COMPUTER COMMUNICATION DEVELOPMENT INSTITUTE

Sikatuna St., Old Albay, Legazpi City

MODULES FOR

ONLINE LEARNING MANAGEMENT SYSTEM

A. Y 2021-2022

Subject:

Fundamentals of Accountancy, Business and Management 2

Prepared by:

Ma. Gina A. Jacob

Subject Teacher

Noted by: Approved by:

Engr. Jay A. Dadea, MIT Ramon Severo L. Moraleda, LLB

School Dean Administrator
MODULE 1
Weeks 1 to 2 - Statement of Financial Position

Learning Objectives

After studying the module, you should be able to:

1. Explain the nature and objectives of general-purpose financial statements.

2. Know the accounts that comprise the asset, liabilities and owner's equity
sections of the statement of financial position.
3. Explain the nature, elements and format of the Statement of Financial Position.
4. Prepare the Statement of Changes in Owner's Equity.
5. Prepare the Statement of Financial Position using the report form and
account form including the supporting notes.
6. Describe the Statement of Income and explain the elements comprising it.
7. Prepare the Statement of Income using single-step and multi-step formats.
8. Explain how net income impacts the Owner's Equity.

Introduction

F inancial Statements are a structured financial representation of the financial position

of and the transactions undertaken by an enterprise. The objective of general-purpose financial
statements is to provide information about the financial position, performance and cash flows of
an enterprise that is useful to a wide range of users in making economic decisions. Financial
statements also show the results of management's stewardship of the resources entrusted to it.
To meet this objective, financial statements provide information about an enterprise's:
a) Assets;
b) Liabilities;
c) Equity;
d) income and expenses; and
e) Cash flows.

These informations, along with other information in the notes to the financial statements, assist
users in predicting the enterprise's future cash flows and in particular the timing and certainty
of the generation of cash equivalents.

Statement of Financial Position

Nature
The Statement of Financial Position is a financial statement providing information about the entity's,
resources (assets), claims against those resources (liabilities) and the remaining claim, accruing
to the owner (owner's equity) as of the end of a period. It is also commonly known as the
Balance Sheet Statement.

Usefulness

This report is useful in assessing present and future cash flows, liquidity and long term solvency.

Liquidity refers to the period of time before an asset is converted to cash or until a liability is paid.

Long-term solvency refers to the riskiness of a company with regard to the amount of liabilities
in its capital structure. The risk to an investor or creditor increases as the percentage of liabilities
relative to equity increases. Solvency also provides information about financial flexibility, that
is the ability of a company to alter cash flows in order to take advantage of unexpected investment
opportunities and needs. For instance , the higher the percentage of a company's liabilities to
its equity, the more difficult it typically will be to borrow additional funds either to tke advantage
of a promising investment opportunity or to meet obligations. In general, the lower the financial
flexibility, the higher the risk is that the enterprise will fail.

Elements

The elements of the Statement of Financial Position are:

Assets These are resources controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.

Liabilities These are present obligations of the entity arising from past events, the
settlement of which is expected to result in an outflow from the resources
embodying economic benefits.

Equity This represents residual interest in the assets of the entity after deducting
all its liabilities.

Review of Classification of Asset

Assets are subclassified as current assets and non-curretn assets.

A. Current Assets

Current Assets are classified and presented according to liquidity with the most liquid followed by
those with lesser liquidity. Since cash is the most liquid, it is always listed first followed by other
current assets according to their proximity to cash.

Improvements to International Accounting Standards 1 (December 2003) classify assets as current

when it is:
a. expected to be realized in, or is intended for sale or consumption in, the entity's normal
operating cycle.
b. held primarily for the purpose of being traded.

c. expected to be realized within twelve months of the balance sheets date; or

d. cash or a cash equivalent unless it is restricted from being exchange or used to settle
a liability for at least twelve months after the balance sheet date.

Classification of Current Assets

Cash includes coins, currencies, checks, bank deposits , and other cash items readily available
for use in the operations of the business.

Cash Equivalents are short-term investments that are readily converted to known amounts of
cash which are subject to an insignificant risk to changes in value (per SFAS No. 22, revised 2000).

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.

Trade and Other Receivables include the amounts collectible from any of the following accounts:

• Accounts Receivable - is the amount collectible from the customer to whom sales have
been made or services have been rendered on account or credit.

• 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.

• Interest Receivable - amount of interest collectible on promissory notes received from

from customers and clients.

• Advances to Employees - certain amount of money loaned to employees payable in

cash or through salary deductions.

• Accrued Income - income already earned but not yet received.

Inventories represents the unsold goods at the end of the accounting period. This is applicable
only to a mechandising business.

Prepaid Expenses include supplies bought for use in the business or services and benefits to be
received by the business in the future paid in advance.

Contra-Asset Accounts are accounts deducted from the related asset accounts. The following are
the contra-asset accounts.
Allowance for bad Debts are losses due to uncollectible accounts. This is deducted from the
accounts receivable accounts to get the net realizable value. This is in line with the financial
statement's qualitative characteristics of conservatism wherein no profits would be anticipated
but all probable or estimable losses should be provided.
Accumulated Depreciation represents the expired cost of property, plant, and equipment as a
result of usage and passage of time. This is deducted from the cost of the related asset account
to get the carrying value or book value of the asset.

B. Non-Current Assets

Classification of Non-Current Assets

Long-term Investments are assets held by an enterprise for the accretion of wealth through
capital distribution such as interest, royalties, dividends and rentals, for capital appreciation or
for other benefits to the investing enterprise such as those obtained through ttrading relationships.
Investments are classified as long-term when they are intended to be held for an extended period
of time (International Accounting Standards No. 25).

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 (International Accounting Standards No. 16). Examples of
Property, Plant, and Equipment are:

• Land is a piece of lot or real estate owned by the enterprise on which a building can be
constructed for business purposes.

• Building is an edifice or structure used to accommodate the office, store, or factory of a

business enterprise in the conduct of its operations.

• Equipment includes typrewriter, air-conditioner, calculator, filing cabinet, computer,

electric fan, trucks, and 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.

• Furniture and Fixtures include tables, chairs, carpets, curtains, lamp and lighting fixtures,
and wall decors. Specific account titles maybe used such as Office Furniture and Fixtures
and Store Furniture and Fixtures.

Intangible Assets are identifiable, nonmonetary assets without physical substance held for use in
the production or supply of goods or services, for rentals to others, or for administrative
purposes. These includes goodwill, patents, copyrights, licenses, franchises, trademarks, brand
names, secret processes, subscription lists and noncompetition agreements ( International
Accounting Standards No. 38).
Presented below is the asset section of the statement of finanical position or balance sheet and
the supporting notes.

Assets Note

Current Assets
Cash 5 450,000
Investment in Trading Securities 75,000
Trade and Other Receivables 6 100,000
Merchandise Inventory 90,000
Prepaid Expenses 7 95,000
Total Current Assets 810,000

Non-Current Assets
Property, Plant, and Equipment 8 700,000
Total Assets 1,510,000

Note 5 - Cash

Cash on Hand 200,000

Cash in Bank 250,000
Total 450,000

Note 6- Trade and Other Receivables

Accounts Receivable 65,000

Less: Allowance for Bad Debts 5,000 60,000
Notes Receivable 15,000
Interest Receivable 10,000
Advances to Employees 10,000
Accrued Income 5,000
100,000

Note 7 - Prepaid Expenses

Supplies 25,000
Prepaid Insurance 70,000
95,000
Note 8 - Property, Plant, and Equipment
Land 180,000
Building 500,000
Less: Accumulated Depreciation 20,000 480,000
Equipment 50,000
Less: Accumulated Depreciation 20,000 30,000
Furniture & Fixtures 10,000
Total 700,000
Activity 1.1

Presented below are the assets of Blue Jeans Trading. Prepare the assets section of the balance
sheet for year ended December 31, 2019 together with the supporting notes.

Cash on Hand 200,000

Accounts Receivable 100,000
Allowance for Bad Debts 5,000
Notes Receivable 40,000
Interest Receivable 12,000
Advances to Employees 20,000
Accrued Income 10,000
Supplies 1,000
Prepaid Rent 7,000
Land 400,000
Building 700,000
Accumulated Depreciation - Building 50,000
Equipment 100,000
Accumulated Depreciation - Equipment 30,000
Furniture & Fixtures 80,000
If assets can be subdivided into current and noncurrent assets, liabilities are also
classified in the same manner. The following section discusses the different types of
debts that are classified and presented based on their maturity. Obligations presently
due for payment are listed first.

Review of Classification of Liabilities

A. Current Liabilities

Improvements to International Accounting Standards 1 (December 2003) classifiy a liability as a

current liability when it is:

a. expected to be settled in the entity's normal operating cycle;

b. held primarily for the purpose of being traded; and

c. due to be settled within twelve months after the balance sheet date; or entity does not
have an unconditional right to defer settlement of the liability for at least twelve months
after the balance sheet date.

Classification of Current Liabilities

Trade and Other Payables include payables from any of the following accounts:

Accounts Payable includes debts arising from purchase of an asset or acquisition of

services on account.

Notes Payable includes debts arising from purchase of an asset or acquisition of services
on account evidenced by a promissory note.

Loan Payable is a liability to pay the bank or other financing institution arising from funds
borrowed by the business from these institutions payable within twelve months or shorter.
Note : If loan is payable beyond twelve months, then it is classified under non-current
liabilities.

Utilities Payable is an obligation to pay utilities companies for services received from them.
Examples of this are telephone services to PLDT, electricity to APEC, and water services
to LCWD.

Unearned Revenues represent obligations of the business arising from advance payments
received before goods or sevices 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. Examples of these are salaries payable, utilities payable, taxes payable, and interest payable.
Classification of Non-Current Liabilities

Non-Current Liabilities are long term liabilities or obligations which are payable for a period
longer than one year. Examples of Non-current Liabilities are as follows:

Mortgage Payable is a long-termdebts 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 asset to be sold and the proceeds of the sale to be used to settle the
obligation.

Bond Payable is a certificate of indebtedness under the seal of corpoaration , specifying the
terms of repayment and the rate of interest to be charged.

The owner's equity is added below the liabilities. Presented below is the liabilities section and
owner'w equity section of the statement of financial position and its supporting notes.

Liabilites & Owner's Equity Note

Current Liabialites
Trade and Other Payables 430,000
Non-Current Liabilities
Mortgage payable 300,000
Loan Payable 100,000
Total Non-Current Liabailities 400,000
Total Liabilities 830,000
Owner's Equity
Ren, Capital 680,000
Tota Liabilities and Capital 1,510,000

Note 9 - Trade and Other Payables

Accounts Payable 250,000

Notes Payable 120,000
Accrued Expenses 60,000
Total 430,000
Activity 1.2

Presented below are the assets of Blue Jeans Trading. Prepare the liabilities and owner's equity
section of the balance sheet for year ended December 31, 2019 together with the supporting
notes.

Accounts Payable 30,000

Notes Payable 20,000
Accrued Expenses 10,000
Loan Payable (5years) 80,000
Mortgage Payable 700,000
Jeans, Capital 745,000
The Statement of Changes in Owner's Equity or Statement of Owner's Equity shows the changes
in the Capital or Owner's Equity as a result of additional investment or withdrawals by the owner,
plus or minus the net income or net loss for the year.

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 a temporary account used at the end of the accounting period to close income
and expenses accounts. The balance of this account shows the net income or net loss for the
period before it is closed to the capital account.

Below is the statement of owner's equity of RenRen Merchandising.

Ren Ren Merchandising

Statement of Changes in Owner's Equity
For Year Ended December 31, 2019

Ren, Capital, Beginning 280,000

Add: Additional Investment 22,200
Net Income 407,800 430,000
Total 710,000
Less: Drawings 30,000
Ren, Capital, End 680,000

Activity 1.3

The beginning capital of Blue Jeans Trading is ₱ 728,000. During the year the owner made an
additional investment of ₱20,000 and withdrew ₱35,000 for personal use. Net income during
the year amounted to ₱45,000. Prepare the statement of changes in owner's equity for year
ended December 31, 2019.
The Two Forms of Statement of Financial Position

There are two forms of statement of financial position or balance sheet as follows:

1. Account Form which follows the accounting equation where assets are listed on the
left-hand column of the report with the liabilities and owner's equity listed on the
right-hand columns; and

2. Report Form which shows in one straight column athe assets, followed by liabilities and
owner's equity.

Account Form
Ren Ren Merchandising
Statement of Financial Position
As of December 31, 2019

Assets Notes Liabilities & Owner's Equity Notes

Current Assets Current Liabilities

Cash 5 450,000 Trade and Other Payables 9 430,000
Investment in Trading Securities 75,000
Trade and Other Receivables 6 100,000 Non-Current Liabilities
Merchandise Inventory 90,000
Prepaid Expenses 7 95,000 Mortgage Payable 300,000
Total Current Assets 810,000 Loan Payable 100,000
Total Non-Current Liabilities 400,000
Total Liabilities 830,000
Non-Current Assets
Owner's Equity
Property, Plants, and Equipment 8 700,000 Ren, Capital 680,000

Total Assets 1,510,000 Total Liabilities and Capital 1,510,000

* Ren, Capital of ₱680,000 is the ending capital in the statement of changes in owner's equity.
Report Form

Ren Ren Merchandising

Statement of Financial Position
As of December 31, 2019

Assets Notes

Current Assets
Cash 5 450,000
Investment in Trading Securities 75,000
Trade and Other Receivables 6 100,000
Merchandise Inventory 90,000
Prepaid Expenses 7 95,000
Total Current Assets 810,000

Non-Current Assets
Property, Plant, and Equipment 8 700,000

Total Assets 1,510,000

Liabilities & Owner's Equity

Current Liabilities
Trade and Other Payables 9 430,000

Non-Current Liabilities
Mortgage Payable 300,000
Loan Payable 100,000
Total Non-Current Liabilities 400,000
Total Liabilities 830,000

Owner's Equity
Ren, Capital 680,000

Total Liabilities and Capital 1,510,000

* Ren, Capital of ₱680,000 is the ending capital in the statement of changes in owner's equity.
Notes to Financial Statement (continuation)

Note 5 - Cash

Cash on Hand 200,000

Cash in Bank 250,000
Total 450,000

Note 6 - Trade and Other Receivables

Accounts Receivable 65,000

Less: Allowance for Bad Debts 5,000 60,000
Notes Receivable 15,000
Interest Receivable 10,000
Advances to Employees 10,000
Accrued Income 5,000
Total 100,000

Note 7 - Prepaid Expenses

Supplies 25,000
Prepaid Insurance 70,000
Total 95,000

Note 8 - Property, Plant, and Equipment

Land 180,000
Building 500,000
Less: Accumulated Depreciation 20,000 480,000
Equipment 50,000
Less: Accumulated Depreciation 20,000 30,000
Furniture & Fixtures 10,000
Total 700,000

Note 9 - Trade and Other Payables

Accounts Payable 250,000

Notes Payable 120,000
Accrued Expenses 60,000
Total 430,000
Activity 1.4

Prepare the statement of financial position or balance sheet of Blue Jeans Trading for year
ended December 31, 2019. Refer to Activity 2.1 for the asset section of the SFP or balance sheet,
and acticity 2.2 for the liabilities and owner's equity section. Prepare the SFP or balance sheet
using the account form and report form.

Activity 1.5

Classify the following as:

A. Current assets
B. Non-current assets
C. Current liabilities
D. Non-current liabilities

1. Cash
2. Mortgage payable
3. Notes receivable
4. Car
5. Furniture
6. Supplies
7. Prepaid rent
8. Loans payable (24 months)
9. Inventory
10. Taxes Payable
11. Copyright
12. Land
13. Accounts receivable
14. Loans receivable (3months)
15. Machineries

Activity 1.6

On January 1, 2018, the capital of Ms. Ann Cortes is ₱102,500. During the year the owner made
as additional investment of ₱25,000 and withdrew assets worth ₱78,000 for personal use.
Net income during the year amounted to ₱91,500. Prepare the statement of changes in owner's
equity for year ended December 31, 2018.

Activity 1.7

Refer to activity 2.6, assume that instead of a net income of ₱91,500, the business incurred
a net loss in the amount of ₱ 35,000. Prepare the statement of changes in owner's equity.
Activity 1.8

Presented below are accounts of SunShine Merchandising.

Cash ?
Accounts Receivable 59,400
Allowance for Bad Debts 5,000
Notes Receivable 39,600
Interest Receivable 5,000
Merchandise Inventory 247,500
Prepaid Insurance 6,000
Office Supplies 30,000
Delivery Equipment 225,000
Accumulated Depreciation - Delivery Equipment 72,000
Furniture and Fixtures 180,000
Accumulated Depreciation - Furniture and Fixtures 67,500
Accounts Payable 45,000
Accrued Expenses 8,000
Notes Payable (due in 3 years) 105,000
S, Capital ?
S, Drawing 50,000

During the year, the owner made an additional investment of ₱20,000 and withdrawals
amounting of ₱50,000. S, Capital, Beginning is ₱617,600. Net Income for the year is
₱75,000.

Required: 1. Prepare the statement of financial position and determine the amount
of cash.
2. Prepare the supporting notes.
3. Prepare the statement of changes in owner's equity.
Weeks 3 to 4 - The Income Statement

Nature

The Statement of Income is a financial statement providing information about an entity's past
performance. Its purpose is to measure the results of the entity's operations for some specific
time period. This statement is also known as Statement of Comprehensive Income .

Elements

The Statement of Income is also comprised of accounting elements, namely:

1. Revenues
2. Expenses
3. Gains and Losses

Revenues are inflows of assets to an entity from delivering or providing goods,

rendering services, or carrying out other activities. Revenue repersents
whar a company's customers pay for its goods and services and the
rewards of doing business.

Expenses are outflows of assets arising from delivering or producing goods,

rendering services, or carrying out other activities. Expenses are the
sacrifices required to attain revenues. Examples are cost of
merchandise sold, selling and administrative expenses.

Gains and arise from the sale or loss in value of assets other than merchandise.
Losses These assets may include equipment, machinery, invesments in
marketable securities.

Preparation of the Statement of Income

The heading for the Statement of Income must include the name of the business, the name of the
statement and the period for which activity is being reported. Periodis the length of time (usually a
year, a month, a quarter) for which activity is being reported on an Income Statement.

Forms of Income Statement

1. Natural Form - otherwise called the nature of expense method, it represents expenses
according to nature. This type of income statement is used in a service business. It is
also called the single-step income statement since a single step of deducting expenses
from revenue is performed to arrive at the net income or net loss.

2. Functional Form - otherwise known as the cost of sales method, It presents expenses
according to finction (e.g. cost of sales, selling expenses, administrative expenses). This
type is used in a merchandising business. It also called the multiple-step income statement
since a series of steps is performed to arrive at the net income or net loss.
Comparison of the Natural Form and the Functional Form Income Statements

Natural Form Functional Form

Income From Services ₱ xxx Net Sales ₱ xxx

Less: Cost of Sales xxx
Gross Profit ₱ xxx
Less: Operating Expenses xxx Less: Operating Expenses xxx
Net Income/Loss ₱ xxx Net Income/Loss ₱ xxx

*Notice that in the natural form income statement, a single-step of deducting total expenses
from total revenues was done to get the net income/loss operations. However, in the functional
form income statement, a series of steps was done showing several activities of the business
before finally arriving at the net income/loss from operations.

A Review of the Single-Step Income Statement

The following are the accounts that compose the single-step:

Service Income includes revenues earned or generated by the business in performing services
for a customer or client. The following are different examples of income and the accounting
term used to describe the income.

Examples: Laundry Services by a laundry shop (Laundry Income)

Medical Services by a doctor (Medical Fees)
Dental Services by a dentist (Dental Fees)
Advisory Services by a consultant (Consultancy Fees)
Accounting or Auditing Services by a certified public accountant (Audit Fees)

Salaries or Wages Expense includes all payments made to employees or workers for rendering
services to the company. Examples are salaries or wages, 13th month pay, cost of living allowances,
and other related benefits given to them.

Utilities Expense is an expense related to the use of electricity, fuel, water, and telecommunications
facilities.

Supplies Expense covers office supplies used by the business in the conduct of its daily operations.

Insurance Expense is the expired portion of premiums paid on insurance coverage such as premiums
paid for health or life insurance, motor vehicles or other properties.

Depreciation Expense is the annual portion of the cost of a tangible asset such as buildings,
machineries, and equipment charged as expense for the year.
Uncollectible Accounts Expense/Doubtful Accounts Expense/Bad Debts Expense means the
amount of receivables charged as expense for the period because they are estimated to be
doubtful of collection.

Interest Expense is the amount of money charged to the borrower for the use of borrowed funds.

Natural Form Income Statement

Alex Bernal Spa
Income Statement
For Year Ended December 2019

Note
Service Revenue 454,000
Other Income 1 61,000
Total Income 515,000
Expenses
Salaries 155,000
Rent 85,000
Depreciation 2 20,000
Supplies 5,000
Insurance 2,000
Other Expense 3 4,000
Finance Cost 4 4,000 275,000
Net Income 240,000

Notes to Financial Statements

Note 1 - Other Income
Rent Income 30,000
Dividends Income 15,000
Gain on Sale of Equipment 10,000
Interest Income 6,000
Total 61,000

Note 2 - Depreciation Expense

Depreciation Expense - Building 15,000
Depreciation Expense - Equipment 5,000
Total 20,000

Note 3 - Other Expense

Loss on Sale of Furniture 4,000

Note 4 - Finance Costs

Interest Expense - Mortgage 3,000
Interest Expense - Loan 1,000
Total 4,000
The Multiple-Step Income Statement
Components of the Multiple-Step Income Statement

Ren Ren Merchandising

Income Statement
For year ended December 3, 2019

Note

Net Sales 1 ₱ xxx

Cost of Sales 2 xxx
Gross Profit ₱ xxx
Other Income 3 xxx
Total Income ₱ xxx
Operating Expenses
Distribution Expenses 4 ₱ xxx
Administrative Expenses 5 xxx
Other Expenses 6 xxx
Finance Cost xxx xxx
Net Income ₱ xxx

Net Sales
The first line after the heading of the income statement is the net sales. To show the details of
its computation, it is supported by a note to financial statement. Net sales is computed as follows:

Gross Sales ₱ xxx

Less: Sales Returns & Allowances ₱ xxx
Sales Discount xxx xxx
Net Sales ₱ xxx

Cost of Sales
The cost of sales or cost of goods sold represents the cost of merchandise inventory sold by
the business to its customers. This comprises the company's biggest expense and is deducted
from nets sales to arrive at the gross profit. Computation of cost of sales is as follows.

Merchandising Inventory, Beginning ₱ xxx

Add: Net Cost of Purchases
Purchases ₱ xxx
Less: Purchases Returns and Allowances ₱ xxx
Purchase Discounts xxx xxx
Net Purchases ₱ xxx
Add: Freight-in xxx xxx
Goods Available for Sale ₱ xxx
Less: Merchandise Inventory, End xxx
Cost of Sales ₱ xxx
Other Income

Other income is income derived from sources other than company's main line of business.
Examples are interest income, dividends income, commissions income, rent income, and gain
on sale of assets. To show the details of this income account, it is supported by a note to financial
statement.

Distribution Expenses/ Selling Expenses

Selling expenses are those incurred in directly selling the merchandise. Includes salaries of
sales personnel, expenses incurred in promoting or advertising the product, commissions on
sales, store supplies used, utilities used in the store, depreciation expense of assets used in the
store and the cost of transporting the merchandise to the customer's place of business under
the account title freight-out or delivery expense.

General/Administrative Expenses

General or administrative expenses are expenses necessary in the management of the office.
This includes the salaries of office personnel, office supplies used, utilities used in the office,
depreciation of office assets and the provision for bad debts or uncollectible accounts.

Note: If the business has a small office, does not maintain a store, and sales are also made in the
office, operating expenses need not be categorized under selling and administrative expenses.

Other Expenses

Other Expenses are expenses not connected to the operating activities of the business. An
example of this is loss on sale of assets and discount lost.

Finance Cost

Finance Cost are the interest expense paid for the use of borrowed funds.
Illustrative Problem

The following account balances are taken from the books of Ren Ren Merchandising on
December 31, 2019.

Sales 782,000
Sales Returns & Allowances 32,000
Sales Discount 48,000
Purchases 220,000
Purchases Purchases Returns & Allowances 34,000
Purchase Discout 26,000
Freight-in 10,000
Merchandise Inventory, Beginning 180,000
Merchandise Inventory, End 120,000
Sales Salaries Expenses 52,000
Depreciation Expense-Store Equipment 7,800
Utilities Expense - Store 6,000
Office Salaries Expense 34,000
Utilities Expense - Office 4,400
Office Supplies 3,000
Bad Debts Expense 2,000
Interest Expense 2,400
Loss on Sale of Equipment 1,600
Discount Lost 1,000
Interest Income 30,000
Rent Income 20,000
Ren Ren Merchandising
Income Statement
For year ended December 31, 2019

Note
Net Sales 1 702,000
Cost of Sales 2 230,000
Gross Profit 472,000
Other Income 3 50,000
Total Income 522,000
Operating Expenses
Distribution Expenses 4 65,800
Administrative Expenses 5 43,400
Other Expenses 6 2,600
Finance Cost 7 2,400 114,200
Net Income 407,800

Note 1 - Net Sales

Gross Sales 782,000

Less: Sales Returns & Allowances 32,000
Sales Discount 48,000 80,000
Net Sales 702,000

Note -2 Cost of Sales

Merchandising Inventory, Beginning 180,000

Add: Net Cost of Purchases
Purchases 220,000
Less: Purchases Returns & Allowances 34,000
Purchase Discount 26,000 60,000
Net Purchases 160,000
Add: Freight-in 10,000 170,000
Goods Available for Sale 350,000
Less:Merchandise Inventory, End 120,000
Cost of Sales 230,000

Note -3 Other Income

Interest Income 30,000

Rent Income 20,000
Total 50,000
Note 4 - Distribution Expenses

Sales Salaries Expense 52,000

Depreciation Expense - Store Equipment 7,800
Utilities Expense - Store 6,000
Total 65,800

Note 5 - Administrative Expenses

Office Salaries Expense 34,000

Utilities Expense - Office 4,400
Office Supplies 3,000
Bad debts Expense 2,000
Total 43,400

Note 6 - Other Expenses

Loss on Sale of Equipment 1,600

Discount Lost 1,000
2,600

Note 7 - Finance Cost

Intrest Expense 2,400

Let's Have Activities

Activity 1.9

The following are accounts taken from the books of Brainy Consultancy Services for the
month of July 2019. Prepare an income statement from the given data.

Consultancy Fees 200,000

Other Icome 10,000
Salaries Expenses 25,000
Rent Expenses 20,000
Utilities Expense 10,000
Depreciation Expense 3,000
Bad debts Expense 1,000
Activity 1.10

Based on the information that follows, prepare the cost of goods sold section of a
multiple step income statement.

Merchandise Inventory, January 1, 2019 136,000

Purchases 408,000
Purchases Returns & Allowances 16,800
Purchase Disacount 8,160
Freight-in 3,200
Merchandise Inventory, December 31, 2019 112,000

Activity 1.11

Use the following information to prepare a multiple-step income statement, including the
revenue section and the cost of goods sold section, for Twin Buddy Depot for the year
December 31, 2019.

Sales 664,000
Sales Returns & Allowances 6,480
Sales Discount 13,280
Merchandise Inventory, Beginning 180,000
Purchases 445,200
Purchases Returns & Allowances 14,400
Purchase Discounts 8,904
Freight-in 2,560
Merchandise Inventory, End 118,400
Distribution Expenses
Sales Salaries Expense 48,000
Advertising Expense 5,684
Administrative Expenses
Office Salaries Expense 40,000
Supplies Expenses 2,600
Utilities Expense 36,000
Insurance Expense 4,000
Depreciation Expense - Building 11,000
Depreciation Expense - Equipment 10,000
REFERENCES:
• Ong, Flocer L., (2016). Fundamentals of Accountancy, Business, and Management.
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• Manalo, Marivic M., (2016). Learning to Succeed in Business with Accounting.

Phoenix Bldg., 927 Quezon Avenue, Quezon City. Phoenix Publishing House, Inc.

• Cabrera, Elenita B. & Cabrera, Gilbert B., (2019). Fundamentals of Accountancy, Business,
and Management. 2017 C.M. Recto Avenue, Manila. GIC Enterprises & Co., Inc.

• Ballada, Win & Ballada, Susan, (2018). Basic Accounting.

838 Padre Campa St., España, Smpalok, 1051 Manila. Domdane Publisher

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