fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE

accounting FUNDAMENTAL ACCOUNTING EQUATION]

TYPES OF FINANCIAL STATEMENTS

The Financial Statements are comprised of the following:

1. Statement of Financial Position (BALANCE SHEET)

•shows the financial condition/position of an enterprise
•consists of the Assets, Liabilities, and Capital

XYZ Company
Statement of Financial Position
As of December 31, 20xx

Note
ASSETS
Current Assets
Cash P XX
Accounts Receivable XX
Inventory XX
Prepaid Rent XX
Total Current Assets P XX

Non-current Assets
Land P XX
Buildings & Improvement XX
Furniture & Fixtures XX
General Equipment XX
Total Fixed Assets P XX

TOTAL ASSETS P XX

LIABILITIES & OWNER’S EQUITY

Current Liabilities
Accounts Payable P XX
Taxes Payable XX
Salaries & Wages XX
Interest Payable XX
Total Current Liabilities P XX

Non-current Liabilities
Mortgage Payable P XX
Loan Payable XX
Total Non-current Liabilities XX
TOTAL LIABILITIES P XX
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

Owner’s Equity
A, Capital P XX
Retained Earnings XX
TOTAL OWNER’S EQUITY XX

TOTAL LIABILITIES & OWNER’S EQUITY P XX

2. Statement of Comprehensive Income (INCOME STATEMENT)

•shows the result of business operations
•consists of the Revenue, Cost, and Expenses
•International Accounting Standards (IAS) defines TOTAL
COMPREHENSIVE INCOME as the “change in equity during a period
resulting from transactions and other events, other than those changes
resulting from transactions with owners in their capacity as owners”

XYZ Company
Income Statement
For the Year Ended December 31, 20xx

Note
REVENUES
Service Revenue P XX
Other Revenue XX
Less: Sales Returns & Allowances XX
TOTAL REVENUES P XX

EXPENSES
Salaries P XX
Depreciation XX
Supplies XX
Rent XX
Insurance XX
Other expenses XX
Finance Cost XX
TOTAL EXPENSES XX
NET INCOME BEFORE TAXES P XX
Less: Income Tax Expense XX
NET INCOME P XX
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

3. Statement of Changes in Owner’s Equity (STATEMENT OF OWNER’S

EQUITY)
•shows the changes in the capital or owner’s equity as a result of
additional investment or withdrawals, plus or minus the net income or
the net loss for the given period

XYZ Company
Statement of Changes in Owner’s Equity
For the Year Ended December 31, 20xx

A, Capital P XX
Add: Additional Investment P XX
Net Income XX XX
Subtotal P XX
Less: Drawings XX
TOTAL OWNER’S EQUITY P XX

4. Statement of Cash Flows

•summarizes the cash receipts and cash disbursements for the
accounting period
•classifies cash inflows (receipts) and outflows (disbursements) into
Operating, Investing, Financing Activities
•shows the net increase or decrease of cash AND the ending cash
balance
•allows management to assess the business’ ability to generate cash and
project future cash flows

XYZ Company
Statement of Cash Flows
For the Year Ended December 31, 20xx

Cash Flows from Operating Activities

Receipts
Collections from customers P XX
Rent income XX
Dividends income XX
Interest income XX
Payments
fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

Operating expenses (XX)

Interest expense (XX)
Net Cash from Operating Activities P XX

Cash Flows from Investing Activities

Receipts
Proceeds from sale of equipment P XX
Proceeds from sale of furniture XX
Payments
For purchase of furniture (XX)
Net Cash from Investing Activities XX

Cash Flows from Financing Activities

Receipts
Additional investment of owner P XX
Proceeds of bank loan XX
Payments
Cash withdrawal of owner (XX)
Payment of bank loan (XX)
Net Cash from Financing Activities XX

Net Increase/Decrease in Cash P XX

Cash balance – January 1 XX
Cash balance – December 31 P XX

•The ending cash balance should be the same amount of the cash
account presented in the Statement of Financial Position or Balance
Sheet.

FUNDAMENTAL ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

D ebit C redit

E xpenses O wner’s Equity

A ssets I ncome (Revenue)

D rawings L iabilities
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

d) Cash or cash equivalents

TYPICAL ACCOUNT TITLES unless it is restricted
USED from being exchanged or
used to settle a liability

Balance Sheet
for at least twelve months
after the balance sheet
date
FORMS OF BALANCE SHEET EXAMPLES:
Cash – coins, currencies,
1) Account Form – assets are
checks, bank deposits, and
on the left-hand column,
other cash items readily
liabilities and OE are on the
available for use in business
right
operations
2) Report Form – one straight
Cash Equivalents – short-
column (first should be assets
term investments that are
followed by liabilities and OE)
readily convertible to cash
The following are classified as real which are subject to an
or permanent accounts: insignificant risk to changes
in value
1 ASSETS Marketable Securities –
•economic resources owned by the stocks and bonds purchased
business expected for future gain by the enterprise held only
•property and rights of value owned for a short span of time.
by the business These are purchased with
1.1 Current Assets the business’ excess cash.
According to IAS (2003), Trade and Other Receivables
a) Expected to be realized in, – Accounts receivables,
or is intended for sale or Notes receivable, Interest
consumption in the receivable, Advances to
entity’s normal operating Employees, Accrued Income
cycle (income that is earned but
b) Held primarily for the not yet received)
purpose of being traded Inventories – unsold goods at
c) Expected to be realized the end of the accounting
within twelve months of period (applicable to
the balance sheet date merchandising businesses)
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

Prepaid Expenses – expenses accounts. These should be

that are paid in advance deducted from Accounts
1.2 Non-current Assets Receivable to get the net
a) Long-Term Investments – realizable value. “No profits
classified as long-term would be anticipated but all
when they are intended to probable or estimable losses
be held for an extended should be provided.”
period of time Accumulated Depreciation –
b) Property, Plant, and expired cost of property,
Equipment – tangible plant and equipment
assets that are used in because of usage and
the production or supply passage of time. This should
of goods/services that will be deducted from the cost of
be used for more than the related asset account to
one period. This includes get the carrying value or
land, building, equipment book value of the asset
such as store eq., office
eq., delivery eq., 2 LIABILITIES
transportation eq., •includes debts, obligations to pay,
machinery and claims of the creditors on the assets
equipment, and furniture of the business
& fixtures 2.1 Current Liabilities
c) Intangible Assets – non- a) expected to be settled in the
monetary assets without entity’s normal operating
physical substance such cycle
as goodwill, patents, b) held primarily for the purpose
copyrights, licenses, of being traded
franchises, trademarks, c) due to be settled within
brand names, secret twelve months after the
processes, subscription balance sheet date or the
lists, and non-competition entity does not have an
agreements unconditional right to defer
1.3 Contra-Asset Accounts – settlement of the liability for
these are accounts that are at settlement of the liability
deducted from assets for at least twelve months
EXAMPLES: after the BS date
Allowance for Bad Debts – EXAMPLES:
losses due to uncollectible
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

Trade and Other Payables – •investment of the owners plus or

Accounts payable, Notes minus the results of the operations
payable, Loan payable (payable •main sources: investment of
within twelve months), Utilities owners, earnings of the business
payable, Unearned Revenues •Capital – an account bearing the
(advance payments), Accured name of the owner representing the
Liabilities (incurred but not yet original and additional investment
payed such as salaries payable, increased by the net income of the
utilities payable, and taxes accounting period which is also
payable) decreased through withdrawals
2.2 Non-current Liabilities – made by owners and net loss
liabilities or obligations payable •Drawing – withdrawals of the
for a period longer than one year owner/s in cash or other assets
EXAMPLES: •Income Summary – temporary
Mortgage Payable – long-term account used at the end of the
debt with security or collateral in accounting period to close income
the form of real properties, the and expense accounts. The balance
creditor can foreclose or sell the of this will show the net income or
mortgaged asset to settle the net loss before it is closed to the
obligation capital account.
Bonds Payable – certificate of
indebtedness under the seal of a
corporation
*bonds – a contract between
Income
two companies, these bonds are
issued because companies need Statement
to borrow large amount of money
(they issue bond  investors buy FORMS OF INCOME STATEMENT
these bonds  company receives
1) Natural Form – also called as
money)
“nature of expense” method.
This is for service businesses.
2) Functional Form – also called
3 OWNER’S EQUITY OR CAPITAL
as “cost of sales” method. This
•includes the interest of the owners
presents the expenses
on the business
according to their function
•claims of the owners on the assets
like cost of sales, selling
of the business
expenses, administrative
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

Statement of
expenses. This is usually for
merchandising businesses.

The following are classified as

nominal or temporary
Cash Flows
accounts:
a) Operating Activities – cash
1 REVENUE – is the total
inflows (receipts) and cash
amount of income generated by
outflows (payments/
the sale of goods or services
disbursements) from the
related to the company's
normal operations of the
primary operations. Revenue,
business
also known as gross sales, is
RECEIPT EXAMPLES:
often referred to as the "top line"
Collection from customers,
because it sits at the top of the
royalties/fees/commissions
income statement. Income, or
received, interest, dividend,
net income, is a company's total
and other income received
earnings or profit.

2 EXPENSES - is the money PAYMENT EXAMPLES:

spent, or costs incurred, by a Payment to suppliers,
business in their effort to employees’ salaries,
generate revenues. government licenses and
Essentially, accounts taxes, interest expense,
expenses represent the cost of operating expenses
doing business; they are the
sum of all the activities that b) Investing Activities - cash
hopefully generate a profit. inflows (receipts) and cash
outflows (payments/
EXAMPLES: Service Income, disbursements) from the
Utilities Expense, Insurance purchase and sale of property
Expense, Salaries or Wages expense, and equipment, investment in
Supplies Expense, Depreciation debt or trading securities
Expense, Doubtful Accounts
Expense, Interest Expense c) Financing Activities - cash
inflows (receipts) and cash
outflows (payments/
disbursements) from the
 fundamentals of [FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE
accounting FUNDAMENTAL ACCOUNTING EQUATION]

owners & creditors of the

business
RECEIPT EXAMPLES:
Original and additional
investments by owners,
proceeds of loans
PAYMENT EXAMPLES:
Cash withdrawal of owner,
payment for loan’s principal
balance

ENDING CASH BALANCE =

BEG.CASH BALANCE + NET
INCREASE OR DECREASE

Same amount as the balance of

cash account as seen in the
balance sheet