Fundamentals of Accountancy and Business

Management 2
Statement of Comprehensive
Income:
Elements for Service and
Merchandising Business
Quarter 3 ● Module 2

What I Know
If you answer all the test items correctly in this pretest, then you may skip studying this
learning material and proceed to the next learning module.
A. MATCHING TEST.
Direction: Match the description in column A with the account title in column B. On a separate
sheet of paper, write the letter of your answers.
 Column A Column B
Description Account Title
1. This account includes amount paid for water and A. Bad Debts
electricity consumed for the period Expense
2. Account used to record acquisition of merchandise B. Cost of Sales
inventory for reselling C. Depreciation
3. An expense account containing items that are Expense
infrequent or immaterial to warrant a separate D. Interest Income
classification E. Miscellaneous
4. The anticipated loss from receivables doubtful of Expense
collection F. Purchases
5. The income received from lending money G. Rent Expense
6. The amount of merchandise inventory sold during H. Sales
the period I. Taxes and
7. This is the generic revenue account for a Licenses Expense
merchandising business J. Utilities Expense
8. The amount paid to Bureau of Internal Revenue and
to other regulatory agencies
9. Payments made to owners of leased property
10. This refers to the allocated costs of fixed asset
charged as expense for the accounting period

B. ALTERNATE RESPONSE.
Direction: Read and understand each statement. On a separate sheet of paper, write the word
True if the statement is correct, and False if it’s otherwise.

1. The Statement of Comprehensive Income shows the profitability of a business entity for a
certain accounting period.
2. The two primary elements of the Statement of Comprehensive Income are assets and
liabilities.
3. Income includes revenues and gains.
4. Gains and losses do NOT arise in the ordinary course of business.
5. Other Comprehensive Income includes realized revenues, gains and losses.

What’s In
Take time to review the steps in the accounting process to see how far you have gone:
Step 1: Journalizing transactions
Step 2: Posting transactions to the Ledger
Step 3: Preparation of Trial Balance
Step 4: Adjusting Journal Entries
Step 5: Preparation of Worksheet

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 Step 6: Preparation of Financial Statements
a) Statement of Comprehensive Income
b) Statement of Financial Position
c) Statement of Changes in Owner’s Equity
d) Cash Flow Statement
e) Notes to Financial Statements
Step 7: Closing Entries
Step 8: Preparation of Post-Closing Trial Balance
Step 9: Reversing Entries

Recall in the previous lessons in Fundamentals of Accountancy and Business Management

1 the five elements of accounting – Assets, Liabilities, Equity, Income and Expenses.
The first three elements (Assets, Liabilities and Equity) are real accounts or balance sheet
accounts. They are found on the Statement of Financial Position or Balance Sheet.
The last two elements (Income and Expenses) are nominal or income statement accounts.
They are found on the Statement of Comprehensive Income or Income Statement.
In each element are the different account titles unique or applicable only for a certain type of
business. Service, merchandising and manufacturing businesses will have some account titles
different from each other.

What’s New
Activity : The Kimchi Story
Teresa’s mother used to work as a tutor to Korean students in one of the English Language Schools
in Baguio City. Schools offering face-to-face instruction were one of the industries greatly affected
by the COVID pandemic. Their school has been temporarily closed for few months now.
While at home, Teresa and her mother decided to sell kimchi to friends and neighbors. They don’t
manufacture the kimchi, rather, these are bought in bulk at wholesale prices from a supplier. They
packed the products in smaller quantities of 250 grams, 500 grams and 1000 grams. Their products
are posted on their Facebook account and to online Buy and Sell Groups. Soon, orders started
coming in. Teresa wants to have an accurate recording of the things related to their newfound
business. Help them use the proper terminologies.

Directions: Unscramble the letters to reveal the term described in the first column. Write your
answers on a separate sheet of paper.

1. The term to describe the amount

received everytime a kimchi is ESSLA _____
sold
2. The term used to refer to the
amount paid by Teresa to the SCTOS _____
supplier of kimchi

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 3. The term to describe amounts paid
to various persons or entities for
items or services necessary in the
conduct of business. For SXEEPESN ________
instance, the taxi fare to deliver
the kimchi to customers or the
packaging materials used.
4. Some customers will ask for
reduction in the selling price.
What term is used to describe DOTNSICU ________
this?

What’s Is It
THE STATEMENT OF COMPREHENSIVE INCOME (SCI)
The SCI provides information about the peformance or profitability of the business entity.
Internal users, such as the owners, managers and employees, use the SCI to make decisions and
craft strategies relative to improving future performance and increasing profitability. External users
such as the Bureau of Internal Revenue requires submission of SCI to properly determine the tax
due them.
The SCI has two parts:
1. Net Income from the Income Statement. Revenues, expenses and realized gains
and losses are reported here.
2. Other Comprehensive Income which consists of unrealized gains, and losses.

Illustration: Realized and Unrealized Gain/ Loss

Problem:
On December 1, a business entity in the Philippines received USD 1,000 (US Dollars) from a
customer. The exchange rate at that time was USD 1 is to Php 50. On December 31, the exchange rate
rose to USD 1 is to Php 55. How much is the gain or loss on foreign exchange? Is the gain or loss realized
or unrealized?

Solution:
1. Peso value on December 1 = USD 1,000 x (Php 50 / USD 1)
= Php 50,000

2. Peso value on December 31 = USD 1,000 x (Php 50 / USD 1)

= Php 55,000

3. Gain on Foreign Exchange = Php 55,000 - Php 50,000

= Php 5,000

Is the gain realized or unrealized? This depends on the following scenarios:

a) Realized gain - if the US dollars were converted or exchanged into peso bills as of December 31.

b) Unrealized gain – if the amount remained in its US dollar form as of December 31.

Note:

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 A business having no Other Comprehensive Income is not required to prepare SCI.
They may limit the reporting requirement to only the Income Statement or the Statement of
Profit and Losses.

ELEMENTS OF THE SCI

The SCI has two primary elements – Income and Expenses.
I. INCOME
Income are increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from business owners. Income includes both
revenues and gains.

A. Revenues
• income arising from the normal operating activities of the enterprise or in the
ordinary course of business.
• they may arise from one or more of the following:
o sale of goods; o rendering of services; and
o use of assets by another entity yielding interests,
royalties, and dividends

B. Gains
• income not arising from the ordinary course of business.
• Example: a service business wants to retire an old laptop. The laptop has a net
book value of P5,000. It was sold for P6,000. Is there a gain? The selling price
is higher than the net book value. Thus, the business has a Gain on Sale of
Equipment amounting to P1,000. Is this an ordinary business activity? No,
because selling laptops is not the usual or day-to-day activity of the firm.

Revenue Accounts According to the Type of Business

1. Service Business

Service Revenue, Service Fee, and Service Income are the generic revenue
accounts of a service business. However, several business entities customize their revenue
accounts to better capture the essence of these revenue-generating transactions.

Examples:
• Car Rental business may use Car Rental Revenue.
• Schools use Tuition Fees and Miscellaneous Fees.
• Law offices may have Acceptance Fee, Retainer’s Fee, Consultation Fee.

2. Merchandising Business
a. Sales Revenue or Sales is the generic revenue account of a merchandising
business.

b. Sales Returns and Allowances is an account that is used to record the selling price
of goods returned by a customer. Returns could be due to defective, damaged, or
incorrect items delivered to customers.

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 c. Sales Discounts are reductions from the selling price of an item either for promotional
purposes or establishing goodwill to customers. For instance, discount is granted to a
customer who purchased in bulk.

3. Other Revenue Accounts

Apart from selling goods or rendering services, a service or merchandising business
may also directly or indirectly engage in some activities that may result to generating
revenues.

a. Interest Income
• revenue derived from lending money
• example: A business entity receives interest income from bank deposits.

b. Royalty Income
• income derived from allowing another person or entity to use one’s tangible
or intangible property
• example: A book author who holds a copyright receives royalty income from
the publisher for every book sold.

c. Dividends
• revenues derived from investment in stocks of a corporation
• example: Company A holds stocks of corporation B. At the end of the year, company
B paid dividends to company A.

II. EXPENSES
Expenses are decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity. Expenses include both expenses and losses.
A. Expenses are costs incurred in the ordinary course of business. These are
necessary in the process of generating revenues.
B. Losses, on the other hand, satisfy the definition of expenses but may not arise in
the ordinary course of business. Example of losses are Loss due to Theft, Loss
on Sale of Fixed Asset, Loss on Calamity.

Expense Accounts According to the Type of Business

1. Service Business
Expenses incurred by an entity in the ordinary course of business maybe
numerous. Thus, it maybe necessary to group or classify them into one common account
title. Here are some of the commonly used account titles.

a. Salaries and Wages Expense – payment for salaries and wages of employees

b. Utilities Expense – includes cost of electricity and water used in the business
c. Rent Expense – the amount paid or incurred for use of property of another person or
entity. This is usually associated with office or store space or premises occupied by
the business entity
d. Advertising Expense – costs incurred in promoting the business in various media
(newspaper, radio, TV, social media)
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 e. Repairs and Maintenance Expense – incurred in the repair and maintenance of
machineries, equipment and other fixed assets
f. Taxes and Licenses Expense – amounts paid to BIR for tax due and to other
government regulatory agencies for license to conduct a certain type of business or
to operate within a barangay, city or municipality
g. Supplies Expense – cost of supplies used for the period. This may be specified as
Office Supplies (paper, inks, stationeries, clips) or Store Supplies (packaging
materials, receipts)
h. Interest Expense – cost of borrowing a sum of money or its equivalent
i. Communications Expense – this includes telephone and internet bills, phone cards,
cellphone loads and postage stamps
j. Insurance Expense – this account represents the expired portion of the insurance
premiums paid.
k. Transportation or Travel Expense – this represents those incurred by employees or
management to travel to places on official business functions.
l. Depreciation Expense – this refers to that part of the cost of fixed assets allocated
as expense for the period.
m. Bad Debts Expense – the amount of accounts receivable estimated to be doubtful of
collection
n. Miscellaneous Expense – this is a catch-all account for all other expenses that are
not recurring, minimal, or immaterial to warrant a separate account title

2. Merchandising Business
The expenses enumerated under service business may also be the expenses of a
merchandising business. The following are account titles unique to a merchandising
business.

a. Cost of Sales – this is the cost of goods or merchandise inventory sold

b. Purchases – this account is used to record acquisition of merchandise inventory.
c. Freight-In – the costs incurred in transporting inventories purchased from a supplier
d. Freight-Out or Delivery Expense – the cost of transporting goods sold to customers
e. Purchase Returns and Allowances - amounts of purchases returned to supplier due
to damage or error
f. Purchase Discounts – reduction from the price of an item purchased

What’s More
Activity 1: Service or Merchandising?
Directions: Given the following income and expense accounts, classify them according to the type
of account by writing I if it’s an Income account or E if it’s an Expense account. Classify them further
whether they are used exclusively by a service business, merchandising business or both. Use
these codes:
S – exclusively for service business
M – exclusively for merchandising business
B – can be used by both service and merchandising

Type of Type of
Account Title
Account Business

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 Ex. Purchases E M
1. Notarial Fee (for a Law Office)
2. Sales
3. Freight-out
4. Utilities Expense
5. Bookkeeping Fees (for a Bookkeeping business)
6. Salaries Expense
7. Purchase Discounts
8. Cost of Sales
9. Advertising Expense
10. Loss on Theft
11. Gain on sale of old equipment
12. Freight-in
13. Repairs and Maintenance Expense
14. Office Supplies Expense
15. Depreciation Expense
Activity 2: Classifying Expenses

Direction: The owner of a CTRL-S Computer Shop asked you to classify the list of expenses made
by his shop attendant. Use the example provided as your guide in answering this activity.

Transaction Expense Account Title

Salaries and Wages
Ex. Salary for the week (P350 x 6 days)
Expense
1. Payment of internet bill for June
2. Fee of technician for repairing CPU #12
3. Payment of electric bills
4. Purchase of 6 bottles of black ink
5. Purchase of 10 reams long bond paper used in
printing services
6. Taxi fare from supplier’s store to computer shop
7. Payment of water consumed for the month
8. Payment to a radio station for 1 week radio
advertisement
9. Christmas donations to a youth organization
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 10. Rental payment for the month

What I Have Learned

Directions: Fill-in the blanks with the key concept or term learned in this module. Choose the correct
word or phrase from the box. Some words/ phrases in the box may not be used as answers. Write
your answers on a separate sheet of paper.
1. The SCI shows the _____________ of a business entity for a given period.
2. A ____________ business is engaged in purchasing goods and selling them at a higher
price.
3. The SCI has two basic elements, namely: __________ and __________.
4. The income arising from the ordinary course of business is ______________.
5. The income that may not arise from the ordinary course of business is _________________.
6. Expenses that may not arise from the ordinary course of business are
__________________.
7. _____________ are reductions in the buying or selling price of goods purchased or sold.
8. The amount of goods sold is ____________________________.
9. The Other Comprehensive Income portion of the SCI contains ______________ income,
expenses, gains, and losses.

Cost of Sales Income Profitability

Discounts Losses Financial Position
Expenses Merchandising Revenue
Gains Service Purchases
Realized Unrealized

What I Can Do
Activity 1: The Sari-Sari store

Directions: Read carefully the given scenario then identify the appropriate income or expense
account to be used. Use the example provided as your guide in answering this activity. Write your
answers on a separate sheet of paper.

Scenario: The owner of your favorite neighborhood sari-sari store, asked you to help her understand
the terminologies used in the Income Statement. Use the given transactions to explain the accounts.

Transaction Account Title

Ex. The business bought 5 boxes of canned goods for reselling
Purchases
from ABC Supermarket
1. Sold 3 packs of powdered milk to a customer who paid in cash.

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 2. Sold 1 cavan of rice worth Php 1,500 to a neighbor. The neighbor
agreed to pay after 30 days. However, the rice will be Php 1,400
only when paid within 15 days.
3. The customer who bought powdered milk returned one pack
because it is already beyond expiration date. A refund was
made.
4. The customer who bought 1 cavan of rice paid after 10 days. A
Php 100 discount was granted to him
5. The business paid Php 700 to a jeepney driver for the
transportation of goods from ABC Supermarket to the store.
6. Returned 6 pieces of canned goods to ABC Supermarket. The
cans have dents. A refund for the returned goods was received.
7. The business bought Php 50,000 worth of merchandise from a
distributor of milk products. The amount will be paid after 20
days.
8. Paid Php 48,000 to the dealer of Nestle products. Php 2,000 was
taken as a discount for early payment of account.

Activity 2: Name that Account

Direction: Given the following types of service business, suggest 3 – 5 specific revenue accounts
that will appropriately identify their revenue-generating activities. Use the example provided as your
guide in answering this activity. Write your answers on a separate sheet of paper.

Service Business Revenue Accounts

Example:
Medical/ Dental Clinic 1) Professional Fee
2) Doctor’s Fee
3) Consultation Fee
4) Dental Fee
5) Laboratory Fee

Banks and Lending Institutions

Automotive Repair Shop

Laundry Shop

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 Computer Shop

Delivery/ Errand Services

Assessment
A. MATCHING TEST.

Direction: Match the description in column A with the account title in column B. On a separate
sheet of paper, write the letter of your answer.

Column A Column B
Description Account Title
1. Payments made to owners of leased property A. Bad Debts
2. This account includes amount paid for water and Expense
electricity consumed for the period B. Cost of Sales
3. Account used to record acquisition of merchandise C. Depreciation
inventory for reselling Expense
4. An expense account containing items that are D. Interest Income
infrequent or immaterial to warrant a separate E. Miscellaneous
classification Expense
5. This refers to the allocated costs of fixed asset F. Purchases
charged as expense for the accounting period G. Rent Expense
6. The anticipated loss from receivables doubtful of H. Sales
collection I. Taxes and
7. The income received from lending money Licenses Expense
8. The amount of merchandise inventory sold during J. Utilities Expense
the period
9. This is the generic revenue account for a
merchandising business
10. The amount paid to Bureau of Internal Revenue and
to other regulatory agencies

B. ALTERNATE RESPONSE.

Direction: Read and understand each statement. On a separate sheet of paper, write the word
True if the statement is correct, and False if it’s otherwise.

1. Income includes revenues and gains

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 2. The Statement of Comprehensive Income shows the profitability of a business entity for a
certain accounting period.
3. The two primary elements of the Statement of Comprehensive Income are assets and
liabilities.
4. Gains and losses do NOT arise in the ordinary course of business.
5. Other Comprehensive Income includes realized revenues, expenses, gains and losses

Performance Task # 1
Activity: The Accounts of My Business

Directions: Think of a business that you want to establish. Limit your business to a service or
merchandising type of business. Do NOT choose manufacturing (e.g. food production and
processing). Your business should have a capital of less than one million pesos and with less than
5 employees. Identify all possible revenue and expense accounts for your business. Be specific as
possible. Write on a separate sheet of paper.
1. Name of the business: _________________________________
2. Type (Service or Merchandising): ____________________________
3. Revenue Accounts:
_____________________________________
_____________________________________
_____________________________________
4. Expense Accounts:
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________

RUBRIC
CRITERIA DESCRIPTION

All the reasonable 1 – 2 account titles are 3 – 4 account titles are 5 or more account titles
Completeness
account titles either inappropriate either inappropriate are either inappropriate
and
appropriate to the and/or are significantly and/or are significantly and/or are significantly
Appropriateness missing with respect to
nature of the business missing with respect to missing with respect to
of the nature of the
are included. the nature of the the nature of the
Revenue business.
business. business.
Accounts (8) (6) (4)
(10)
All the reasonable 1 – 2 account titles are 3 – 4 account titles are 5 or more account titles
Completeness
account titles either inappropriate either inappropriate are either inappropriate
and
appropriate to the and/or are significantly and/or are significantly and/or are significantly
Appropriateness missing with respect to
nature of the business missing with respect to missing with respect to
of the nature of the
are included. the nature of the the nature of the
Expense business.
business. business.
Accounts (8) (6) (4)
(10)

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