APPLIED ECONOMICS

-​ It is the study of how individuals, business firms, governments, and societies as a whole make choices
under conditions of scarcity.
-​ It understands how people behave and how they interact within a society. It also uses a scientific approach
in its investigations.

SCARCITY, CHOICE AND TRADE-OFFS (S.C.T)

Scarcity - a situation in which people cannot have everything that they want because of limited resources.
Resources - the most basic elements that people use to produce the goods and services that they want. A
resource is scarce when the available quantity of that resource is less than its desired uses. When resource are
scarce, goods and services are scarce.
Making a choice means selecting one thing over another.
Trade-off arises from scarce time or scarce money (spending power) resource.

3 WAYS FUNDAMENTAL LESSONS OF ECONOMICS CAN BE APPLIED TO THE WORLD

●​ Economics provides tools for understanding the world. What we see in the world today is the result of the
choices consumers make under conditions of scarcity.
●​ Economics help you predict the likely effects of events and government actions.
●​ Economics can be used as a guide in making personal and business decisions ,as well as decisions about
matters that concern society as a whole. ]

Applied Economics - the application of economic theories and models in real life. It consists of learning how
choices affect individual decision-making and how the availability of factors aid decision makers craft sound
judgment.

BASIC ECONOMIC CONCEPTS (SCARCITY, NEEDS, WANTS)

The study of economics revolves around the concepts of scarcity, needs, and wants. At its very core, economics
means the efficient allocation of available resources.
This definition has two underlying assumptions:
●​ People have unlimited needs and wants, and these needs and wants drive consumption.
●​ The concept of scarcity which means resources are limited.

OPPORTUNITY COST AND COMPARATIVE ADVANTAGE

Opportunity Cost - the benefit you give up because you choose to take one action in favor of another.
Comparative Advantage - There is a need to calculate the opportunity cost for each country iaf the countries
have to specialize in the production of only one good (Having lower opportunity cost).
Absolute Advantage - the ability or capacity to produce more output compared to another entity.

BASIC ECONOMIC PROBLEMS

●​ What goods to produce or service to provide?
-​ Relates to resources
●​ How to produce and how much to produce of these goods and services?
-​ Pertains to the inputs of production
●​ For whom to produce these goods and services?
-​ focuses on the distribution and consumption of goods and services

Economic goods cover goods, services, products, and the like that have a price and are sold in a market.
BRANCHES OF ECONOMICS
Micro - from the greek word mikros, meaning “small”
Microeconomics
●​ Examines the individual or company level It deals with household and firms, such as the buying behavior
of consumers and profit-maximizing behavior of sellers.
●​ Analyzes individual parts of an economy – a consumer, a business firm, an industry, a single market –
rather than the whole economy.
●​ Focuses on the concept of law of supply and demand which deals with consumer and producer decisions.

Example: What will happen to the cost of desktop computers over the next two years?

Under Microeconomics are the following:

●​ Labor Economics
●​ Decisions of individual firms
●​ Decisions of individual households
●​ Decisions of individual consumers
●​ Factors that infaluence economic choices
●​ How demand and prices are determined in individual markets

Macro - from the greek word makros, meaning “large”

Macroeconomics
●​ Studies the aggregate or country level
●​ Takes overall view of the economy
●​ Focuses oan a larger scale, such as the national economy
●​ Major indicators include national income account, GDP, inflation, and interest rate.

Example: What determines national income and overall production?

CATEGORIES OF ECONOMICS

Normative Economics - evaluates economic decisions, policies, or outcomes as good or bad. It is based on
opinions and is subjective
Example: Asking you to provide your opinion on whether the Philippine economy is doing good or not.

Positive Economics - Evaluates economic scenarios and policies based on qualitative and quantitative analysis.
This makes positive economics factual and objective.
Example: Observing Philippine economic growth based on data for the past three quarters.

FACTORS OF PRODUCTION (L.L.E.C)

●​ Land - represents land and similar natural resources available such as farms and agricultural land. Use
of land is paid in the form of rent payment. The factor income on the use of land is rent.
●​ Labor - human capital such as workers and employees that transform raw material and regulate
equipment to produce goods and services. The factor income on labor is wage.
●​ Capital - also refer to investment capital that represents physical assets such as production facilities,
warehouses, equipment, and technology used in the production of goods and services. The factor
income for capital is interest.
●​ Entrepreneur - the factor that decides how much of and in what way the other factors are to be used in
production. The return on Entrepreneurship is profit.
Circular Flow Diagram - An economic model that illustrates the flow of factors of production in the economy. This
model shows the flow of goods and factors of production in the economy through households and firms.
 The model shows that households provide labor to firms. Firms/businesses hire labor to produce goods and
services and labor is compensated in the form of wages. Wage represents the households’ income from labor,
which will be used to purchase goods and services from firms. The payments from household become the firms’
profit, which may be used to increase factors of production. The cycle goes on.

Qualitative Approach - economic data analysis focus on directional relationship of different economic variables.
An example is interest and price relationship.
Quantitative Approach - involves mathematical and statistical analysis of economic data called econometrics.

Other quantitative and qualitative tools used extensively in the study of economics are variables, equations and
functions, and graphs to illustrate economic theories and economic models.

ECONOMIC VARIABLES
●​ Economic variables are important in explaining and understanding economic theories or models.

Variable is an element that can change in contrast to a fixed one. In economics, variables are used to signify
elements in an economic model.
Functions (ƒ) - explain the relationship between two or more economic variables. Functions illustrate which of the
variables are dependent and which ones are independent.
D = ƒ(P) D stands for demand and P stands for price. The expression reads ”Demand is a demanded. P is the
independent variable. function of price,” which means that the price of commodities determines the quantity
demanded. P is the independent variable.

An economic equation is a mathematical expression of an economic thought or concept used to further explain
economic theories and models.
Y=C + I + G + Xn
Y=C + I + G + (X – M)
Y=ƒ(C, I, G, X, M)

A graph provides a visual representation of the relationship between two or more economic variables. It helps
break down abstract ideas or theories through diagrams.

Economic theories simplify economic phenomena. These are statements or observations on the relationship of
variables.
-​ Marginal utility theory is an example of an economic theory. It states that people buy goods that give the
highest personal satisfaction
Economic models are the representations of economic and social phenomena analyzed using research,
observations, and testing.
-​ Circular flow diagram is an example of economic model

Ceteris paribus is a Latin term that literally translates to “all else being the same.” This is a popular
assumptions used by economists in examining economic phenomenon. The ceteris paribus assumption implies
that there are other elements which may affect the model, but for the pertinent study, the model focuses only on
specific variables.

Time Series versus Cross-sectional Data

-​ The format of data sometimes influences the analysis of economic data. The typical presentation is either
time-series or cross-sectional format. The main difference between the two lies in the period of study.

Time Series means that data that are collected for particular element(s) for several time periods. For instance,
growth rate indicators involve the observation of data for more than one period. Census is conducted every five
years to gather information about the population

Cross-sectional data include different variables for a single time period. The demographic information of the
Philippines from the most recent census shows an example of cross-sectional data. It compares the age, gender,
income level, and other similar variables of individuals from one period. Rather than growth, cross sectional data
provide insights on the components.

MICROECONOMIC CONCEPTS
-​ The concept of utility is the foundation of consumer buying behavior and demand for goods.

Utility refers to the value or satisfaction derived from the consumption of a good.
Marginal Utility is the additional utility or satisfaction from the consumption of an additional unit of good, keeping
other things constant.
Budget is a broad term used to illustrate income constraints.
Disposable income is the income after taxes
(Disposable income = Gross income – Income taxes)

Discretionary income is the income left from disposable income after all other necessary (nontax) expenses
have been deducted.The amount that is either spent or saved corresponds to discretionary income.
(Discretionary income = Disposable income – Nontax expenses)

MACROECONOMICS CONCEPTS
-​ The most common macroeconomic concepts are those that measure the national income of the economy.
Typical national income indicators include the GDP, Gross National Product (GNP), and GNI.

Gross domestic product (GDP) is defined as the total value of final goods and services consumed during a
given period.
“Final” is emphasized in the value of goods and services derivation of GDP to avoid double counting.

Y = National income
C = Household consumption expenditure
I = Investment expenditure
G = Government expenditure
X = Exports of goods and services
M = Imports of goods and services

●​ Nominal GDP is derived when the value of goods is expressed in current prices
●​ Real GDP is adjusted for inflation and is expressed at constant or base year prices.
●​ Inflation refers to the persistent rise in price levels of good and services. It is measured through the rise
and fall in value of money or conversely, a fall in the purchasing power.
●​ Consumer price index (CPI) measures the purchasing power of the peso through regular survey of the
price level of consumer goods and services that are included in a virtual “basket of goods.”
●​ Interest Rate defined as the factor income for capital. It is the cost of borrowing or the return on
investment. If you obtain a loan from a bank, the bank charges you an interest in exchange for lending you
the money. The interest charges become the income for the bank.
●​ Nominal interest rate is the rate stated in bonds or the rate typically quoted by banks and lending
institutions. It is sometimes referred to as the “as-is” or “unadjusted” rate.
●​ Real interest rate is the rate adjusted for inflation.

BUSINESS FINANCE

Financial Insitutions/intermediaries - performs certain financial and monetary transactionsa/activities such as

●​ Deposits,
●​ Accept investments
●​ Currency exchange
●​ Provide loans to businesses.

These are the firms that bridge the gap between surplus units (SUs) or investors/lenders and deficit units
(DUs) or borrowers. They channel funds from lenders to borrowers and include depository and non-depository
institutions.

●​ When they underwrite securities or act as brokers or dealers, they are intermediaries.
●​ If they buy securities, they are investors or lenders.
●​ When they are the ones issuing securities, they are borrowers.

MAJOR CATEGORIES OF FINANCIAL INSTITUTIONS

- Commercial Banks​​ - Insurance Companies
- Investment Banks​ ​ - Investment Companies
- Shadow Banks​ ​ - Management and Investment Companies
- Universal Banks​ ​ - Nonbank Financial Institutions
- Credit Unions​ ​ - Savings and Loans
- Brokerages

Commercial banks - in particular deposit taking monetary institutions that extend credit source to the retail and
purchaser market. Lend the money of savers/depositors to small and medium enterprises that will pay them an
interest regularly in exchange for the use of their funds. GENERALLY NOW NOT FRANCHISED.

Universal Banks - lend to multinational companies or companies with global presence and their clientele are
mostly the larger corporations. (Ex. Allied Bank, China Bank).
Investment Banks - are known to efficiently raise price range for massive agencies and governments. There are
two functions of Investment banks. It is a financial services company that acts as an intermediary in large and
complex financial transactions. An investment bank is usually involved when a startup company prepares for its
launch of an initial public offering (IPO) and when a corporation merges with a competitor
 ●​ Primary Function - accepts deposit, making advances, and credit creation.
●​ Secondary Function - purchase of bonds/shares and to give or accept money.

Mutual Fund - an investment company that pools money from many investors and invests the money in stocks,
bonds, short-term money-market instruments, other securities or assets, or some combinatiuoan of these
investments. The combined holdings the mutual fnd owns are know as its portfolio.
Financial Market
●​ Organized for vendors and consumers with various types of funds may make transactions.
●​ Refers to a marketplace, where creation and trading of financial assets, such as shares, debentures,
bonds, derivatives, currencies, etc. take place.
●​ It plays a crucial role in allocating limited resources, in the country’s economy.
●​ It acts as an intermediary between the savers and investors by mobilizing funds between them.
Examples: Stock Market-regular activities of buying and selling, Bond Market- issue new debt

CLASSIFICATION OF FINANCIAL MARKETS

As to term or maturity
●​ money market-where short-term instruments are dealt.
●​ capital market -where long-term instruments were dealt
Money Market - The market where monetary assets such as commercial paper, certificate of deposits, treasury
bills, etc. which mature within a year, are traded is called money market. No such market exists physically; the
transactions are performed over a virtual network, i.e. fax, internet or phone.

Capital Market - The market where medium and long term financial assets are traded in the capital market. It is
divided into two types:
As to type of issue
●​ Primary Market: A financial market, wherein the company listed on an exchange, for the first time, issues
new security or already listed company brings the fresh issue.
●​ Secondary Market: Alternately known as the Stock market, a secondary market is an organized
marketplace, wherein already issued securities are traded between investors, such as individuals,
merchant bankers, stockbrokers and mutual funds.

Financial Instruments - monetary contract between parties or any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity. They can be created, traded, modified and
settled. They are the tools that help business daily operations, and eventually make it grow
Ex:
-​ Financial asset - cash
-​ Financial Liabiality - any liability that is a contractual obligation.
-​ Equity Instrument - any contract that evidences a residual interest in the assets of an entity after
deducting all liabilities. (Ex. Ordinary Share Capital)
Common Examples of Debt and Equity Instruments
➢ Debt Instrument - fixed returns to fixed interest rates. (Ex.: Treasury Bonds usually low interest and have
very low risk and Corporate Bonds usually have higher interest rates).
➢ Equity Instruments - varied returns based on the performance of the issuing company. Returns from equity
instruments come from either dividend or stock price appreciation. There are two type of equity instrument:
Preferred Stocks and Common Stock
-​ Preferred Stock - if a company were to be liquidated and its assets have to be distributed, no asset will
be distributed to common stockholders have been given
-​ Common Stock is the real owners of the company
TYPES OF FINANCIAL INSTRUMENTS
- Deposits​ ​ ​ ​ - Debentures or bonds
- SDRs (Special Drawing Rights)​ - Other accounts receivables & payables
- Borrowings​ ​ ​ ​ - Financial Derivatives
- Loans​ ​ ​ ​ - Letter of guarantee
- Shares and other equity

In finance, financial instruments are classified as to their term or maturity date.

They can either be short- term (with maturity of one year or less) or long- term (with maturity of more than one
year).
Short- term instruments belong to the money market
Long- term instruments belong to the capital market

The Flow Of Money And The Role Of Financial Manager

➢ To make money, it must first spend money – on inventory and supplies, equipment and facilities, and employee
wages and salaries.
➢ Finance is critical to the success of all companies. It may not be as visible as marketing or production, but
management of a firm’s finances are just as much a key to the firm’s success.
➢ Financial Managers have a complex and challenging job. They analyze financial data prepared by
accountants, monitor the firm’s financial status, and prepare to implement financial plans.

Finance - study of how individuals or businesses evaluate investment opportunities, business proposals, and
business projects and raise capital to fund them. It is the life blood of business.
Financial management - efficient and effective management of funds.

The flow of funds to businesses begin with the source of funds.

●​ one who has the money to lend
●​ the one who saves and deposits with the bank or any financial institution. When money is deposited to a
bank, this same money looks for outlets so that it can grow. This same money finds itself in the hands of
the businessmen who borrow the money lent through the banks or financial institution. In exchange for
borrowing the money from the depositor, the borrower pays the interest.
●​ Where does the financial manager put this borrowed money? Remember that the goal of the finance is to
maximize profit. Therefore it is expected that the financial manager invest this money in projects that are
worthwhile.

ROLE OF FINANCIAL MANAGERS

●​ Perform data analysis and advise senior managers on profit maximizing ideas.
●​ Responsible for the financial health of an organization. They produce financial reports, direct investment
activities, and develop strategies and plans for the long-term financial goals of their organization.
TYPES OF FINANCIAL MANAGERS

Credit managers - oversee the firm’s credit business.

●​ set credit-rating criteria
●​ determine credit ceilings
●​ monitor the collections of past-due accounts.

Cash Managers - monitor and control the flow of cash that comes in and goes out of the company to meet the
company’s business and investment needs
Risk Managers - control financial risk by using hedging and other strategies to limit or offset the probability of a
financial loss or a company’s exposure to financial uncertainty.

Insurance Managers - decide how best to limit a company’s losses by obtaining insurance against risks such as
the need to make disability payments for an employee who gets hurt on the job or costs imposed by a lawsuit
against the company.

IMPORTANT SKILLS FOR FINANCIAL MANAGERS

Analytical Skills - assist executives in makiang decision that affect the organziation, a task for which they need
analytical ability.

Communication - Excellent comamunciatioan skills are essential abecause financial managers must explain and
justify compley financial transactions.

Attention to detail - In preparing and analyzinag reports such as balance sheets and income statements,
financial managers must pay attention to detail.

Math Skills - Must be skilled in math, including algebra. An understanding of international finance and complex
financial documents also is important.

Organizational Skills - deals with a range of information and documents. They must stay organized to do their
jobs effectively.
FABM2

STATEMENT OF FINANCIAL POSITION (SFP)

Includes the amounts of the company’s total assets, liabilities, and owner’s equity which in totality provides
the condition of the company on a specific date. (Haddock, Price, & Farina, 2012)
●​ Referred to as balance sheet
●​ Claims of creditors are called liabilities
●​ Claims of owners are referred to as equity

Permanent Accounts - these are accounts that are permanent in a sense that their balances remain intact from
one accounting period to another. (Haddock, Price, & Farina, 2012).
Ex. Cash, Accounts Receivable, Accounts Payable, Loans Payable and Capital among others. Basically, assets,
liabilities and equity accounts are permanent accounts.
Note: They are called permanent accounts because the accounts are retained permanently in
the SFP until their balances become zero

Temporary Accounts - found in the Statement of Comprehensive Income (SCI). Unlike permanent accounts,
they will have zero balances at the end of the accounting period.

Contra Assets - accounts presented under the assets portion of the SFP but are reductions to the company’s
assets. These include Allowance for Doubtful Accounts and Accumulated Depreciation.
●​ Allowance for Doubtful Accounts is a contra asset to Accounts Receivable. This represents the
estimated amount that the company may not be able to collect from delinquent customers.
●​ Accumulated Depreciation is a contra asset to the company’s Property, Plant and Equipment. This
account represents the total amount of depreciation booked against the fixed assets of the company
ELEMENTS OF THE STATEMENT OF FINANCIAL POSITION
●​ The SFP is a report on the basis of accounting equation: Assets = Liabilities + (Owners’) Equity.
●​ Assets are resources with future benefits that are within the control of the company, which means the
company can prevent others from benefitting from the asset.
Ex.: Cash
●​ First criterion. It has future benefits. It can be used to settle obligations, pay for puchases of assets or be
distributed to owners.
 ●​ Second criterion. Within the control of the company. Physical safeguards and processes are established
in order to prevent others from using the company’s cash for themselves such as:
➢ depositing cash in reputable banks
➢ legal actions of the company against someone who steal or misuse its cash.

On the other side of the SFP are the claims.

●​ Liabilities and equity are sources of financing.
●​ Liabilities are claims of creditors who require payments of principal and interest. On the other hand,
equity represents claims of owners and are not required to be repaid for their investment in the company.
●​ In the event of the company’s closure, the owners are entitled to the assets of the company only after all
the creditors had been paid.

KINDS OF ASSETS
➢ Cash
●​ money owned by the company
●​ refers only to funds readily available to be spent for the company’s oprations.
●​ used for buying assets, paying suppliers, utilities, employee salaries and others
●​ used for settlement of obligations
●​ cash are sourced from contribution of owners, proceeds from borrowings, sale of assets or collections
from customers.
➢ Cash on hand - cash kept in the company’s premises
●​ Includes bills, coins and bank checks kept in the premises of the company.
●​ Checks will be part of cash, if the date of the check is on or before the SFP date. A check dated after the
SFP date is a post-dated check and is classified as receivable rather than cash.
●​ Not all bank deposits are classified as cash. Time deposits with a term of up to 90 days are reported as
cash equivalents while those that will mature longer than 90 days are reported as investments.
●​ Cash equivalents are technically not cash because it is not immediately available for use.
➢ Cash in bank - refers to money in the bank which can be kept in a savings or checking account.
➢ Receivables
●​ is a general term that refers to the company’s right to collect or claim payment. The right to collect comes
from unpaid sales or lending activities.
●​ The company collects cash from its receivables.
●​ There are also receivables that may be settled in other assets or services.
Ex.: Receivable from suppliers may be settled in merchandise.
➢ Cash on Delivery (COD) - a sale agreement that requires a customer to pay the seller immediately upon
delivery of goods.
➢ Accounts Receivables
●​ this account means receivable from customers;
●​ a credit sales agreement where a customer promised to pay the seller at some future time after delivery;
●​ is evidenced by sales invoices and delivery receipts
●​ normally has a term of 30 days (customers to pay 30 days after delivery)
●​ other terms such as 60, 90 and 180 days are given by some lenient sellers
➢ Notes Receivables
●​ is evidenced by promissory notes (PN)
●​ Customers who are unable to pay their accounts on due dates are sometimes required to sign a PN
 ●​ PN is a legal document that says the borrower promises to pay, on scheduled payment dates, a specific
sum called the principal and interest based on principal and stated interest rate.
●​ The company may also lend money to its employees or other companies if the company has excess cash.
➢ Inventory
●​ cost of unsold merchandise.
●​ only merchandise held for sale are reported as Inventory.
-​ Items that are to be used in the day to day activities of the company are​
supplies and not inventory
Ex.: A convenient store that sells ballpens (inventory)
●​ Ballpens used in recording transactions (supplies)
●​ Trading/Merchandising - contains merchandise held for resale.
●​ Manufacturing Company - composed of raw materials, unfinished inventories/work-in process and unsold
finished goods.
●​ Consignment - will be part of the inventory of the merchandise owner.
➢ Prepaid Expenses
●​ Refer to future expenses that the company had paid in advance
●​ It is placed in this account until the services or items are used and become expenses
●​ Accrual accounting dictates that expense is recognized only when incurred or used.
​ Ex. Prepaid loads, Prepaid rent, Prepaid insurance
➢ Insurance
●​ Insurance contracts are time based.
●​ The buyer of the contract is insured only within the contract period.
●​ The advanced payment of the insured is at first a Prepaid Expense (Prepaid Insurance). It is transferred to
expense evenly over the contract period.
●​ At the end of the contract perid, the entire advance payment should have been fully transferred to expense
such that the balance of the Prepaid Insurance is zero.
➢ Property , Plant and Equipment or PPE
●​ Classified as long-term asset (or non-current asset) because these assets will be used in the business for
more than one year.
●​ Only assets owned and controlled by the company will be reported as PPE. Rented facilities and
equipment are excluded from PPE.
●​ Examples of PPE are land, building, warehouse, automobiles, delivery vehicle, computer equipment and
manfacturing equipment.
●​ The cost of purchasing equipment as asset. As the asset is used, a portion of the cost is transferred to
expense.
●​ The process of recognizing the asset is called capitalization while depreciation refers to transferring of cost
of asset to expense.
●​ Depreciation is linked to usage.
●​ An assumption in accounting is that the asset will be used evenly over its useful life, called straight-line
method of depreciation.
●​ Depreciation will increase the expense account and decrease the asset account.
●​ A contra asset account called accumulated depreciation.
●​ The cost of the PPE, net of the balance of accumulated depreciation as of the SFP date is called Net Book
Value of the PPE.
➢ Intangible Assets
●​ are long-term assets similar to PPE. These assets will be used in the business for more than one year.
●​ the allocation of the cost of intangible assets to the year it was used is called amortization.
 ●​ cost is amortized evenly over its useful life just like a PPE.
●​ have no tangible (cannot be seen or touch) properties.There may be a piece of evidence of the asset, but
the actual asset is “intangible”.
​ Ex.: patent, brand name, trademark
●​ Patent is a grant conferred by the government to the creator of an invention whether a product or a
process for the sole right to make, use and sell that invention for a specified period of time
●​ Brand Name - refers to word or words used to identify a specific product and its manufacturer.
●​ Trademark - the symbol that represents the brand

Liabilities
Are obligations that the company is required to pay. Payments are made in the form of cash, goods or
services. Entities to whom the company is indebted are called creditors.
KIND OF LIABILITIES
➢ Payables - are obligations to make payments to creditors.
Two kinds of payables: Accounts Payable (AP) and Notes PAyable (NP)
➢ Account Payable (AP)
●​ obligations to the suppliers of inventories evidenced by the supplier’s sales invoices and delivery receipts
●​ 30 day credit terms - purchases should be paid 30 days from delivery date
●​ discounts for early payments 2/10, n/30 (reads: two ten net thirty) - means payment of full payment is due
in 30 days but a 2% discount maybe taken if paid within 10 days (after delivery)
➢ Note Payable (NP)
●​ Obligation evidenced by a promissory note
➢ Accrued Expenses
●​ Refers to unpaid expenses of the company as of the cut-off date of the Statement of Financial Position.
Ex. Salaries Payable, Utilities Payable, Rent Payable and Interest Payable
➢ Unearned Income
●​ customer deposits or downpayments received before the delivery of goods or services
●​ These will not count as sales until deliveries are made
●​ Payments are initially recorded as Unearned Income - a liability payable in goods or services.
➢ Long-term liabilities
●​ Refers to obligations with due dates that fall more that one year from the date of the SFP.
Ex. Bank Loan
●​ Documented by a promissory note
●​ company pays interest periodically
●​ repayment of the principal is based on the contractual agreement.
●​ can all be paid at maturity or in installment over the term of the loan.
●​ part of the financing activities of the company

Equity
​ It is the net assets of the business. It is composed of the owner's investments and the accumulated net
income of the company, net of any distribution to the owners. It reflects the portiona of the asset that belongs to
the owners of the business.
For a sole proprietorship, the SFP will reflect only one equity account - Owner’s Capital.
●​ investments (contributios e.g cash)
●​ net income earned by the business which is closed to capital account
●​ a separate Drawing account is maintained to monitor the withdrwals of the owner and is also closed to
the capital account at the end of the year.
STATEMENT OF COMPREHENSIVE INCOME

Revenue
➢ Service Income
●​ The Service Income account is generally used to describe revenue derived from rendering of services.
●​ A more specific account name maybe used to identify the services rendered such as Rental Income,
Professional Fee and Tuition Fee Revenue.
➢ Sales
●​ The Sales Revenue account is generally used to describe revenue derived from selling of goods.
●​ A more specific account name may be used to identify the goods sold such as Office Supplies Sales, Book
Sales, Food Sales, etc
●​ Revenue from sales of goods is recognized when goods have been delivered. However, customers are
allowed to return goods that do not meet their quality standards
●​ When goods are returned, it is not deducted from Sales. Normal accounting practice is to report it under
the account name Sales Returns and Allowances - a contra sales account.
1. The Statement of Comprehensive Income is a statement that reports the results of operations of the
business for one period. Also referred to as Income Statement.
2. A statement of Comprehensive Income is described as a “for the period” report.
●​ This means that the amount presented on the report include only those that occurred within the given
period.
Ex.: The SCI in Figure 1 is described as “for the year ended December 31, 20X1.” Reported revenue of
₱1.29 million was generated from January 1, 20X1 to December 31, 20X1.

3. Income refers to a transaction that increases assets and/or decrease liabilities leading to increase in equity
resulting from the operations of the business and not from the owner’s contribution.
4. Expenses are transactions that decrease assets and/or increase lliabilities leading to decrease in equity
resulting from the operations of the business and not because of distributions to owners.
5. There are two kinds of income, revenue and gains.
a.Revenues are income generated from the primary operations of the business.
b.Gains are income derived from other activities of the business.
Ex.: Sale of merchandise to Juana’s customers - Revenue (primary operation is to sell inventories);
Interest income from time deposit - Gains and other income
6. There are also two kinds of expenses, expenses and losses
a.Expenses are related to the primary operations of the business
b.Losses are from other activities of the business

7. Revenue is earned upon delivery of goods and services

8. There are three approaches to recognizing expense;

●​ The matching principle requires that expenses should be recorded in the same period in which revenue, to
which those expenses relate, is recognized.
●​ The principle of rational allocation requires that the cost of long-term expenditure to be rationally allocated
over the period of usage based on the expected pattern of usage.
●​ Expenditures are charged immediately to expense if the period and pattern of usage are not clear such
that there is no rational way to allocate.

Expenses

➢ Cost of Goods Sold

●​ This is an account used by companies that sells good instead of services.
●​ For trading operations, Cost of sales collects the cost of merchandise sold. This includes the purchase
price of inventory, brokerage, and shipment (Freight-In ) cost to bring the goods to the premises of the
company.

2 Kinds of Inventory Accounting (Keeping record of inventory)

➢ Perpetual Inventory Accounting
●​ The inventory account is “perpetually”updated for purchases and sales.
●​ The inventory account is increased when goods for sale are acquired and decreased when goods are
sold.
●​ The Cost of Goods sold account is updated every time a sale is made.
➢ Periodic Inventory Accounting
●​ The inventory account is only “periodically”updated. “Periodically” means that the inventory account is
updated only at end of the year or end of the month.
●​ Cost of merchandise acquired is collected using the Purchases account.
●​ There are two contra-Purchase accounts: Purchase Returns and Allowances and Purchase Discount.
●​ Returns of defective goods are reported under Purchase Returns and Allowances.
●​ Discounts taken are reported under Purchase Discount.
●​ “Net Purchases” is equivalent to Purchases plus Freight-In less Purchase Returns and Discount (Net
Purchases = Purchases + Freight-In - Purchase Returns - Purchase Discount)
➢ Operating Expenses
●​ Refer to all other expenses related to the operation of the business., other than cost of sales.
●​ Includes salaries of employees, supplies, utilities (electricity, telephone and water bills), gasoline expense,
representation, bad debts expense, depreciation and amortization.
●​ Bad debts expense is an operating expense related to accounts receivable. It is an estimated expense.
Accounting rule is:
1. to periodically analyze the collectibility of Accounts Receivable and;
2. to immediately charge to expense the amount deemed uncollectible