FUNDAMENTALS OF

ACCOUNTING, BUSINESS
AND MANAGEMENT 2
(FABM 2)
FUNDAMENTALS OF ACCOUNTING,
BUSINESS AND MANAGEMENT 2 TOPICS
STATEMENT OF FINANCIAL POSITION
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF CHANGES IN EQUITY
CASH FLOW STATEMENT
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS
FUNDAMENTALS OF ACCOUNTING,
BUSINESS AND MANAGEMENT 2 TOPICS
ACCOUNTING BOOKS – JOURNAL/LEDGER
BASIC DOCUMENTS AND TRANSACTIONS RELATED TO BANK DEPOSITS
BANK RECONCILIATION STATEMENT
ACCOUNTING PRACTICE SET
INCOME AND BUSINESS TAXATION
ARE YOU AN ASSET OR ARE YOU A LIABILITY?

10 YEARS FROM NOW?

STATEMENT OF FINANCIAL POSITION
THE STATEMENT OF FINANCIAL POSITION, OFTEN CALLED THE BALANCE SHEET, IS A
FINANCIAL STATEMENT THAT REPORTS THE ASSETS, LIABILITIES, AND EQUITY OF A
COMPANY ON A GIVEN DATE. IN OTHER WORDS, IT LISTS THE RESOURCES, OBLIGATIONS,
AND OWNERSHIP DETAILS OF A COMPANY ON A SPECIFIC DAY.
YOU CAN THINK OF THIS LIKE A SNAPSHOT OF WHAT THE COMPANY LOOKED LIKE AT A
CERTAIN TIME IN HISTORY.
BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

ASSETS SECTION

ASSETS ARE RESOURCES THAT THE COMPANY CAN USE TO CREATE GOODS OR PROVIDE
SERVICES AND GENERATE REVENUES. THERE ARE MANY WAYS TO FORMAT THE ASSETS
SECTION, BUT THE MOST COMMON SIZE BALANCE SHEET DIVIDES THE ASSETS INTO TWO
SUB-CATEGORIES: CURRENT AND NON-CURRENT. THE CURRENT ASSETS INCLUDE CASH,
ACCOUNTS RECEIVABLE, AND INVENTORY. THESE RESOURCES ARE TYPICALLY CONSUMED
IN THE CURRENT PERIOD OR WITHIN THE NEXT 12 MONTHS.
CURRENT ASSETS

A CURRENT ASSET IS CASH OR ANY ASSET THAT CAN BE REASONABLY CONVERTED TO

CASH WITHIN ONE YEAR.

CURRENT ASSETS TYPICALLY INCLUDE CATEGORIES SUCH AS CASH, MARKETABLE

SECURITIES, SHORT-TERM INVESTMENTS, ACCOUNTS RECEIVABLE , PREPAID EXPENSES,
AND INVENTORY.
CURRENT ASSETS ARE IMPORTANT BECAUSE THEY INDICATE HOW MUCH CASH A
COMPANY ESSENTIALLY HAS ACCESS TO WITHIN THE NEXT 12 MONTHS OUTSIDE OF
THIRD-PARTY SOURCES. IT IS INDICATIVE OF HOW THE COMPANY FUNDS ITS ONGOING,
DAY-TO-DAY OPERATIONS, AND HOW LIQUIDA FIRM IS. THE RATIO OF CURRENT ASSETS
TO CURRENT LIABILITIES IS PARTICULARLY IMPORTANT IN JUDGING LIQUIDITY.
 CURRENT ASSETS
CASH
CASH IS BILLS, COINS, BANK BALANCES, MONEY ORDERS, AND CHECKS. CASH IS USED TO ACQUIRE GOODS
AND SERVICES OR TO ELIMINATE OBLIGATIONS.
• ITEMS THAT DO NOT FALL WITHIN THE DEFINITION OF CASH ARE POST-DATED CHECKS AND NOTES
RECEIVABLE. MOST FORMS OF CASH ARE ELECTRONIC, RATHER THAN BILLS AND COINS, SINCE CASH
BALANCES CAN BE STATED IN THE COMPUTER RECORDS FOR INVESTMENT ACCOUNTS.
• CASH IS LISTED FIRST IN THE BALANCE SHEET, SINCE THE REPORTING SEQUENCE IS IN ORDER BY
LIQUIDITY, AND CASH IS THE MOST LIQUID OF ALL ASSETS. A RELATED ACCOUNTING TERM IS CASH
EQUIVALENTS, WHICH REFERS TO ASSETS THAT CAN BE READILY CONVERTED INTO CASH.
SHORT-TERM INVESTMENTS
THE SHORT-TERM INVESTMENT CLASSIFICATION REFERS TO FUNDS THAT HAVE BEEN PLACED IN
INVESTMENT INSTRUMENTS THAT WILL MATURE WITHIN ONE YEAR OR WHICH ARE EXPECTED TO BE
LIQUIDATED WITHIN ONE YEAR. EXAMPLES OF THESE INSTRUMENTS ARE MONEY MARKET FUNDS AND
MARKETABLE SECURITIES. MOST INVESTMENTS THAT ARE ACTIVELY TRADED CAN BE CONSIDERED SHORT-
TERM INVESTMENTS, SINCE THEY CAN BE EASILY LIQUIDATED. THE AMOUNT INVESTED IN THESE
INSTRUMENTS IS CLASSIFIED AS A CURRENT ASSET ON THE BALANCE SHEET OF THE INVESTOR.
A BUSINESS TYPICALLY STORES A LARGE PART OF ITS EXCESS FUNDS IN SHORT-TERM INVESTMENTS SO
THAT IT CAN EARN A SMALL RETURN WHILE STILL BEING ABLE TO ACCESS THE FUNDS FOR ITS OPERATING
NEEDS ON SHORT NOTICE.
PREPAID EXPENSE
A PREPAID EXPENSE IS AN EXPENDITURE THAT IS PAID FOR IN ONE ACCOUNTING PERIOD, BUT FOR WHICH
THE UNDERLYING ASSET WILL NOT BE ENTIRELY CONSUMED UNTIL A FUTURE PERIOD. AN EXAMPLE OF A
PREPAID EXPENSE IS INSURANCE, WHICH IS FREQUENTLY PAID IN ADVANCE FOR MULTIPLE FUTURE
PERIODS; AN ENTITY INITIALLY RECORDS THIS EXPENDITURE AS A PREPAID EXPENSE, AND THEN CHARGES IT
TO EXPENSE OVER THE USAGE PERIOD.
A PREPAID EXPENSE IS LISTED WITHIN THE CURRENT ASSETS SECTION OF THE BALANCE SHEET UNTIL THE
PREPAID ITEM IS CONSUMED. ONCE CONSUMPTION HAS OCCURRED, THE PREPAID EXPENSE IS REMOVED
FROM THE BALANCE SHEET AND IS INSTEAD REPORTED IN THAT PERIOD AS AN EXPENSE ON THE INCOME
STATEMENT. IF THE TOTAL ENDING BALANCE IN THE PREPAID EXPENSES ACCOUNT IS QUITE SMALL, IT MAY
BE AGGREGATED WITH OTHER ASSETS AND REPORTED WITHIN AN "OTHER EXPENSES" LINE ITEM IN THE
BALANCE SHEET.
ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE REFERS TO SHORT-TERM AMOUNTS DUE FROM
BUYERS TO A SELLER WHO HAVE PURCHASED GOODS OR SERVICES FROM
THE SELLER ON CREDIT. CREDIT IS USUALLY GRANTED IN ORDER TO GAIN
SALES OR TO RESPOND TO THE GRANTING OF CREDIT BY COMPETITORS.
ACCOUNTS RECEIVABLE IS LISTED AS A CURRENT ASSET ON THE
SELLER'S BALANCE SHEET.
INVENTORY
• INVENTORY IS AN ASSET THAT IS INTENDED TO BE SOLD IN THE ORDINARY COURSE OF BUSINESS.
INVENTORY MAY NOT BE IMMEDIATELY READY FOR SALE. INVENTORY ITEMS CAN FALL INTO ONE OF THE
FOLLOWING THREE CATEGORIES:
• HELD FOR SALE IN THE ORDINARY COURSE OF BUSINESS; OR
• THAT IS IN THE PROCESS OF BEING PRODUCED FOR SALE; OR
• THE MATERIALS OR SUPPLIES INTENDED FOR CONSUMPTION IN THE PRODUCTION PROCESS.
• THIS ASSET CLASSIFICATION INCLUDES ITEMS PURCHASED AND HELD FOR RESALE. IN THE CASE OF
SERVICES, INVENTORY CAN BE THE COSTS OF A SERVICE FOR WHICH RELATED REVENUE HAS NOT YET
BEEN RECOGNIZED.
IN ACCOUNTING, INVENTORY IS TYPICALLY BROKEN DOWN INTO THREE CATEGORIES, WHICH ARE:
• RAW MATERIALS. INCLUDES MATERIALS INTENDED TO BE CONSUMED IN THE PRODUCTION OF FINISHED
GOODS.
• WORK-IN-PROCESS. INCLUDES ITEMS THAT ARE IN THE MIDST OF THE PRODUCTION PROCESS, AND
WHICH ARE NOT YET IN A STATE READY FOR SALE TO CUSTOMERS.
• FINISHED GOODS. INCLUDES GOODS READY FOR SALE TO CUSTOMERS. MAY BE TERMED MERCHANDISE IN
A RETAIL ENVIRONMENT WHERE ITEMS ARE BOUGHT FROM SUPPLIERS IN A STATE READY FOR SALE.
INVENTORY IS TYPICALLY CLASSIFIED AS A SHORT-TERM ASSET, SINCE IT IS USUALLY LIQUIDATED WITHIN
ONE YEAR.
MARKETABLE SECURITY
A MARKETABLE SECURITY IS AN EASILY TRADED INVESTMENT THAT IS READILY
CONVERTED INTO CASH, USUALLY BECAUSE THERE IS A STRONG SECONDARY
MARKET FOR THE SECURITY. SUCH SECURITIES ARE TYPICALLY TRADED ON A PUBLIC
EXCHANGE, WHERE PRICE QUOTES ARE READILY AVAILABLE. THE TRADEOFF FOR THE HIGH
LEVEL OF LIQUIDITY IS THAT THE RETURN ON MARKETABLE SECURITIES IS USUALLY LOW.
MARKETABLE SECURITIES ARE RECORDED AS A CURRENT ASSET, SINCE THEY HAVE
A MATURITY OF LESS THAN ONE YEAR.
EXAMPLES OF MARKETABLE SECURITIES ARE:
BANKER'S ACCEPTANCES-A BANKER'S ACCEPTANCE ARISES WHEN A BANK GUARANTEES
(OR ACCEPTS) CORPORATE DEBT, USUALLY WHEN IT ISSUES A LOAN TO A CORPORATE
CUSTOMER AND THEN SELLS THE DEBT TO INVESTORS. BECAUSE OF THE BANK
GUARANTEE, A BANKER'S ACCEPTANCE IS VIEWED AS AN OBLIGATION OF THE BANK. IF
THE BANK HAS A GOOD REPUTATION, THE ACCEPTANCE CAN BE RE-SOLD IN AN OPEN
MARKET, AT A DISCOUNT TO ITS FACE VALUE. A BANKER'S ACCEPTANCE IS CONSIDERED
TO BE A VERY SAFE ASSET, AND IS USED EXTENSIVELY IN INTERNATIONAL TRADE.
A BANK WILL ONLY ISSUE AN ACCEPTANCE WHEN IT IS COMFORTABLE WITH THE
ISSUER'S ABILITY TO REDEEM THE DEBT WHEN DUE.
CERTIFICATES OF DEPOSIT - A CERTIFICATE OF DEPOSIT IS A TERM BANK DEPOSIT WITH A
FIXED DURATION AND STATED INTEREST RATE. A CD IS ESSENTIALLY A PROMISSORY NOTE
ISSUED BY A BANK.
A CERTIFICATE OF DEPOSIT NORMALLY PAYS A FIXED INTEREST RATE UPON MATURITY,
THOUGH SOME VARIABLE-RATE VERSIONS ARE AVAILABLE. A MORE RESTRICTIVE CD MAY
REQUIRE AN EARLY-WITHDRAWAL PENALTY.

TREASURY BILLS - A TREASURY BILL IS A SHORT-TERM DEBT SECURITY THAT IS ISSUED

BY THE UNITED STATES GOVERNMENT TO RAISE MONEY. IT IS ISSUED WITH MATURITY
DATES OF EITHER FOUR WEEKS, 13 WEEKS, OR 26 WEEKS.
COMMERCIAL PAPER - COMMERCIAL PAPER IS UNSECURED DEBT THAT IS ISSUED BY AN ENTITY,
AND WHICH HAS A FIXED MATURITY RANGING FROM ONE TO 270 DAYS. A COMPANY USES
COMMERCIAL PAPER TO MEET ITS SHORT-TERM WORKING CAPITAL OBLIGATIONS. IT IS
COMMONLY SOLD AT A DISCOUNT FROM FACE VALUE, WITH THE DISCOUNT (AND THEREFORE THE
INTEREST RATE) BEING HIGHER IF THE TERM IS LONGER. A COMPANY CAN SELL ITS COMMERCIAL
PAPER DIRECTLY TO INVESTORS, SUCH AS MONEY MARKET FUNDS, OR THROUGH A DEALER IN
EXCHANGE FOR A SMALL COMMISSION.
BECAUSE THERE IS NO COLLATERAL ON THE DEBT, COMMERCIAL PAPER IS ONLY AN OPTION FOR
LARGE COMPANIES HAVING HIGH-LEVEL CREDIT RATINGS FROM A RECOGNIZED CREDIT RATING
AGENCY. FOR THOSE COMPANIES CAPABLE OF ISSUING IT, THE INTEREST RATE ON COMMERCIAL
PAPER IS EXTREMELY LOW.
 NONCURRENT ASSET
• A NONCURRENT ASSET IS AN ASSET THAT IS NOT EXPECTED TO BE CONSUMED WITHIN ONE YEAR. IF A
COMPANY HAS A HIGH PROPORTION OF NONCURRENT TO CURRENT ASSETS, THIS CAN BE AN INDICATOR OF
POOR LIQUIDITY, SINCE A LARGE AMOUNT OF CASH MAY BE NEEDED TO SUPPORT ONGOING INVESTMENTS IN
NONCASH ASSETS.
• SOME NONCURRENT ASSETS, SUCH AS LAND, MAY THEORETICALLY HAVE UNLIMITED USEFUL LIVES. A
NONCURRENT ASSET IS RECORDED AS AN ASSET WHEN INCURRED, RATHER THAN BEING CHARGED TO EXPENSE
AT ONCE. DEPRECIATION, DEPLETION, OR AMORTIZATION MAY BE USED TO GRADUALLY REDUCE THE AMOUNT OF
A NONCURRENT ASSET ON THE BALANCE SHEET.
• IN A CAPITAL-INTENSIVE INDUSTRY, SUCH AS OIL REFINING, A LARGE PART OF THE ASSET BASE OF A BUSINESS
MAY BE COMPRISED OF NONCURRENT ASSETS. CONVERSELY, A SERVICES BUSINESS THAT REQUIRES A
MINIMAL AMOUNT OF FIXED ASSETS MAY HAVE FEW OR NO NONCURRENT ASSETS.
• NONCURRENT ASSETS ARE AGGREGATED INTO SEVERAL LINE ITEMS ON THE BALANCE SHEET, AND ARE LISTED
AFTER ALL CURRENT ASSETS, BUT BEFORE LIABILITIES AND EQUITY.
• EXAMPLES OF NONCURRENT ASSETS ARE:
• LONG-TERM INVESTMENTS
• INTANGIBLE FIXED ASSETS (SUCH AS PATENTS)
• TANGIBLE FIXED ASSETS (SUCH AS EQUIPMENT AND REAL ESTATE)
• GOODWILL
NON-CURRENT ASSETS

LONG-TERM INVESTMENTS
LONG-TERM INVESTMENTS IS THE NAME OF AN ASSET ACCOUNT THAT INCLUDES ALL INVESTMENTS THAT
ARE NOT EXPECTED TO BE LIQUIDATED WITHIN THE NEXT TWELVE MONTHS. THE ACCOUNT MAY CONTAIN
MANY TYPES OF INVESTMENTS, INCLUDING DEBT AND EQUITY SECURITIES AND REAL ESTATE. THE ACCOUNT
IS STATED ON THE BALANCE SHEET AFTER CURRENT ASSETS.
INTANGIBLE FIXED ASSETS
AN INTANGIBLE ASSET IS A NON-PHYSICAL ASSET HAVING A USEFUL LIFE GREATER THAN
ONE YEAR. IF AN INTANGIBLE ASSET IS DETERMINED TO HAVE A USEFUL LIFE, THEN ITS
BOOK VALUE IS AMORTIZED OVER THAT USEFUL LIFE. IF AT ANY POINT THERE IS JUDGED TO
BE A DECLINE IN THE REMAINING VALUE OF AN INTANGIBLE ASSET BELOW ITS CARRYING
AMOUNT, THEN THE DIFFERENCE IS RECOGNIZED AS AN IMPAIRMENT EXPENSE IN THE
CURRENT PERIOD; THAT IS, THE IMPAIRMENT CHARGE IS NOT SPREAD OUT OVER A
NUMBER OF PERIODS.
EXAMPLES OF INTANGIBLE ASSETS ARE:
1. MARKETING-RELATED INTANGIBLE ASSETS
TRADEMARKS
NEWSPAPER MASTHEADS
INTERNET DOMAIN NAMES
NONCOMPETITION AGREEMENTS
2. CUSTOMER-RELATED INTANGIBLE ASSETS
CUSTOMER LISTS
ORDER BACKLOG
CUSTOMER RELATIONSHIPS
• ARTISTIC-RELATED INTANGIBLE ASSETS
• PERFORMANCE EVENTS
• LITERARY WORKS
• MUSICAL WORKS
• PICTURES
• MOTION PICTURES AND TELEVISION PROGRAMS

• CONTRACT-BASED INTANGIBLE ASSETS

• LICENSING AGREEMENTS
• SERVICE CONTRACTS
• LEASE AGREEMENTS
• FRANCHISE AGREEMENTS
• BROADCAST RIGHTS
• EMPLOYMENT CONTRACTS
• USE RIGHTS (SUCH AS DRILLING RIGHTS OR WATER RIGHTS)

• TECHNOLOGY-BASED INTANGIBLE ASSETS

• PATENTED TECHNOLOGY
• COMPUTER SOFTWARE
• TRADE SECRETS (SUCH AS SECRET FORMULAS AND RECIPES)
TANGIBLE FIXED ASSET

A TANGIBLE ASSET IS PHYSICAL PROPERTY - IT CAN BE TOUCHED. THE TERM IS MOST COMMONLY
ASSOCIATED WITH FIXED ASSETS, SUCH AS MACHINERY, VEHICLES, AND BUILDINGS. IT IS NOT USED TO
DESCRIBE SHORTER-TERM ASSETS, SUCH AS INVENTORY, SINCE THESE ITEMS ARE INTENDED FOR SALE OR
CONVERSION TO CASH. TANGIBLE ASSETS COMPRISE THE KEY COMPETITIVE ADVANTAGE OF SOME
ORGANIZATIONS, ESPECIALLY IF THEY USE THE ASSETS EFFICIENTLY TO PRODUCE SALES.
TANGIBLE ASSETS ARE FREQUENTLY USED AS COLLATERAL FOR LOANS, SINCE THEY TEND TO HAVE ROBUST,
LONG-TERM VALUATIONS THAT ARE VALUABLE TO A LENDER. THESE ASSETS TYPICALLY REQUIRE A
SIGNIFICANT AMOUNT OF MAINTENANCE TO UPHOLD THEIR VALUES AND PRODUCTIVE CAPABILITIES, AND
LIKELY REQUIRE INSURANCE PROTECTION.
GOODWILL
GOODWILL IS THE EXCESS OF THE PURCHASE PRICE PAID FOR AN ACQUIRED ENTITY AND
THE AMOUNT OF THE PRICE NOT ASSIGNED TO ACQUIRED ASSETS AND LIABILITIES. IT
ARISES WHEN AN ACQUIRER PAYS A HIGH PRICE TO ACQUIRE ANOTHER BUSINESS. THIS
ASSET ONLY ARISES FROM AN ACQUISITION; IT CANNOT BE GENERATED INTERNALLY.
GOODWILL IS AN INTANGIBLE ASSET, AND SO IS LISTED WITHIN THE LONG-TERM ASSETS
SECTION OF THE ACQUIRER'S BALANCE SHEET.
NEGATIVE GOODWILL ARISES WHEN AN ACQUIRER PAYS LESS FOR AN ACQUIREE THAN
THE FAIR VALUE OF ITS ASSETS AND LIABILITIES. THIS SITUATION USUALLY ONLY ARISES
AS PART OF A DISTRESSED SALE OF A BUSINESS.
LIABILITIES SECTION
• LIABILITIES ARE DEBT OBLIGATIONS THAT THE COMPANY OWES OTHER COMPANIES, INDIVIDUALS, OR
INSTITUTIONS. THESE RANGE FROM COMMERCIAL LOANS, PERSONAL LOANS, OR MORTGAGES. THIS
SECTION IS TYPICALLY SPLIT INTO TWO MAIN SUB-CATEGORIES TO SHOW THE DIFFERENCE BETWEEN
OBLIGATIONS THAT ARE DUE IN THE NEXT 12 MONTHS, CURRENT LIABILITIES, AND OBLIGATIONS THAT
MATURE IN FUTURE YEARS, LONG-TERM LIABILITIES.
• CURRENT DEBT USUALLY INCLUDES ACCOUNTS PAYABLE AND ACCRUED EXPENSES. BOTH OF THESE TYPES
OF DEBTS TYPICALLY BECOME DUE IN LESS THAN 12 MONTHS. THE LONG-TERM SECTION INCLUDES ALL
OTHER DEBTS THAT MATURE MORE THAN A YEAR INTO THE FUTURE LIKE MORTGAGES AND LONG-TERM
NOTES.
CURRENT LIABILITY
A CURRENT LIABILITY IS AN OBLIGATION THAT IS PAYABLE WITHIN ONE YEAR. THE
CLUSTER OF LIABILITIES COMPRISING CURRENT LIABILITIES IS CLOSELY WATCHED, FOR A
BUSINESS MUST HAVE SUFFICIENT LIQUIDITY TO ENSURE THAT THEY CAN BE PAID OFF
WHEN DUE. ALL OTHER LIABILITIES ARE REPORTED AS LONG-TERM LIABILITIES, WHICH
ARE PRESENTED IN A GROUPING LOWER DOWN IN THE BALANCE SHEET BELOW CURRENT
LIABILITIES.
THE FOLLOWING ARE COMMON EXAMPLES OF CURRENT LIABILITIES:

• ACCOUNTS PAYABLE. THESE ARE THE TRADE PAYABLES DUE TO SUPPLIERS, USUALLY AS EVIDENCED BY
SUPPLIER INVOICES.
• SALES TAXES PAYABLE. THIS IS THE OBLIGATION OF A BUSINESS TO REMIT SALES TAXES TO THE
GOVERNMENT THAT IT CHARGED TO CUSTOMERS ON BEHALF OF THE GOVERNMENT.
• PAYROLL TAXES PAYABLE. THIS IS TAXES WITHHELD FROM EMPLOYEE PAY, OR MATCHING TAXES, OR
ADDITIONAL TAXES RELATED TO EMPLOYEE COMPENSATION.
• INCOME TAXES PAYABLE. THIS IS INCOME TAXES OWED TO THE GOVERNMENT BUT NOT YET PAID.
• INTEREST PAYABLE. THIS IS INTEREST OWED TO LENDERS BUT NOT YET PAID.
• BANK ACCOUNT OVERDRAFTS. THESE ARE SHORT-TERM ADVANCES MADE BY THE BANK TO OFFSET ANY
ACCOUNT OVERDRAFTS CAUSED BY ISSUING CHECKS IN EXCESS OF AVAILABLE FUNDING.
• ACCRUED EXPENSES. THESE ARE EXPENSES NOT YET PAYABLE TO A THIRD PARTY, BUT ALREADY
INCURRED, SUCH AS WAGES PAYABLE.
• CUSTOMER DEPOSITS. THESE ARE PAYMENTS MADE BY CUSTOMERS IN ADVANCE OF THE COMPLETION OF
THEIR ORDERS FOR GOODS OR SERVICES.
• DIVIDENDS DECLARED. THESE ARE DIVIDENDS DECLARED BY THE BOARD OF DIRECTORS, BUT NOT YET
PAID TO SHAREHOLDERS.
• SHORT-TERM LOANS. THIS IS LOANS THAT ARE DUE ON DEMAND OR WITHIN THE NEXT 12 MONTHS.
• CURRENT MATURITIES OF LONG-TERM DEBT. THIS IS THAT PORTION OF LONG-TERM DEBT THAT IS DUE
WITHIN THE NEXT 12 MONTHS.
NONCURRENT LIABILITIES

NONCURRENT LIABILITIES ARE THOSE OBLIGATIONS NOT DUE FOR

SETTLEMENT WITHIN ONE YEAR. THESE LIABILITIES ARE SEPARATELY
CLASSIFIED IN AN ENTITY'S BALANCE SHEET, AWAY FROM CURRENT
LIABILITIES. EXAMPLES OF NONCURRENT LIABILITIES ARE:
• LONG-TERM PORTION OF DEBT PAYABLE
• LONG-TERM PORTION OF BONDS PAYABLE
• THE AGGREGATE AMOUNT OF CURRENT LIABILITIES IS A KEY COMPONENT OF SEVERAL MEASURES OF THE
SHORT-TERM LIQUIDITY OF A BUSINESS, INCLUDING:
• CURRENT RATIO. THIS IS CURRENT ASSETS DIVIDED BY CURRENT LIABILITIES.
• QUICK RATIO. THIS IS CURRENT ASSETS MINUS INVENTORY, DIVIDED BY CURRENT LIABILITIES.
• CASH RATIO. THIS IS CASH AND CASH EQUIVALENTS, DIVIDED BY CURRENT LIABILITIES.

FOR ALL THREE RATIOS, A HIGHER RATIO DENOTES A LARGER AMOUNT OF LIQUIDITY AND THEREFORE AN
ENHANCED ABILITY FOR A BUSINESS TO MEET ITS SHORT-TERM OBLIGATIONS.
EQUITY SECTION
• EQUITY CONSISTS OF THE OWNERSHIP OF THE COMPANY. IN OTHER WORDS, THIS
MEASURES THEIR STAKE IN THE COMPANY AND HOW MUCH THE SHAREHOLDERS OR
PARTNERS ACTUALLY OWN. THIS SECTION IS DISPLAYED SLIGHTLY DIFFERENT
DEPENDING ON THE TYPE OF ENTITY. FOR EXAMPLE A CORPORATION WOULD LIST THE
COMMON STOCK, PREFERRED STOCK, ADDITIONAL PAID-IN CAPITAL, TREASURY STOCK,
AND RETAINED EARNINGS. MEANWHILE, A PARTNERSHIP WOULD SIMPLY LIST THE
MEMBERS’ CAPITAL ACCOUNT BALANCES INCLUDING THE CURRENT EARNINGS,
CONTRIBUTIONS, AND DISTRIBUTIONS.
• IN THE WORLD OF NONPROFIT ACCOUNTING, THIS SECTION OF THE STATEMENT OF
FINANCIAL POSITION IS CALLED THE NET ASSETS SECTION BECAUSE IT SHOWS THE
ASSETS THAT THE ORGANIZATION ACTUALLY OWNS AFTER ALL THE DEBTS HAVE BEEN
PAID OFF. IT’S EASIER TO UNDERSTAND THIS CONCEPT BY GOING BACK TO AN
ACCOUNTING EQUATION EXAMPLE. IF WE REARRANGE THE ACCOUNTING EQUATION TO
STATE EQUITY = ASSETS – LIABILITIES, WE CAN SEE THAT THE EQUITY OF A NON-PROFIT
IS EQUAL TO THE ASSETS LESS ANY OUTSTANDING LIABILITIES.
Example
Let’s take a look at a statement of financial position example.
• YOU HAVE $1250 IN YOUR CHECKING ACCOUNT.
• YOU HAVE $1750 IN YOUR REVOLVING SAVINGS ACCOUNT.
• YOU PURCHASED A COMPUTER LAST SUMMER AND IT IS VALUED AT $500.
• YOU RECEIVED A GRADUATION GIFT OF A WATCH AND IT IS VALUED AT $300.
• YOU PURCHASED NEW FURNITURE FOR YOUR APARTMENT. IT IS VALUED AT $1,000, BUT YOU STILL OWE
$400.
• YOUR CAR IS VALUED AT $5,000, BUT YOU STILL OWE $1,500.
• YOU OWE $300 ON A CREDIT CARD.
• YOU HAVE PUT $1,000 INTO A ROTH IRA.
• YOU PARTICIPATE IN YOUR EMPLOYER’S 401K PROGRAM. YOU HAVE SAVED $5,000.
• YOU NEED A ROOT CANAL PROCEDURE AT YOUR DENTIST OFFICE. YOU OWE $400.
• YOU JUST CASHED YOUR INCOME TAX REFUND OF $1,000.
• YOU PURCHASED A FLAT-SCREEN TV THAT IS VALUED AT $500.
• YOU HAVE $75 IN CASH.
• YOU HAVE A STUDENT LOAN BALANCE OF $20,000.
• YOU PURCHASE A CONDO FOR $60,000 AND YOU OWE $45,000.
• YOU AND YOUR BEST FRIEND MOVE INTO YOUR NEW CONDO. THEY PAY YOU $450 A MONTH IN RENT.
• HERRERA EVENTS AND SERVICES INC. IS AN EXPERIENCED EVENTS
PLANNER. THE TRANSACTION AND ACCOUNTS FOR THE BUSINESS AS OF
DECEMBER 2018 ARE AS FOLLOWS:
• A. INVESTED P 100, 000 IN CASH TO START HER OWN BUSINESS.
• B. PAID P 5, 000 FOR ONE MONTH’S RENT
• C. BOUGHT OFFICE FURNITURE FOR P 15, 000 IN CASH
• D. RECEIVED DELIVERY OF LAPTOP COMPUTER, P 54, 000. PAID 50% DOWN
PAYMENT, BALANCE DUE IN 30 DAYS.
• E. PERFORMED SERVICES FOR P 12, 000 IN CASH.
• F. PERFORMED SERVICES FOR P 10, 800 ON CREDIT.
• G. ACQUIRED A FAX MACHINE FOR P 7, 500; PAID P 3, 000 IN CASH,
BALANCE DUE IN 10 DAYS.
• H. RECEIVED P 5, 400 FROM CLIENTS ON ACCOUNT.
• I. PAID P 10, 000 FOR SALARIES.
• J. SETTLED IN FULL THE P 4, 500 BALANCE FOR THE FAX MACHINE.
• K. RECEIVED P 7, 000 IN CASH FOR SERVICES PERFORMED.
L. PERFORMED SERVICES FOR P 12, 000 ON CREDIT
M. PAID P 1,350 FOR MONTHLY TELEPHONE BILL
N. PAD P 2,400 FOR ELECTRICAL AND WATER BILLS.
O. COLLECTED P 2, 000 FOR CLIENTS ON ACCOUNT
P. ESMERALDA WITHDREW P 7, 000 IN CASH FOR PERSONAL EXPENSES.
 FUNDAMENTALS OF
ACCOUNTING, BUSINESS
AND MANAGEMENT 2
(FABM 2)
ASSET
LIABILITY
SHAREHOLDERS EQUITY
REVENUE
EXPENSES
WHAT IS A JOURNAL AND A LEDGER?
JOURNALS AND LEDGERS ARE WHERE
BUSINESS TRANSACTIONS ARE RECORDED IN
AN ACCOUNTING SYSTEM. IN ESSENCE, DETAIL-LEVEL
INFORMATION FOR INDIVIDUAL TRANSACTIONS IS
STORED IN ONE OF SEVERAL POSSIBLE JOURNALS,
WHILE THE INFORMATION IN THE JOURNALS IS THEN
SUMMARIZED AND TRANSFERRED (OR POSTED) TO A
LEDGER.
JOURNAL
A JOURNAL IS A CHRONOLOGICAL RECORD OF ALL
COMPANY’S TRANSACTIONS LISTED BY DATE. IT IS
OFTEN REFERRED TO AS THE BOOK OF ORIGINAL ENTRY.
THE RECORDING OF FINANCIAL INFORMATION INTO THE
JOURNAL IS CALLED JOURNALIZING.
JOURNAL ENTRIES
DATE – THE DATE AT WHICH THE TRANSACTION OCCURRED.
ACCOUNT TITLES AND EXPLANATION – IS THE UNIQUE NAME ASSIGNED TO
AN ACCOUNT IN AN ACCOUNTING SYSTEM. AN ACCOUNT TITLE IS
ESSENTIAL WHEN THE ACCOUNTING STAFF NEEDS TO IDENTIFY AN
ACCOUNT, SINCE THE TITLE CONVEYS THE PURPOSE OF THE ACCOUNT.
REFERENCE NUMBER – A FOLIO NUMBER IS A REFERENCE NUMBER USED IN
ACCOUNTING TO UNIQUELY IDENTIFY AN ENTRY IN A JOURNAL OR LEDGER.
THE NUMBER MAY BE NUMERIC OR ALPHANUMERIC. THE REF COLUMN IS
LEFT BLANK DURING THE JOURNALIZING PROCESS AND IS FILLED OUT
DURING THE POSTING PROCESS.
JOURNAL ENTRIES
DEBIT – ACCOUNTING ENTRY THAT EITHER INCREASES
AN ASSET OR EXPENSE ACCOUNT, OR DECREASES
A LIABILITY OR EQUITY ACCOUNT. IT IS POSITIONED TO THE
LEFT IN AN ACCOUNTING ENTRY.
CREDIT – ACCOUNTING ENTRY THAT EITHER INCREASES A
LIABILITY OR EQUITY ACCOUNT, OR DECREASES AN ASSET OR
EXPENSE ACCOUNT. IT IS POSITIONED TO THE RIGHT IN AN
ACCOUNTING ENTRY.
D- DIVIDENDS
E - EXPENSES
A- ASSETS
L - LOSSES
DEBIT CREDIT
G - GAINS
I - INCOME
R- REVENUES
L - LIABILITIES
STOCKHOLDERS CREDIT DEBIT
S -
EQUITY
LAND DEBIT
WITHDRAWALS CREDIT
SALES REVENUE CREDIT
ACCOUNTS PAYABLE CREDIT
SALARY EXPENSE DEBIT
CASH DEBIT
CAPITAL CREDIT
EQUIPMENT DEBIT
 Date Account Titles and Ref Debit Credit
Explanation
Sept. 1 Cash 110 P280,
Kate’s Capital 310 000 P280,
Owner’s investment of 000
cash
Sept. 2 180
Inventories 220 P20, 000
Accounts Payable P20, 000
LEDGER
A LEDGER ACCOUNT CONTAINS A RECORD OF BUSINESS
TRANSACTIONS. IT IS A SEPARATE RECORD WITHIN
THE GENERAL LEDGER THAT IS ASSIGNED TO A SPECIFIC
ASSET, LIABILITY, EQUITY ITEM, REVENUE TYPE, OR
EXPENSE TYPE.
LEDGER ACCOUNTS
Ref. Balance Sheet Accounts (Assets) Balance Sheet Accounts
(Liability)
110 Cash 210 Notes Payable
120 Accounts Receivables 220 Accounts Payable
130 Supplies 230 Salaries Payable
140 Prepaid Rent 240 Utilities Payable
150 Prepaid Insurance 250 Interest Payable
160 Service Vehicle 260 Unearned Referral Revenues
170 Accumulated Depreciation Balance Sheet Accounts
(Equity)
175 Equipment 310 Capital
180 Inventories 320 Withdrawals
330 Revenue
LEDGER ACCOUNTS
Ref. Income Statement Accounts
(Income)

410 Consulting Revenues

420 Referral Revenues
(Expenses)
510 Salaries Expense 560 Depreciation Expense – Vehicle
520 Supplies Expense 570 Depreciation Expense – Office
Equipment
530 Rent Expense 580 Miscellaneous Expense
540 Insurance Expense 590 Interest Expense
 Difference Between Journal and Ledger
JOURNAL LEDGER

Each transaction leads to a Ledger is organized by

pair of journal entries: A debit account
to one account and an equal
offsetting credit in another.
JOURNAL
SEPTEMBER 1, 2018 - KATE INVESTED P280, 000 CASH

Date Account Titles and Ref Debit Credit

Explanation
Sept. 1 Cash 110 P280,
Kate’s Capital 310 000 P280,
Owner’s investment of 000
cash
LEDGER
SEPTEMBER 1, 2018 - KATE INVESTED P280, 000 CASH

Account: Cash Account No.

110
Date Explanation Ref Debit Credit Balance
Sept. 1 Cash 110 P280, P280,
000 000
SEPTEMBER 1, 2018 - KATE INVESTED P280, 000 CASH

Account: Capital Account

No. 310
Date Explanation Ref Debit Credit Balance
Sept. 1 Kate’s Capital 110 P280, P280,
000 000
SEPT. 2 - ACQUIRED MEDICAL EQUIPMENT COSTING P95, 000 FROM
BENJO MEDICAL EQUIPMENT, PAYING P25, 000 IN CASH, AND
FINANCING THE REMAINDER BY ISSUING A P70, 000 NOTE PAYABLE.
Date Account Titles and Ref Debit Credit
Explanation
Sept. 1 Cash 110 P280,
Kate’s Capital 310 000 P280,
Owner’s investment of 000
cash
Sept. 2 Equipment 175 P95, 000
Cash 110 P25, 000
Note Payable 210 P70, 000
Purchased Medical
Equipment
LEDGER
Account: Cash Account No.
110
Date Explanation Ref Debit Credit Balance
Sept. 1 Invested in the 110 P280, P280,
business 000 000
Sept. 2 110 P25,
Paid down payment 000 P255,
for Medical 000
equipment
Account: Equipment Account
No. 175
Date Account Titles and Ref Debit Credit Balance
Explanation
Sept. 2 P95, P95, 000
000
Account: Note Payable Account No.
220
Date Account Titles and Ref Debit Credit Balance
Explanation
Sept. 2 P70, P70,
000 000
LET’S WRAP UP!!!

WHAT IS A JOURNAL?
WHAT IS A LEDGER?
WHAT ARE THE ACCOUNTS LISTED IN DEBIT?
WHAT ARE THE ACCOUNTS LISTED IN CREDIT?
ON AUGUST 1, 2018, MS. JESSEL ANN GARALDA, A RECENT
MEDICAL BOARD TOPNOTCHER, STARTED HER MEDICAL
PRACTICE. DURING THE MONTH OF AUGUST, THE FOLLOWING
TRANSACTIONS WERE COMPLETED.
AUG. 1 - MS. GARALDA INVESTED P242, 500 PERSONAL FUNDS IN
A NEW BANK ACCOUNT IN THE NAME OF JESSEL ANN GARALDA,
M.D.
AUG. 2 - ACQUIRED MEDICAL EQUIPMENT COSTING P195, 000
FROM GARPA MEDICAL EQUIPMENT, PAYING 75, 000 IN CASH,
AND PAYING THE REMAINDER AFTER 3 MONTHS.
AUG.3 – PAID RENT FOR THE MONTH OF AUGUST, P12, 500.
AUG. 5 – ACQUIRED MEDICAL SUPPLIES FROM GIRADO MEDICAL
SUPPLY ON ACCOUNT, P25, 250.
AUG. 7 – RECEIVED P28, 450 IN CASH FROM PATIENTS FOR MEDICAL
SERVICES RENDERED THIS WEEK.
AUG. 9 – PAID ESMERALDA LABS FOR PREPARING LABORATORY WORK
ON A PATIENT, P6, 800.
AUG. 12 – PAID SALARIES FOR MEDICAL TECHNICIAN AND
RECEPTIONIST, P19, 600.
AUG. 15 – BILLED PATIENTS P61,700 FOR SERVICES RENDERED.
AUG. 17 – PAID GIRADO MEDICAL SUPPLY, P8, 750.
AUGUST 20 – PAID TELEPHONE EXPENSE P8, 500.
AUG. 21 – PAID MISC. EXPENSE WORTH P11, 150.
AUG. 22 – RECEIVED P37, 500 FROM PATIENTS BILLED ON AUG.
15.
AUG. 23 – ACQUIRED ADDITIONAL MEDICAL SUPPLIES FROM
GIRADO MEDICAL SUPPLY ON ACCOUNT P19, 100.
AUG. 25 – PAID SALARIES P 11, 200.
AUG. 26 – BILLED PATIENTS P40, 150 FOR SERVICES RENDERED.
AUG. 27 – PAID GIRADO MEDICAL SUPPLY P6,150
AUG. 28 – WITHDREW P15, 000
 Date Account Titles and Ref Debit Credit
Explanation

Cash 110 P242,

Aug. 1 Capital 310 500 P242,
Invested Cash for the 500
Business
Equipment 175 P195,
Cash 110 000 P75, 000
Accounts Payable 220 P120,
Aug. 2 Purchased Medical 000
Equipment from Garpa
Medical Equipment
 Date Account Titles and Ref Debit Credit
Explanation
Rent Expenses 530 P12, 500
Aug. 3 Cash 110 P12, 500
Paid rent for the month of
August
Supplies 130 P25, 250
Accounts Payable 220 P25, 250
Aug. 5 Purchased Supplies on
Account
 Date Account Titles and Ref Debit Credit
Explanation
Cash 110 P28, 450
Aug. 7 Service Revenue 440 P28, 450
Recieved Cash for medical
services
Miscellaneous Expenses 580 P6, 800
Cash 110 P6, 800
Aug. 9 Paid Esmeralda for
Laboratory works
 Date Account Titles and Ref Debit Credit
Explanation
Salary Expenses 510 P19, 600
Aug. 12 Cash 110 P19, 600
Paid salaries for medical
technician and
receptionist
Accounts Receivable 120 P61, 700
Service Revenue 440 P61, 700
Aug. 15 Billed patients for
services
 Date Account Titles and Ref Debit Credit
Explanation
Accounts Payable 220 P8, 750
Aug. 17 Cash 110 P8, 750
Paid Girado Supply

Utility Expense 550 P8, 500

Aug. 20 Cash 110 P8, 500
Paid Telephone Bill
Misc. Expense 580 P11, 150
Aug. 21 Cash 110 P11,150
Paid Misc. Expense
 Date Account Titles and Ref Debit Credit
Explanation
Cash 110 P37, 500
Aug. 22 Accounts Receivables 120 P37, 500
Received cash from
patients billed on Aug. 15
Supplies 130 P19, 100
Aug. 23 Accounts Payable 220 P19, 100
Acquired additional
supplies
Salaries Expense 510 P21, 200
Aug. 25 Cash 110 P21, 200
Paid Salaries
 Date Account Titles and Ref Debit Credit
Explanation
Accounts Receivable 120 P50, 150
Aug. 26 Service Revenue 440 P50, 150
Billed Patients for
Services
Accounts Payable 220 P16, 150
Aug. 27 Cash 110 P16, 150
Paid Girado Medical
Supply
Withdrawal 320 P25, 000
Aug. 28 Cash 110 P25, 000
Withdrew Cash
LEDGER
Account: Cash Account No.
110
Date Explanation Ref Debit Credit Balance
Aug. 1 P242, 500 P242, 500
Aug. 2 P75, 000 P167, 500
Aug. 3 P12, 500 P155, 000
Aug. 7 P28, 450 P183, 450
Aug. 9 P6, 800 P176, 650
Aug. 12 P19 ,600 P157, 050
Aug. 17 P8, 750 P148, 300
Aug. 20 P8, 500 P139, 800
LEDGER
Account: Cash Account No.
110
Date Explanation Ref Debit Credit Balance
Aug. 21 P11, 150 P128, 650
Aug. 22 P37, 500 P166, 150
Aug. 25 P21,200 P144, 950
Aug. 27 P16, 150 P128,800
Aug. 28 P25,000 P103,800
LEDGER
Account: Accounts Receivable Account
No. 120
Date Explanation Ref Debit Credit Balance
Aug. 15 P61, 700 P61, 700
Aug. 22 P37, 500 P24, 200
Aug. 26 P50, 150 P74, 350
LEDGER
Account: Accounts Payable Account No.
220
Date Explanation Ref Debit Credit Balance
Aug. 2 P120, (P120,
Aug. 5 000 000)
Aug. 17 P8,750 P25, 250 (P145,
Aug. 23 250)
Aug. 27 P16, 150 P19, 100 (P136,
500)
(P155,
600)
(P139,
450)
LEDGER
Account: Supplies Account No.
130
Date Explanation Ref Debit Credit Balance
Aug. 5 P25, 250 P25, 250
Aug. 23 P19, 100 P44, 350
Account: Equipment Account
No. 175
Date Explanation Ref Debit Credit Balance
Aug. 2 P195, 000 P195, 000
LEDGER
Account: Service Revenue Account No.
440
Date Explanation Ref Debit Credit Balance
Aug. 7 P28, 450 P28, 450
Aug. 15 P61, 700 P90, 150
Aug. 26 P50, 150 P140, 300
LEDGER
Account: Misc. Expense Account No. 580
Date Explanation Ref Debit Credit Balance
Aug. 9 P6, 800 P6, 800
Aug. 21 P11, 150 P17, 950

Account: Salary Expense Account No. 510

Date Explanation Ref Debit Credit Balance
Aug. 12 P19, 600 P19, 600
Aug. 25 P21, 200 P40, 800
LEDGER
Account: Utility Expense Account No.
550
Date Explanation Ref Debit Credit Balance
Aug. 20 P8, 500 P8, 500

Account: Rent Expense Account No.

530
Date Explanation Ref Debit Credit Balance
Aug. 3 P12, 500 P12, 500
LEDGER
Account: Withdrawal Account No. 320
Date Explanation Ref Debit Credit Balance
Aug. 28 P25, 000 P25, 000

Account: Capital Account No.

310
Date Explanation Ref Debit Credit Balance
Aug. 1 P242, P242, 500
500