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FLORENCHITA REPOLLO-SOMBLINGO, MA, PH.D. (C.A.

R)
somblingofr@yahoo.com
FLORENCE is currently the Department Head of the
Agribusiness Department. She is teaching both
agribusiness and agricultural economics courses. She
finished her BSA major in Agribusiness at Silliman
University at Dumaguete City and her MA major in
Educational Administration at Western Mindanao State
University, Zamboanga City. She is finishing her Ph.D. in
Development Studies at the Ateneo de Zamboanga
University, Zamboanga City. She co-authored Product Development, Marketing
Management and Accounting for Non-Accountant Modules.




Arby_abdula@yahoo.com / alabdula@gmail.com
Arby is a lecturer in the Agribusiness Department, at the
College of Agriculture, Western Mindanao State
University, Zamboanga City, Philippines. Some of
Agribusiness subjects she handles are the Investment
Management, Marketing Management, and other
Agricultural Economics courses. She Management, and
other Agricultural Economics courses. She completed
academic requirements for Master in Agricultural
Extension minor in Agricultural Economics at Visayas State University and finished her
Master of Science in Agricultural Economics at the University of Arkansas (Fayetteville
Campus), U.S.A., with minor subjects focus on Marketing and Agribusiness
Management.




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ACKNOWLEDGEMENT

The authors humbly thank all those who in one way or the other have provided
help and assistance in the realization of this work.
To God Almighty for the guidance, wisdom and all the blessings that He
continuously showered upon them, Praise be to Him.
Above all, they are grateful to DOST-PCARRD and WMSU for the chance that
they have provided to the authors to write this module with all financial back-ups.
To all of you, thank you so much.


F.R.S. / A.L.A.

ii

MODULE DESCRIPTION

This module is designed for you as would-be-manager or would-be-entrepreneur
of your small or medium agribusiness enterprise, bookkeepers or account clerks, and
other professionals who are interested to learn and understand more about accounting,
accounting financial statements and reports. It aims to guide and assist you in your
decision making processes, to allow you to participate actively in the financial matters of
your business and to let you appreciate the various accounting terminologies and
methodologies applied in your on-going undertakings.

iii

Table of Contents

ACKNOWLEDGEMENT ........................................................................................................... i
MODULE DESCRIPTION ........................................................................................................ ii
INTRODUCTION ................................................................................................................... 1
Time frame .......................................................................................................................... 2
Goals ................................................................................................................................... 2
Learning Outcomes ............................................................................................................. 3
1. Introduction of accounting for non-accountants ................................................... 4
1.1. What is transaction? ................................................................................ 4
1.2. What is accounting? ................................................................................. 6
2. Functions of Accounting and Financial Statements ................................................ 6
2.1 First Accounting Function: Recording ......................................................... 6
2.2 Second Accounting Function: Classifying ................................................... 7
2.2.1. Business resources are classified as follows ................................ 7
2.2.1.1. Asset
2.2.1.2. Liabilities
2.2.1.3. Capital
2.2.1.4. Income
2.2.1.5. Expenses
2.2.1.6. Equities
2.3 Third Accounting Function: Summarizing ................................................... 9
2.3.1. Accounting Equation .................................................................... 9
2.3.2. Assets and Equities .................................................................... 10
2.3.3. Financial Statements .................................................................. 12
2.3.3.1. The Balance Sheet
2.3.3.2. Income Statement
2.3.3.3. Cash Flow Statement
2.4 Fourth Accounting Function: Interpreting ................................................ 22
3. Profitability Analysis.............................................................................................. 23
3.1. Return on Investment (ROI) .................................................................... 23
3.2. Return on Working Capital ...................................................................... 24
3.3. Return on Equity (ROE) ............................................................................ 24
4. Breakeven Analysis ............................................................................................... 24
4.1. Breakeven Price (BEP) ............................................................................. 24
4.2. Breakeven Volume (BEV) ......................................................................... 25
Evaluation ................................................................................................................. 32
Summary ................................................................................................................. 32
References ................................................................................................................. 33
Module 4: Accounting for Non-Accountant 1

INTRODUCTION


Why do you need to study accounting when you are not an accountant?

Accounting is an activity you will do even if you are not an accountant, simply
because it is necessary especially so if you engage in a profit-oriented undertaking.

With the day to day transactions happening in your simple business, or even to
your corporate enterprise, it is but very important that you keep records. It is because it
can help you remember the significant activities and events which are useful and
beneficial while you are managing your business. You will be able to make good
decisions based on your available business records kept.

Your need for written records is very necessary for your business ventures.
Information that occurs in your business will be recorded in your book of accounts
following procedures peculiar to accounting. Your financial reports like income
statement, balance sheet, capital statement and cash flow statement can be prepared
at the end of each month, semester, or yearly which would tell you how your business
progresses, and the status of your business like for instance: how much the property of
your business is, how much your business owes to its creditors, and how much your
earns or loses in a month, in a semester or in a year.

Thus, it is wise that you keep records because as a manager, you will be guided
on what to do especially in managing your enterprise. Your future plans and projects
are dependent on your various accounting reports prepared and their contents.

When you are operating a business enterprise, whether it is small or big, you will
be obligated by the Bureau of Internal Revenue (BIR) to submit reports for tax purposes.
And these reports are based on the various transactions that your business is involved
into which are represented by authentic business receipts or invoices, like for example,
sales invoice, purchase invoice, official receipts, cash vouchers, journal vouchers,
etc.(Pasion,2002).


Why should you keep records in your business enterprise?

Every day, in your business endeavor, various transactions and activities are
difficult to remember exactly if you are not used to writing them down. It is either that
you, as the manager, have incurred so much expenses without your knowledge, or you
may not be able to collect sales on account because you either forget or you cannot
recall such transaction happening. Your customers might be lost if their future orders
Module 4: Accounting for Non-Accountant 2


lost or cannot be availed due to the absence of records or reminders.

For families and individuals, written records are important in relation to how
they will plan for their consumptions and other expenses. Many families cannot meet
both ends with their salary because they fail to do their monthly budget; thus, they will
resort to borrowing from shark lenders. Most often, these families cannot get out from
such predicament because instead of using the borrowed money to help them in their
expenses, it would become a burden now since the borrowed money will double and
double in its value due to high interest added to the borrowed capital, hence, quarrels
and misunderstanding would result if the one who borrowed cannot pay anymore.

For the government, record keeping is very important since the agency performs
the task of accounting how much tax would be collected from the business sector and
how much they have spent. This is a requirement needed to be able to report to the
people through the congress of the Philippines (Pasion, 2002). This is necessary in as
much that the government spends the money of the people collected through various
types of taxes imposed which become income of the government and will be used on
projects like construction of schools, hospitals, roads, bridges, and others that would
benefit the welfare of the constituents.


TIME FRAME

This training module is a vital aspect when you will prepare your business plan
before you will engage in any profit-oriented undertaking as well as in analyzing the
performance of your existing business. This is designed for one day training. Allotted
time for each topic of this module is presented in the designed matrix found in table 1.


GOALS

The goals of the module include the following:

1. To describe accounting principles, financial statements and financial analysis
2. To utilize financial reports as guide and aid in handling business activities
effectively and efficiently
3. To analyze financial statements and reports using financial ratios
4. To apply accounting terminologies and methods in all business activities
Module 4: Accounting for Non-Accountant 3


Learning Outcomes

At the end of the module, you are expected to:

To make use of applicable accounting rules and terminologies in the day to day
business activities
To come up with a complete and reliable financial statement/report
To make use of financial statement reports as effective tools in determining the
financial condition of the business




Module 4: Accounting for Non-Accountant 4


1. Introduction of accounting for non-accountants

Business activities are meant to generate economic activity. Business transforms
good and services in forms that
other hand, people whose needs and wants are to be satisfied would also be willing to
exchange their goods and services whose value equals the value of what they receive.
This is the essence of a business transaction, the exchange of values; values received
equal the values parted with.

1.1 What is a transaction?

A transaction is the act of conducting or negotiating business affairs (Grolier
International Dictionary, 1990). It is also defined as an exchange of wares for a certain
equivalent of money. Every day you always exchange goods to satisfy your needs and
wants. Before, this exchange was done through bartering. Bartering was practiced
before when two individuals would exchange goods to goods. Like for instance, salt
bartered with rice or fish. However today, you often use money when you need or want
to buy something that you need or want. Hence, in every transaction there is value
received and value parted with (Pasion, 2002)

Moreover, it is presumed that the exchange of value occurs under the
circumstance wherein both parties in the transaction perceive that the exchange of
value is equal, otherwise if the perception is not equal, then one of the parties involved
in the transaction will not be receiving, nor be parting with any values that they have.

Furthermore, note that a transaction may occur between individuals, between
an individual and an entity (a business), and between entities (such as between business
corporations), so that each party in the transactions will experience values parted with
and values received. Recognizing these two facets of a business transaction is
fundamental in record keeping and in analyzing the business performance.

Example: Mario bought two cavans of palay worth P2,000.00 cash from a sari-
sari store.

For Mario
Value received: 2 cavans of palay (value in the form of goods)
Value parted with: Cash P2, 000.00 (a monetary value)

For the sari-sari store
Value received: Cash of P 2,000 (a monetary value)
Value parted with: 2 cavans of palay (value in the form of good)
Module 4: Accounting for Non-Accountant 5


Activity # 1. From the transactions below, determine the value received and value
parted with. Assume that you are the ones incurring the transactions. (See Appendix
for the answers).

1. Purchased one (1) sack of organic fertilizer from Agrivet, Inc. P 1,500.00.
2. Bought on account from Central Trading manual sprayer P 2,000.00.
3. Paid the electric bill P 500.00.
4. Paid P3, 000.00 for wages of workers.
5. Sold coco sugar for cash P 1,000.00.
6. Sold coco sugar on credit P 750.00.
7.
8. Bought fire woods used for cooking P 200.00 cash.
9. Paid cash for toddy purchased P 500.00.
10. Paid for the rent of the equipment P 300.00.






Module 4: Accounting for Non-Accountant 6


1.2 What is accounting?

As defined by various authors and experts, accounting is the bookkeeping
practices involved in a financial record of business transactions and in the preparation of
statements concerning the assets, liabilities, and operating the result of a business
(International Dictionary, 1990).

As defined by the Committee on Terminology of the American Institute of
ng, in a significant manner
and in terms of money, transactions and events which are in part, at least of a financial
a system of accounting; a system that will facilitate the recording of business
transactions, organizing and summarizing them with the end view of ease in analyzing
and interpreting the performance and operation of the business.

There are four distinct functions of accounting, and these are: Recording,
Classifying, summarizing, and interpreting.


2. Functions of Accounting and Financial Statements

2.1 First Accounting Function: Recording

This accounting function involves putting into record the various transactions in
a step-by-step procedure and in order of occurrence or when the transaction happens
or occurs. A transaction is said to have occurred or happened, once a document to its
effect has been made, and as such the transaction is recorded.

Why should a business keep records? Every day in any business undertakings,
various transactions and activities that happen, this is difficult to remember exactly if
one does not write them down. It is either that the manager incurs so much expenses
without his knowledge, or may not be able to collect sales on account because he
either forgets or cannot recall such transaction happening. Customers might be lost if
cannot be availed due to absence of records or reminders.

For families and individuals, written records are important in relation to how
they will plan for their consumptions and other expenses. For the government, record
keeping is important since the agency performs the task of accounting how much tax
would be collected from the people and the business sector and how much they spent,
a requirement needed to be able to report to the people through the congress of the
Philippines (Pasion, 2002).

Module 4: Accounting for Non-Accountant 7


2.2 Second Accounting Function: Classifying

This accounting function involves the grouping together of similar names and
items of the various resources of the business that were already transformed (finished
goods, products, services, loans, etc) or are still in the process of transformation (raw
materials, inventory, etc). By classifying and grouping together of similar resources of
the enterprise, analysis is facilitated, communication is facilitated, and ambiguity is
avoided.

2.2.1 Business resources are classified as follows;

2.2.1.1 Asset - refers to anything that has money equivalent possessed by
the enterprise or business and is used in the operation of the
enterprise, which in its absence, will greatly hamper the operation
of the business. The assets are needed by the business in order that
it can produce the goods and the services that it intended to do. Ex.
Cash, account receivables, land, equipment, supplies, etc.
2.2.1.2 Liabilities -refer to the monetary values of anything that the
business has loaned out, borrowed or taken from outside of the
business itself. The business incurs liabilities in order that it can pay
for its operation as well as to create its initial asset base. Ex. Loans
from Metro Bank, accounts payable, tax payable, notes payable,
etc.
2.2.1.3 Capital refers to the monetary values or the rights of the owner or
owners to a claim on the properties or possessions of the business.
When a capital gets into a business, it is transformed into a number
of forms of which it will become part of the assets of the business.
2.2.1.4 Income refers to the sales the business makes either in cash or on
account. It also refers to professional or consultancy fees, service
income, sales from the farm products.
2.2.1.5 Expenses refer to costs or expenditures, used up supplies and
materials incurred in operating the business. Ex. Salary expense,
Electric bill, Maintenance expense, Supplies used, etc.
2.2.1.6 Equities refer to the rights or claims of both the creditors and the
owners of the business to what the enterprise is owning or
possessing with equivalent monetary values. In case the business
goes bankrupt, and when the project decides to sell out all that it
owns, the first to be paid are the creditors and the money that will
be left after settling all the outside obligations will be divided
among the owners or partners of the enterprise.
2.2.1.7 Drawing refer to the personal withdrawal of the owner or owners
against capital they put in the business. The result of such
withdrawal is a decrease on the capital of the enterprise.
Module 4: Accounting for Non-Accountant 8


Activity # 2. Identify each of the accounts as Asset, Liability, Capital, Income, Expense,
or Drawing.




Account Title Amount (Php)
Cash
10,000.00
P. Juan Capital
129,250.00
Rent Expense 1,000.00
Taxes payable 3,000.00
Account Payable ABC Co 7,500.00
Cash in bank
50,000.00
Supplies 5,500.00
Land 25,000.00
Building 70,000.00
Notes Payable Y Co 5,000.00
Accounts receivables 9,250.00
Mortgages 12,000.00
Consultancy Income
65,000.00
Rental Income
20,000.00
Equipment 25,000.00
Vehicles 20,000.00
Water and electric bills
2,500.00
Fertilizer and chemicals Unused
4,500.00
Supplies used 5,000.00
Inventory
6,000.00
Wages of farm workers
5,000.00
P. Juan Withdrawal 3,000.00
Module 4: Accounting for Non-Accountant 9


2.3 Third Accounting Function: Summarizing

Since a business is conducting a lot of transactions in the course of its life, the
information that was recorded in its books of accounts becomes numerous. If the
business accounting system was properly in place then summarizing the information in
its books is facilitated by their classifications. Distilling all of this information into forms


Summarizing the business transactions is founded on the Accounting Equation.

2.3.1. Accounting Equation

So what is an Accounting Equation? Since all transactions consist of value
received and value parted with, the record keeping procedure will essentially reflect this
dual nature of a business transaction. This mode of record keeping is known as double
entry bookkeeping showing two sides in recording transaction. The left side represents
the value that the business received, and the right side, the value that was parted with.

At the first day of the business opening, the accounting equation should look as
follows:

Value received by the business = Value parted with by the business

only people or entity (such as an organization, a bank) can have value and can have
wants! They are the only ones who can exchange values. Why would people want to
part with what they value? It is because they perceive that the value that they will part
now will be fair enough business transactions to the value that they will receive later.
Observe that a business transaction must be perceived as fair in order that an exchange
in value may happen, otherwise no business transactions may occur. It is illogical and
irrational for a person or an entity to part with their values when the expected exchange
is not equal. One of the underlying assumptions in any economic undertaking is that we
are all logical and rational as far as satisfying our needs and wants are concerned. And
because we are all rational and logical, we are all willing to exchange values when they
are equal. You might ask, What if we are not logical and rational, and then somebody
out there will be cheating you! (You will be sold a poor product or a sub-standard
service!).

In other words people are willing to part with what they value (money, goods
and services) in anticipation that these values will, overtime, return to them something
that is more valuable (Money generally).

Module 4: Accounting for Non-Accountant 10


2.3.2 Assets and Equities

EQUITY
business with the hope and expectation that in the future the value that they
dimension for the satisfaction of their wants and needs) and will be satisfied in
the future

When equities get into a business, the business will change their form into forms
that the business can use in order that it can pursue what it is intended to do. These are
the assets of the business.

ASSETS = the form of the EQUITIES that the enterprise has transformed in order that
it can be utilized by the business to pursue the objectives by which it is
intended to do

Observe that if a business has to function to achieve its objectives, equity must
be available. The equity portion answers the question of where the money came from
to create the assets. Thus, our accounting equation will now be:

ASSET = EQUITIES

Equities
must be satisfied by the business later.

If the business has just started, the various forms by which equity will come into
the business maybe in the form of:

Loans borrowing money from banks

Your personal money

Other people who believe that your business is worth putting their money


A business incurs liabilities in order to sustain its day to day operation. Generally
money borrowed from a bank is a liability of the business.
LIABILITIES = the external monetary obligations or claims that the business has to
settle.
Module 4: Accounting for Non-Accountant 11


There are two types of liabilities that a business can incur, and these are:
The accumulated income and the borrowed money. Surely somebody must own
this accumulated income. Irrespective of who owns that income, the business has still
obligations to the owner of this accumulated income.
The borrowed Money. This is the money that the company has borrowed or has
owed to creditors such as: unpaid supplies delivery, other people or organization the
business owes money with, loans with the bank.
CAPITAL = that portion of the asset that answers the question Where did we get the
money for the business? If it was provided by the owner himself, this


Therefore, the answer to the question of where we got the money for the use of
the business, the answer is it is the business equity, and it is acquired by making
liabilities as well as capital. Thus:

EQUITY = LIABILITIES + CAPITAL

And since ASSETS = EQUITY, the accounting equation will now be as follows:

ASSET = LIABILITIES + CAPITAL

Accumulated Income that portion of the business financial transaction where
all the expenses have already been removed.

Since, Capital can be expanded to Original Capital less Personal Drawings +
Additional Investment + Income Expenditures/Deductions to Income, then the
Equation would be like this:

ASSET = LIABILITIES + (C-W+I+i-d)

C = Capital
W = Personal drawings
I = Additional Investment
i = Income
D = Expenditures/Deductions to income


Module 4: Accounting for Non-Accountant 12


2.3.3 Financial Statements

Such expansion should be emphasized considering that when you start with your
business, it is expected that you might withdraw cash from it to be used for your own
personal needs, or else when you have extra money, you might add it to the capital of
the business. In doing business, you earn income after deducting all expenses. Hence,
this income or profit will now be added to your capital as retained earnings. Thus, at the
end of the operation, let us say, one year, your capital will now increase. However, if
you incur losses because you mismanage the business operation, your capital at the end
of the operation will also decrease or you will go bankrupt.


2.3.3.1 The Balance Sheet

The Balance sheet is prepared based on the accounting equation. It is divided
into two sections: one section contains all assets and the other section contains the
liabilities plus the capital.

The Assets section of the Balance sheet is still divided into two categories: the
current assets and the fixed assets. An asset in the form of stocks (Common or Preferred
Stocks) lies in between current and fixed assets.
The Current Assets are resources or the values that the business possesses and
which can be easily obtained if in case there will a need for cash or money in the
operation of the business. In the preparation of the balance sheet statement, current
assets should be listed first before the non-current or fixed assets.
The Current Assets are the following:

- The deposits that your business has made with your banks.
Notes receivables accounts of people outside of the business which have not
been paid but are represented by a promissory note to pay the account on a
future specified date.
accounts from peoples outside of the business who
have purchased product but have not paid it yet.
are goods that your business has produced but which is

Module 4: Accounting for Non-Accountant 13


Stocks are current assets because they can easily be converted into cash by
selling them even at a price equal to their cost of buying or breakeven cost.
The second category of the assets section in the balance sheet is the fixed assets.
Fixed Assets are the valuables or possessions of the business that are fairly difficult to
convert into cash should there be a need for cash by the business. Fixed assets are
acquired for use in the day to day operation of the business; thus, it is difficult to depart
from them unless the owner would sell them in favor of a modern one, like for instance
computer, machine, or vehicle. Fixed asset is the opposite of current asset.
Some of the most common fixed assets are:
the structures used in the production area, the offices.
- the instruments you use in the conduct of
the day to day business operations
tions motorcycles, bicycles, vans, etc

When you total the value of all your Current Assets and the value of all Fixed
Assets, you will get the total Assets of your business.
CURRENT ASSETS + FIXED ASSETS = TOTAL ASSETS

The Total Assets represent the total monetary value of the resources that your
business can use in the conduct of its day to day operation. The Balance Sheet is a
resources at a point time, usually December 31. It
may change even after a day. Although it may change even in a day, the Balance Sheet is
still a useful tool, because the Total Assets does not significantly change in a relatively
short period of time.


2.3.3.2 Income Statements

The Income Statement shows the outcome of each operation for every
project at a certain specific duration of time. It can be prepared at the end of the
month, semester, quarter or year. This statement will show how much the business
earns or loses during the period (Battad, F.,et.al.,2000).



Module 4: Accounting for Non-Accountant 14


Below is the income and expenses format:

Name of the Business/Project
INCOME STATEMENT
For the period ended________ , 200_
INCOME
Sales of P



TOTAL INCOME (A) P
Less: OPERATING EXPENSES
P



TOTAL OEPRATING EXPENSES (B) P
NET INCOME/(LOSS) (A-B) P



Examples of Income or Revenues:

1. Crops Sale of Vegetables; Sale of Rice/Palay; Sale of Pigs; Sale of Chicken; Sale
of Fruits; Sale of Eggs etc.

Examples of Farm expenses by type of enterprise:

1. Crops Inputs used like seeds, fertilizer, pesticides, insecticides, laborers hired,
fuel, electric and water bills, rental of land, irrigation cost and transportation
cost.

2. Broiler/Swine/Goat/Cattle Stocks, feeds, veterinary supplies, labor cost, water
and electric bill, etc.



Module 4: Accounting for Non-Accountant 15


Activity # 3. Prepare an Income Statement using the following accounts of Pedro
Panduco for the month ended January 31, 2008.

1. Sales of Vegetables P 12,500.00
2. Sales of Fruits 20,000.00
3. Labor Cost 2,000.00
4. Water Bill 500.00
5. Seeds 100.00
6. Organic Fertilizer used 2,500.00
7. Organic Pesticides used 250.00
8. Transportation Cost 600.00
9. Electric Bill 300.00
10. Rental of land 500.00



Module 4: Accounting for Non-Accountant 16


Net Income/(Loss)- A net income is realized if income generated during the
operation is higher than the expenses incurred during same period; if it is the opposite
when income or revenue is lower than expenses, then it is a net loss. A net loss is
expressed by putting parenthesis to the amount.

2.3.3.3 Cash Flow Statement

Cash Flow Statement It is a statement showing all the cash inflows and cash
outflows of the business. It shows how much money there is at the beginning and at the
end of the business period.

Format for cash flow statement:

Name of the Business/Project
CASH FLOW STATEMENT
For the period ended________ , 200_
CASH INFLOWS
P



TOTAL CASH INFLOWS (A) P
Less: CASH OUTFLOWS
P




TOTAL CASH OUTFLOWS (B) P
NET CASH FLOW (A-B) P
Add: CASH BALANCE, BEGINNING
CASH BALANCE, ENDING
P

Cash Inflow- refers to cash receipts made from the disposals of farm products to
the customers, as well as beginning cash to start the business.
Module 4: Accounting for Non-Accountant 17


Cash Outflow- refers to expenses incurred during the operation period. It
includes payments of cash for various materials and supplies used in the projects or
enterprises.

Cash balance ending refers to the cash generated after all expenses have been
deducted from cash inflows of the project. However, if cash inflows are greater than
cash outflows, the business has enough cash to continue with the operation of the
business; if it is not, then it is an indication that the manager should now look for
additional financing from outside sources to continue funding the day to day activities of
the project.

Module 4: Accounting for Non-Accountant 18


Activity # 4. Prepare a Cash Flow Budget using the accounts provided in Activity
number three (3). The beginning cash of the business is P 5,000.00.


Module 4: Accounting for Non-Accountant 19


Balance Sheet This statement prepared on a specific date, usually at the end of
the month or year, shows the financial status of the business. It summarizes the total
assets, total liabilities and capital of the enterprise. It is through this statement that the
owner(s) and the management would know the following:

a. How much is the net worth or equity of the project?
b. How much is the total payables of the business to its creditors?
c. How much is its total asset?

NET WORTH can be determined by deducting all the payables of the business
F, et.al.2000, Pasion, 1990)


art your business on the 1
st
day of January. This is also
the day your Balance Statement starts.
On the 1st day of January you use PhP 10,000 of your own personal money to
put into your new company. On the balance sheet it looks like this:
Hopefully this investment of PhP 10,000 will give you the possibility to gain profit
from your business. If the profit from the company the first year is PhP 5,000 and you
PhP 15,000
(PhP 10,000 + PhP 5,000). On the other hand, if you lose money from running your

Format of a Balance Sheet:

Module 4: Accounting for Non-Accountant 20


Note: The Expanded Form of Capital is (Original Capital + Additional Investment
Personal Withdrawal + Income Deductions to Income).











Module 4: Accounting for Non-Accountant 21


Activity # 5. Make a Balance Sheet using the accounts of Activity # 2.


Module 4: Accounting for Non-Accountant 22


2.4 Fourth Accounting Function: Interpreting
Use the different reports to look critically at your business. Does it perform
well? What can you do better?
There are two main subjects in the report:
Profit & Loss Statement
The Profit and Loss statement tells about the earnings and spending of the
company during the year. This means how much income has the company had from the
daily running of activities and how much has the company spent on the same activities.
This part of the report tells whether the activities have been running as a profitable
business in the period or not. It is called the Profit & Loss Statement.
Balance Statement
The other main statement in the report is the Balance Statement which shows
the actual value of the company as such. This means, how much money is present in the
company in total when the value of buildings, tools, stock, money in the bank account
and in the cash box etc. is added. It also shows how much the company owes to others.
A company normally owes money to suppliers, the bank and to the owner of the
company.
Write Off Fixed Assets/ Depreciation Fixed Assets like vehicles would usually
encounter wear and tear as it is continuously used in the operation of the business. In
the law, it is allowed that owners will depreciate the value of the machine yearly up to
its estimated life span, and such depreciation will be reflected as part of the operating
cost of the project although there is no actual cash incurrence, however, the amount of
money deducted from the income as depreciation cost can be kept by the business that
in the event that the machine can no longer function efficiently, there is already
accumulated cash which can be used to replace the old machine. The accumulated
amount might not be sufficient to buy a new machine, yet, it can be used as down
payment for the purchased machine and the remaining balance can be paid in an
instalment basis from the income that can be generated by the use of the machine.
Example: If you would invest in a new building for your business, or you purchase a 10
thousand pesos worth of machine, you cannot deduct such big investments in the
accounts of the first year. The investment must be spread out over several years. One
way to do it is to depreciate / deduct I write off 30 % of the value every year. An
example:


Module 4: Accounting for Non-Accountant 23


A machine cost Php10,000.00

Year 1 you can deduct Php3,000 in the operating budget (30 % of P10,000).
Year2 you can deduct Php2,100 (10,000 3,000 = 7,000. 30 % of 7,000 = 2,100)
How you depreciate your assets is governed by existing rules in your country.
Or else, you can use the straight line depreciation method (SLDM), where in you will
estimate the salvage value of the machine and its life span. An example:
Cost of a machine - Php 10,000.00 Salvage Value - Php 1,000.00
Life span - 5 years; SLDM = Cost of Machine Salvage Value
Life span
= Php 10,000 Php 1,000
5 years
= Php 1,800.00 yearly depreciation from the 1st up
to the 5
th
year.
Profit I Net income
proprietor makes from running his/her business. Net income does not always exist in
terms of cash. It can be partly or fully tied-up in stocks or balance due from customers.

3. PROFITABILITY ANALYSIS:

To determine the performance of the business after each operation, a
profitability analysis can be prepared using returns on investment, working capital and
equity.


3.1 Return on Investment (ROI)


ROI = Net Income
Production Cost or capital investment

This ratio indicates how much centavo is earned or generated with every one
peso investment.
Module 4: Accounting for Non-Accountant 24



Example: If the answer is 25%, this means that for every one peso invested in the
business, a return of twenty five centavos will be realized.


3.2 Return on Working Capital


Return on Working Capital = Net Income
Operating Expenses

This ratio indicates how much income is generated out of the operating funds
used for a specific period.


3.3 Return on Equity (ROE)


ROE = Net Income
Total Project Equity

This ratio indicates how much income is generated from the capital employed in
the project. The ratio should be higher than the opportunity cost of the capital (say 10%
interest given by banks) to conclude that the project is performing well. (IGP, CLSU,
2000, Escalona, M. 2008).



4. BREAKEVEN ANALYSIS:

This analysis will determine the least or minimum quantity of product given a
specific price to recoup or recover the total operating cost, and the minimum price that
would be set given quantity of product that will be produced by the project. At
breakeven price and breakeven quantity, the project will not realize a profit or a loss,
however, it is very important analysis for a manager since it would guide him to find the
best price or the best quantity to produce to realize his desired profit (Battad, F. 2000,
Escalona, M.A.,2008).


4.1 Breakeven Price (BEP)

(BEP) = TOTAL OPERATING EXPENSES
TOTAL QUANTITY PRODUCED
Module 4: Accounting for Non-Accountant 25



Breakeven Price determines the minimum price set for the product to recover
the operating expenses.

4.2 Breakeven Volume (BEV)


(BEV)= TOTAL OPERATING EXPENSES
PROPOSED SELLING PRICE

Breakeven Volume determines the minimum volume that should be produced to
recoup the operating expenses incurred in the project.





Module 4: Accounting for Non-Accountant 26


Activity #6. Prepare the profitability and breakeven analyses using the given case
below:

Mang Tomas planted tomatoes in a one hectare lot. He spent at least Php
50,000 to grow the plants up to the time they bear fruits and ready for market. He plans
to set the price at Php 35.00 per kg. since the market price is also at Php 35.00 per kg.

Moreover, he plans to produce at least 2,000 kgs. of tomatoes for this project?

At the end of operation, Mang Tomas realized a net income of Php 20,000.00.

Questions

1. What is the breakeven volume of the project?
2. What is the breakeven price of tomatoes?
3. What is the ROI of the project?





Module 4: Accounting for Non-Accountant 27


EVALUATION


This illustrative problem is a guide on what you will do given the summary of
your transaction at the end of the month. You might wish to do other reports but for
purposes of example we prepare a problem and the financial reports made out of the
given problem. (To ease your understanding, we only provide few accounts).

Mang Tomas Sandoval invested on a Coco-sugar Production Business and has the
following accumulated facts of his accounts for the month ended May 31, 2009.


Accounts Amount
Cash 50,000.00
Materials and Equipment 10,000.00
Motorbike 8,000.00
Inventory (coco-sugar) 12,500.00
Due from Shoppers Central-(Customer) 7,500.00
Due from WMSU Canteen-(Customer 5,000.00
Due to Pedro Cruz (Creditor) 5,000.00
Tomas Sandoval, Capital 76,500.00
Tomas Sandoval, Withdrawals 2,000.00
Sales from Coco-sugar 30,000.00
Toddy expense 5,000.00
Labor Cost 6,000.00
Fuel Cost 2,000.00
Delivery Expense 1,000.00
Miscellaneous Expense 2, 500.00


Required: Prepare the following reports:
a. Income Statement
b. Balance Sheet
c. Financial Analysis
c.1 Profitability analysis
c.2 Breakeven Analysis



Module 4: Accounting for Non-Accountant 28


Answers:

a. Preparation of Income Statement:

T. Sandoval Coco-Sugar Business
INCOME STATEMENT
For the period ended May 31, 2009
Sales from Coco-sugar P 30,000.00
Less: Operating Expenses
Cost of Toddy P 5,000.00
Labor Cost 6,000.00
Fuel 2,000.00
Delivery cost 1,000.00
Miscellaneous 2,500.00 16,500.00
Net Income / (Loss) 13,500.00


b. Preparation of Balance Sheet:


T. Sandoval Coco-Sugar Business
BALANCE SHEET
May 31, 2009
ASSET LIABILITIES
Cash P 50,000.00 Due to P. Cruz P 5,000.00
Due from S. Central 7,500.00
Due from WMSU 5,000.00 Total Liabilities P 5,000.00
Inventory 12,500.00
Mat. & Equipt. 10,000.00 CAPITAL
Motorbike 8,000.00 T. Sandoval Cap. P 76,500.00
Less: T.S. W/drawal 2,000.00
P 74,500.00
Plus: Net Income 13,500.00
P 88,000.00
Total Assets P 93,000.00 Total Liab+Capital P 93,000.00


Module 4: Accounting for Non-Accountant 29


c. Profitability Analysis:

1. Return on Investment (ROI) = Net Income


= P 13,500.00
P 16,500.00

= .818 or .82 or 82%

Interpretation: Eighty two per cent (82%) means that in every one peso invested by
Mang Tomas in the operation of his Coco-sugar business, he earns eighty one centavos.
This indicates that the investment is very good since the earning of the business is
higher than its opportunity cost, that is, when the funds of Mang Tomas was deposited
in the bank, it would earn interest of 10% or less, however, the interest is very low as
compared to the earning it would generate if invested on coco-sugar production.


2. Return on Equity = Net Income
Total Project Equity

= P 13,500.00
P 74,500.00

= .18 or 18 %

Interpretation: When net income was compared to the capital invested by Mang Tomas
less his withdrawal, still the income is good since in every one peso investment, it yields
a return of 18 centavos which is still higher as compared to bank interest had Mang
Tomas deposited his money in the bank.


BREAKEVEN ANALYSIS: In case, Mang Tomas wants to produce 100 kilograms each
month, then, his BEP would be:


3. Breakeven Price (BEP) = Total Operating Cost
Total Quantity Produced

= P 16,500.00
100 kgs.

= P 165.00/kg.
Module 4: Accounting for Non-Accountant 30


Interpretation: BEP determines the price that would recover the expenses of Mang
Tomas, however, at that price he neither earns nor loses. The intention of computing
the BEP is that, it serves as basis for Mang Tomas to determine at what price he can
earn better and at what point that he will no longer yield to bargaining from customers.
Assume that Mang Tomas would set his coco-sugar at P 180.00/ kg. What is therefore
the BEV?


4. BREAKEVEN VOLUME (BEV) = Total Oper. Cost
Proposed Selling Price

= P 16,500.00
P180/kg.

= 92kgs.

Interpretation: Mang Tomas would only need 92 kilograms in order to recover his
expenses. However, at that point he is not earning profit; thus, he has to produce more
than 92 kilograms if he is selling price is at 180 per kilogram of coco-sugar.

Module 4: Accounting for Non-Accountant 31


Problem Set

1. Do you find accounting important in your daily activity? Explain
2. Give situation where you were able to apply accounting principles?
3. Problem Solving


The participants will be given a simple prepared problem to work on where they will
now apply what have been taught to them. They will check their answers at the end of
the session and make corrections on areas where they commit mistakes.


Business for the month ending February 28, 2009.

Sales of Roses Php 120,000.00
Sales of Cuttings 10,000.00
*Garden Tools 3,000.00
Labor Cost 40,000.00
Fertilizer and Insecticides cost 10,000.00
Water Bill 2,500.00
Delivery Cost 3,000.00
Maintenance Expense 1,750.00

*garden tools will be replaced monthly.

Required:

1. Prepare the following statements:
a. Income Statement
b. Cash Flow Statement with cash balance beginning of Php 5,000.00
c. Balance Statement
2. Compute for the ROI of the project.











Module 4: Accounting for Non-Accountant 32


SUMMARY

It is important for you to know and appreciate accounting even if you are not an
accountant because by so doing you will learn the development of your business no
matter how small it is. Accounting is simply record keeping and knowing that in every
transaction you make, you receive a value as well as you depart a value also, so long, as
you consider the transaction as fair between you and the person or entity you transact
with.

In accounting there are four functions performed. These are: recording where
transactions have to be recorded in a systematic and chronological order, then,
classifying, where resources and accounts in the business have to be grouped together
according to similarities and likenesses, followed by summarizing; this is done at the end
of each accounting period, say, after each month, semester, or a year to be able to
prepare various financial reports like income statement balance sheet and others so
that financial analysis can also be computed to determine the performance of your
business. The last function is interpreting the results thereof. This means that for you to
appreciate more your business, you need to interpret its performance, and this can be
done through the computation of the profitability and breakeven analysis. The
profitability analysis measures the earnings of the business against the cost of
production or your total equity. The rule of the thumb says that the business is
performing well if its earning is higher than the opportunity cost of capital by ten per
cent. On the other hand, breakeven analysis determines the price and volume of goods
to produce in order to recover the expenses of the business. Breakeven analysis is
important because it helps you to determine the price that gives you the highest profit
at a given volume. It also helps to determine the volume of goods to produce at a given
price that allows you to earn not only to point of recovering your cost but to make
profit.








Module 2: Product Development 33

REFERENCES

Battad, Fortunato, A. et.al. IGP. Income Generating Project. June 2000.

Copeland, R. et al (1995). Managerial Accounting 5
th
ed. Dame Publications, Inc.
Houston, Texas.

Escalona, Marilyn A. Manual in Project Planning and Management, 2008.

Everand, R.B. et al (1996). Business Principles and Management. South-Western
Educational Publishing. Ohio

Larson, K. et al (2002). Fundamental Accounting Principles 16
th
ed. McGraw-Hill. Boston,
Massachusetts.

Pasion, D.S (2002). Introductory Accounting. Part 1.

Penson, J.B. et al (1982). Farm Investment and Financial Analysis. Prentice-Hill Inc. New
Jersey.

Swanson, R. et al (1987). Century First Accounting. p 3-17. South-Western Publishing Co.

The Chair Training Department University of the Philippines Institute for Small Scale
Accounting for Non-Accountants etrieved February 23, 2009
http://www.upd.edu.ph/~issi

Weygandt, J. et al (2002). Principles of Financial Accounting 6
th
ed. John Wiley & Sons
Inc. New York.