of the accounting equation.

• Transactions must always affect 2 or more accounts.

Realization Principle

• It is the REVENUES when SERVICES IS GIVEN.

• Recognizes revenue when it is EARNED WHETHER OR NOT CASH IS COLLECTED.

Example:

Services rendered or goods delivered in 2021 but collected in 2020 should be recognized as revenue in 2021.

IF CASH BASIS of recognizing revenue then cash and revenue will be recognized ONLY in 2020.

Expense Recognition Principle

• It is when EXPENSES ARE INCURRED.

Example:

Water used up in 2021 but paid in 2022 should be recognized and recorded as expense in 2021.

But, IF you are using the CASH CONCEPT, expense is recognized in 2022  when there is cash paid.

In terms of Depreciation:

• By the time it is totally worn out, the cost would have been totally depreciated. Note that the accumulated depreciation increases as a result of the periodic depreciation while the carrying value decreases until it is zero.

2

It is the minimum number or accounts.

Debit

• increase assets and decrease liabilities

• balances that normally have this are:

  • Assets

  • Owner’s Drawings

  • Expenses

Credit

• decrease assets and increase liabilities

Income

It represent an INFLOW OF CASH or OTHER ASSETS coming from a client or customer FOR SERVICE RENDERED OR MECHANDISE SOLD.

Gain

It is an INCOME which may arise but NOT really from its NORMAL COURSE OF OPERATION.

Example:

A machine is no longer in use is sold at more than its purchase cost.

Transportation Fare or Air Fare Revenue

[Revenue Accounts]

Amounts received by airline, bus, jeepneys, tricycle operators from passengers.

Medical Fees Revenue

Amounts received by doctors, hospital and other medical practitioners for services rendered to patients.

Professional or Consultation Fees Revenue

Amounts received by lawyers, accountants, and other professionals rendering consultative services to clients.

Matching Principle

There can be NO REVENUE WITHOUT some sacrifice (EXPENSE) made.

Example:

Commission expense is paid to a salesman every time he makes a sale; freight or transportation cost is paid to a carrier (ship, airplane or cargo truck ) every time merchandise is delivered to a customer.

Depreciation Expense

• It is the cost of an asset that has been depreciated for a single period, and shows how much of the asset's value has been used up in that year.

• Accumulated depreciation is the total amount of ________ ________ that has been allocated for an asset since the asset was put into use.

• It is recognized in the income statement.

Accumulated Depreciation

• It refers to the accumulated reduction in the value of an asset over time.

• When an asset is first purchased, it's typically assigned a value reflecting its expected lifespan, gradually reducing over time.

• It is the total of this depreciation to date.

• is a CONTRA-ASSET account is deducted from the cost price to arrive at net book value.

Utilities Expense

Communication Expense is an expense for services received from PLDT, Globe, Smart or any Telecommunication Company.

Light Expense from Meralco, Pelco or any Electricity providing services.

Water Expense is an expense for services received from Water providing services.

Salaries Expense

Services received from EMPLOYEES.

Transportation Expense

These are the fares paid to PUBLIC UTILITY VEHICLES.

Taxes and Licenses

These are fees to LOCAL MUNICIPALITY and BUREAU OF INTERNAL REVENUE.

Profit or Loss

It is the DIFFERENCE between the TOTAL INCOME EARNED and the TOTAL EXPENSES INCURRED spells the success or failure of the organization.

If income is greater than expenses, the result is a profit and if vice versa it will be considered or result into a loss.

• Income Statement

• Owner’s Equity Statement

• Balance Sheet

• Statement of Cash Flows

The 4 Financial Statements companies prepare from the summarized accounting data are:

• In Sta

• O E Sta

• Bal Sh

• Sta of C Flo

Income Statement

• Reports the REVENUES and EXPENSES for a SPECIFIC PERIOD or TIME.

• Prepared under Nature of Expense Method.

• Money/assets that goes in the business

Net income

Occurs when revenues exceed expenses.

Net Loss

Occurs when expenses exceed revenues

Statement of Financial Position

Reports the ASSETS, LIABILITIES, AND OWNER’S EQUITY at a SPECIFIC DATE.

NOTE:

Total Assets MUST EQUAL TO Total Liabilities and Owner’s Equity.

Account Form

Assets are listed on the left side while the liabilities and owner’s equity are listed on the right side.

Current Assets

These are short-term assets expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.

Non-Current Assets

These are long-term assets that are expected to provide economic benefits for more than one year, such as property, plant, and equipment (PP&E), intangible assets, and long-term investments.

Current Liabilities

These are short-term financial obligations that a company is expected to settle within one year, such as accounts payable, short-term loans, and accrued expenses.

Non-Current Liabilities

These long-term liabilities, are financial obligations that are due in more than one year, such as long-term debt, lease obligations, and deferred tax liabilities.

Statement of Cash Flows

Information for a specific period of time.

Answers the following:

• Where did the cash come from?

• What was the cash used for?

• What was the change in the cash balance?