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ACTBAS1: Introductory Accounting--Part 1

Statement of Financial Position

Statement of Financial Position

It is a formal record that reports the financial condition of a business entity by summarizing its assets,
liabilities, and equity.

It has two partsthe heading and the body. The heading is where the name of the company, title of the
financial statement, and date of the reporting are stated. The body is where the information purported by
the financial statement is presented.

It has two formsthe account form and report form. (The account form presents the elements of the
accounting equation in a horizontal manner. The assets are placed on the left, and the liabilities and
owners equity on the right. The report form presents the elements in a vertical manner where the assets
are presented on top while the liabilities and owners equity are presented at the bottom.)

Assets A resource controlled by the entity as a result of past events and from which future economic benefits
are expected to flow to the entity and can be measure reliably.

Classification of Assets

Current An asset is classified as current when it satisfies any of the following criteria.

i. The entity expects to realize the asset, or intends to sell or consume it, in its normal operating cycle.

ii. The entity holds the asset primarily for the purpose of trading.

iii. The entity expects to realize the asset within twelve months after the reporting period.

iv. The asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting period.

Examples of current assets include the following.

1. Cash or its equivalent

2. Investment in Trading Securities

3. Trade and Other Receivables

4. Prepaid Expenses

5. Short-term investments

Non-current An asset is classified as noncurrent when the asset does not satisfy any of the criteria above.

Tangible, intangible, and financial assets of long term nature fall under this classification.

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ACTBAS1: Introductory Accounting--Part 1
Statement of Financial Position

The operating cycle of an entity is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents. When the entitys normal operating cycle is not clearly
identifiable, it is assumed to be twelve months.

Examples of non-current assets include the following.

1. Intangible property

2. Investment property such as real estate property

3. Biological assets

Liability A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits. It includes the obligation to
transfer cash and non-cash resources or provide services at some future date. Furthermore, a liability is not
recognized until incurred. The liable entity must be identified.

Classification of Liabilities

Current A liability is classified as current when it satisfies any of the following criteria.

i. The entity expects to settle the liability in its normal operating cycle

ii. The entity holds the liability primarily for the purpose of trading

iii. The liability is due to be settled within twelve months after the reporting period.

iv. The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period. Terms of liability that could, at the option of the counterparty,
result in its settlement by the issue of equity instruments do not affect its classification.

v. Other current liabilities are not settled as part of the normal operating cycle, but are due for
settlement within twelve months after the reporting period or held primarily for the purpose of
trading.

Some current liabilities, such as trade payables and some accruals for employee and other operating
costs, are part of the working capital used in the entitys normal operating cycle. An entity classifies
such operating items as current liabilities even if they are due to be settled more than twelve months
after the reporting period. The same normal operating cycle applies to the classification of an entitys
assets and liabilities. When the entitys normal operating cycle is not clearly identifiable, it is assumed
to be twelve months.

Non-current A liability is classified as non-current when it does not satisfy any of the criteria above.

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

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ACTBAS1: Introductory Accounting--Part 1
Statement of Financial Position

It is increased by investment or contribution and revenue. On the other hand, expenses and withdrawal
of the owner decrease it.

Terms used in the reporting of equity of an entity depend on the form of business organization.

1. Owners equity refers to the interest of the owner of a single proprietorship form of
organization.

2. Partners equity refers to the interest of partners that compose a partnership.

3. Shareholders/ Stockholders equity refers to the interest that stockholders have in their
respective corporations.

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