CO QAH + MELC LW HANDOUT No.

1
Course Outline & Quality Assured in Fundamentals of Accounting, Business,
Handouts paired with MELC- Based
and Management 2
Learner’s Worksheet
Semester: 1st Week No. 1

MELC: 1. identify the elements of the SFP and describe each of them (ABM_FABM12-Ia-b-1)
2. prepare an SFP using the report form and the account form with proper classification of items as
current and noncurrent (ABM_FABM12-Ia-b-4)

The basic purpose of accounting is to provide information that is useful for making economic
decision. Accounting information is most communicated to users of accounting information through the
financial statements.

Financial statements are structured representation of an entity’s financial position which is

balance sheet and results of its operations which is the statement of performance. Financial statements
are product of the accounting process.

There are five major financial statements that is used by the accountants and business owners.
These are the Statement of Financial Position (SFP), Statement of Comprehensive Income (SCI),
Statement of Change in Equity (SCE), Statement of Cash Flows (SCF), Note to Financial Statements
(NFS).
STATEMENT OF FINANCIAL POSITION
The Statement of Financial Position (SFP), often called as balance sheet is a statement
that 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.

The statement of financial position only records the company account information on the last
day of an accounting period. In this sense, investors and creditors can go back in time to see what the
financial position of a company was on a given date by looking at the balance sheet.

The elements of the financial positions are as follows:

1. 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.

 The non-current assets section includes resources with useful lives of more than 12 months. In
other words, these assets last longer than one year and can be used to benefit the company
beyond the current period. The most common non-current assets include property, plant, and
equipment.

2. 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 current liabilities and long-term
liabilities.

 Current debt- obligations that are due in the next 12 months. Usually includes accounts payable
and accrued expenses.
 The long-term section includes all other debts that mature more than a year into the future like
mortgages and long-term notes.
 3. 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.

Preparation of SFP using the Report Form and the Account Form

The statement of financial position is formatted like the accounting equation (assets = liabilities +
owner’s equity). Thus, the assets are always listed first.

There are two forms of statement of financial position, the report form and account form.

Consider the following illustration of 3G and Mimmie Company as of December 31, 2021:

Illustration 1

(Illustration1): The table shows

the Report form. In this form,
the accounts are presented in
one straight column- assets
first, followed by liabilities,
and finally, the owner’s equity.

This is usually the format that

will be submitted to the
government and private
agencies such as Banks.
Financial institutions, Bureau
of Internal Revenue, City
Treasurer’s office and others.
 Illustration 2

The format given above is the ACCOUNT FORM. The account form follows
the style of the accounting equitation (i.e., assets are on the left side of the
SFP while liabilities and owner’s equity are on the right side).

According to the Philippine Accounting Standards (PAS), there is no prescribed form for financial
reporting, but the form should be appropriate to the nature of business and transactions of the entity.

Steps to be made in the preparation of balance sheet

In the accounting cycle, the balance sheet and other financial statements are prepared after the
adjusted trial balance is done. Preparing the balance sheet without doing the previous steps of the
accounting cycle will give the preparer troubles in coming up a fair balance sheet statement. Once the trial
balance is adjusted and updated to correct errors and other adjustments, we can now prepare the balance
sheet and income statement. The following are the simple steps you need to know in preparing a simple
balance sheet:

1. Start with the heading. The heading includes the name of entity (individual or company),
name of the statement (balance sheet), and the reporting period (ex. as of December 31, 2011). Some
complex forms of businesses may include a more detailed heading, such as when reporting a consolidated
balance sheet and or when presenting comparative years. Below is an example of a simple heading in the
balance sheet we have prepared from our sample adjusted trial balance. You may also indicate the local
currency (e.g., Amounts in Philippine Pesos) used in your balance sheet statement.

2. Present your assets. Classify your assets

into current and noncurrent assets. Current
assets are cash; cash equivalent; assets held
for collection, sale, or consumption within the
entity’s normal operating cycle; or assets held
for trading within the next 12 months. The rest
are considered noncurrent assets.
 3. Present your liabilities. After we are done
with the total assets, next are the liabilities. Liabilities
should also be classified as current and noncurrent. But in
our example, we only have current liabilities. Our current
liabilities include accrued expenses, loans, and income
tax payable. After presenting our total assets and
liabilities, our balance sheet already looks like this.

4. Add the owner’s equity. The balance sheet is an equation of “Assets = liabilities + equity”.
Thus, we need to add the owner’s equity in the “liabilities and equity” section of our balance sheet. The
owner’s equity presented may only show the ending balance, that is, the ending balance amount shown in
the statement of changes in owner’s equity. This amount is already the result after adjusting the
investments, withdrawals, net income (loss) for the year, and other adjustments from the beginning
balance of the owner’s equity. After, presenting the owner’s equity, our balance sheet will already look like
this.

Note:

The amount in Capital account

under Owner’s Equity should be
equal to the balance in Changes in
Owner’s Equity. As a review in our
Accounting 1, Changes in Owner’s
Equity is computed as:

Capital, Beg. XX

Add: Profit XXX

Total XXX

Less: Drawings XXX

Capital, End XXX

Does the Balance Sheet always balance?

Note that the “total assets” and the “total liabilities and owner’s equity” must be balanced. Also
remember that this is only an example of a balance sheet for a single proprietorship business. Other forms
of businesses, such as partnership and corporation, may have different presentation in the equity section
of the balance sheet. Furthermore, the term balance sheet is amended to statement of financial position by
IAS 1 (International Accounting Standard) in 2007. Hence, if your country is covered by this standard, the
statement of financial position is a more appropriate term than the balance sheet.

APPENDICES

TYPICAL ACCOUNT TITLES USED

ASSETS
CURRENT ASSETS
 Cash- Cash includes currency, coins, checking account balances, petty cash funds, and customers'
checks that have not yet been deposited. A company is likely to have a separate general ledger account
for each checking account, petty cash fund, etc. but will combine the amounts and will report the total as
Cash (or Cash and Cash Equivalents) on the balance sheet.
Accounts Receivable- these are claims against customers arising from sale of services or good on
credit. This type of receivables offers less security than a promissory note.
Notes Receivable- a written pledge that the customer will pay the business a fixed amount of
money on a certain date.
Allowance for Doubtful Accounts- a contra-asset account since its balance is intended to be a
credit balance (or a zero balance). When the balance in this account is combined with the balance in
Accounts Receivable, the resulting amount is known as the net realizable value of the receivables. The
Allowance for Doubtful Accounts is used under the allowance method of reporting bad debts expense.
Accrued Revenues/Receivables- under the accrual method of accounting, revenues are to be
reported when goods or services have been delivered even if a sales invoice has not been generated. This
account will report the amounts that a company has a right to receive but the sales invoices have yet to be
prepared or entered in Accounts Receivable.
Short-term Investments- Short-term or temporary investments may include certificates of deposit,
bonds, notes, etc. that will mature in less than one year. It may also include investments in the common or
preferred stock of another corporation if the stock can be easily sold on a stock exchange.
Inventory- is the cost of goods that have been purchased or manufactured and have not yet been
sold.
Supplies- supplies could be office supplies, manufacturing supplies, packaging supplies or other
supplies that are on hand. The cost of the supplies that remain on hand is reported as an asset.
Prepaid Expenses- These are expenses paid for by the business in advance. It is an asset
because the business avoids having to pay cash in the future for a specific expense. These include
insurance and rent. These prepaid items represent future economic benefits-assets-until the time start to
contribute to the earning process; these, then, become expense.

NON-CURRENT ASSETS
Long-term Investments- This account or asset category will be reported on the balance sheet
immediately following current assets. It may include investments in the common stock, preferred stock, and
bonds of another corporation. It also includes real estate being held for sale and also the money that is
restricted for a long-term purpose such as a building project or the repurchase of bonds payable. The cash
surrender value of a life insurance policy owned by a company is also reported under this asset heading
Property, Plant and Equipment (PPE) – per PAS no. 16, these are tangible assets that are held
by an enterprise for use in the production or supply of goods or services, or for rental to others, or for
administrative purposes and which are expected to be used during more than one period. These includes:
Land- This account represents the property portion of the balance sheet heading "Property,
plant and equipment." It reports the cost of land used in a business. Since land is assumed to last
indefinitely, the cost of land is not depreciated.
Buildings- This account will report the cost of the building used in the business. The cost of
buildings will be depreciated over their useful lives.
Equipment- This account reports the cost of the machinery and equipment used in the
business. The cost of equipment will be depreciated over the equipment's useful life.
Furnitures and fixtures- This account reports the cost of desks, chairs, shelving, etc. that
are used in the business. The cost of furniture and fixtures is to be depreciated over the useful lives.
Vehicles- This account reports the cost of trucks, trailers, and automobiles used in the
business. The cost of vehicles is to be depreciated over the vehicles' useful lives.
Accumulated Depreciation- known as a contra asset account because it has a credit balance
instead of a debit balance that is typical for asset accounts. Whenever Depreciation Expense is debited for
the periodic depreciation of the buildings, equipment, vehicles, etc. the account Accumulated Depreciation
is credited. The credit balance in Accumulated Depreciation will continue to grow until an asset is sold or
scrapped. However, the maximum amount of the credit balance is the cost of the asset(s).
 Intangible Assets- Per PAS No. 38, these are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or services, for rental to others, of for
administrative purposes. These include goodwill, patents, copyrights. Licenses, franchises, trademarks,
brand names, secret processes, subscription lists and non-competition agreements.

LIABILITIES
CURRENT LIABILITIES
Accounts Payable - refers to indebtedness that arise from purchase of goods, materials, supplies
or services and other transaction in the normal course of business operations
Notes Payable - obligations that are evidenced by promissory notes that are to be paid within 1
year
Income Tax Payable - current income tax obligation of the company payable to the government
Withholding Tax Payable - includes wage taxes withheld from employees that will be remitted to
the appropriate government agency. Separate accounts for Social Security Payable and Medicare Payable
are also often used
Accrued Expenses - expenses already incurred but not yet paid. Accrued expense accounts
include: Salaries Payable, Rent Payable, Utilities Payable, Interest Payable, Telecommunications Payable,
and other unpaid expenses
Unearned Revenues - represents advanced payments from customers which requires settlement
through delivery of goods or services in the future

NON-CURRENT LIABILITIES
Long-Term Notes Payable - obligations evidenced by promissory notes which are to be paid
beyond 1 year; also commonly referred to as Loans Payable
Bonds Payable - liabilities supported by a formal promise to pay a specified sum of money at a
future date and pay periodic interests. A bond has a stated face value which is usually the final amount to
be paid. Bonds can be traded in bond markets.
Mortgage Payable - long-term obligation to a bank or other financial institution, secured by real
properties of the business

EQUITY
Capital- This account is used to record the original and additional investments of the owner of the
business entity. It is increased by the amount of profit earned during the year or is decreased by a loss.
Cash or other assets that the owner may withdraw from the business ultimately reduce it. This account title
bears the name of the owner.
Withdrawals- a contra equity account. When the owner of a business entity withdraws cash or
other assets, such are recorded in the drawing or withdrawal account rather than directly reducing the
owner’s equity account.
Common stock- is the par value of the stock sold directly to investors. Par value tends to be quite
small or non existent, so the balance in this account may be minimal.
Preferred stock- is the par value of preferred stock. These shares have special rights and
privileges beyond those accorded to common stock. Some organizations have never issued preferred
stock, while others may have issued a number of tranches of it. The main feature of preferred stock is a
fixed dividend payment, making this a safer investment for investors.
Retained earnings- is the amount of earnings generated by a business to date, less the amount of
any distributions back to shareholders in the form of dividends.
Treasury stock- is a contra account that contains the amount paid to investors to buy back shares
from them. This account has a negative balance, and so reduces the total amount of equity.
Additional paid-in capital- is the amount paid by investors in excess of par value on stock sold
directly to them by the issuer. The balance in this account can be quite substantial, especially in view of the
minimal par value amounts assigned to most stock certificates.

INCOME
 Service Income- Revenues earned by performing services for a customer or client; for example,
accounting services by a CPA firm, laundry services by a laundry shop.
Sales- Revenues earned as a result of sale of merchandise, for example, sale of building materials
by a construction supplies firm.

EXPENSES
Cost of Goods Sold (COGS) – Also known as Cost of Sale, represents the value of the items sold
to customers before any mark-up. In merchandising companies, cost of sales is normally the purchase
price of the goods sold, including incidental costs. In manufacturing businesses, it is the total production
cost of the units sold. Service companies do not have cost of sales.
Purchases- cost of merchandise acquired that are to be sold in the normal course of
business. At the end of the period, this account is closed to Cost of Sales.
Freight in- If the business shoulders the cost of transporting the goods it purchased,
such cost is recorded as Freight-in. This account is also closed to Cost of Sales at the end of
the period.
Advertising Expense - costs of promoting the business such as those incurred in newspaper
publications, television and radio broadcasts, billboards, flyers, etc.
Bank Service Charge- costs charged by banks for the use of their services.
Delivery Expense- represents cost of gas, oil, courier fees, and other costs incurred by the
business in transporting the goods sold to the customers. Delivery expense is also known as Freight-out.
Depreciation Expense- refers to the portion of the cost of fixed assets (property, plant, and
equipment) used for the operations of the period reported
Insurance Expense- insurance premiums paid or payable to an insurance company who accepts
to guarantee the business against losses from a specified event
Interest Expense- cost of borrowing money
Rent Expense- cost paid or to be paid to a lessor for the right to use a commercial property such
as an office space, a storeroom, a building, etc.
Repairs and Maintenance- cost of repairing and servicing certain assets such as building facilities,
machinery, and equipment
Representation Expense- entertainment costs for customers, employees and owners. It is often
coupled with traveling, hence the account title Travel and Representation Expense.
Salaries Expense- compensation to employees for their services to the company
Supplies Expense- cost of supplies (ball pens, ink, paper, spare parts, etc.) used by the business.
Specific accounts may be in place such as Office Supplies Expense, Store Supplies Expense, and Service
Supplies Expense.
License Fees and Taxes- business taxes, registration, and licensing fees paid to the government
Telecommunications Expense- cost of using communication and telephony technologies such as
mobile phones, land lines, and internet
Training and Development- costs for the enhancement of employee skills
Utilities Expense- water and electricity costs paid or payable to utility companies
Uncollectible Accounts Expense- The amount of receivables estimated to be doubtful of
collection and charged as expense during an accounting period.

REFERENCES

Ferrer, R., & Millan, Z. V. (2017). Fundamentals of Accountancy, Business & Management Part 2. 1st
Edition

Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary Approach, Second
Edition. New York: McGraw-Hill/Irwin.

Valencia, E. G., & Roxas, G. F. (2010). Basic Accounting (3rd ed.).

Mandaluyong City, Philippines: Valencia Educational Supply.

Teaching Guide in Senior High School Fundamentals of Accountancy Business and Management 2,
donated by the Commission on Higher Education in Collaboration with the Philippine Normal University to
Department of Education

Websites:

https://www.myaccountingcourse.com/financial-statements/statement-of-financial-position

https://businesstips.ph/how-to-prepare-a-balance-sheet-statement-of-financial-position/