Accounting 2

LESSON 1: STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION
– Also known as the balance sheet. This statement 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).
This gives an information of all sources of the business to be use, the company ’ s obligation to be
settle and the business owner ’ s equity as well. This is the main financial report of the business,
because this serves as the basis of preparation of the other three (3) financial statements. The basis
or the computation in balancing the Statement of Financial Position is the accounting equation:
Assets = Liabilities + Equity. The five (5) main elements of SFP are Assets, Liabilities, Equity, Income
and Expenses.
Components of Statement of Financial Position
I. ASSETS
In financial accounting, an asset is any resource owned by a business or an economic entity.
Simply stated, assets represent value of ownership that can be converted into cash (although cash
itself is also considered an asset). The balance sheet of a firm records the monetary value of the
assets owned by that firm.
A. Classification of Assets according to convertibility:
- are assets that can be easily converted into cash and cash equivalents (typically within a
year). Current assets are also termed liquid assets or short-term assets. Examples include
Cash, Cash Equivalents, Short Term Deposits, Accounts Receivable, Merchandise Inventory,
Marketable Securities, Prepaid Expense, and Office Supplies. Note: Current Assets are
arranged based on which asset can be realized first (liquidity).
Non- Current Assets or Fixed Assets
- are assets that cannot be easily and readily converted into cash and cash equivalents.
Noncurrent assets are also termed fixed assets, longterm assets, or hard assets. Examples
include Property, Plant and Equipment (equipment, furniture, building, land), Long Term
investments, Intangible Assets, Patent and Trademark.
B. Classification of Assets according to Physical Existence
TANGIBLE ASSETS
- assets with physical existence (we can touch, feel, and see them). Examples are Land,
Building, Machinery, Equipment, Cash, Office Supplies, Furnitures and Fixtures, Inventory and
Marketable Securities.
INTANGIBLE ASSETS
- assets that lack physical existence such as Goodwill, Copyrights, Trade Secrets, Licenses and
Permits, and Corporate Intellectual Property.
C. Classification of Assets according to Usage
OPERATING ASSETS
- Are assets that are required in the daily operation of a business. In other words, operating
assets are used to generate revenue from a company ’ s core business activities. Examples:
Cash, Accounts receivable, Inventory, Building, Machinery, Equipment, Patents, Copyrights,
and Goodwill.
NON-OPERATING ASSETS
Are assets that are not required for daily business operations but can still generate revenue.
Examples of non-operating assets include:

• Short-term investments- any

investment made with the expectation to • Marketable securities
convert it into cash in one year or less. • Vacant land
They are part of the account in the • Interest income from a fixed deposit
current assets section of a company's
balance sheet.

II. LIABILITIES
Recorded on the right side of the balance sheet, liabilities are obligation that the company is
required to settle which include loans, accounts payable, mortgages, deferred revenues, bonds,
warranties, and accrued expenses. In general, a liability is an obligation between one party and
another not yet completed or paid for. The main types of liabilities are:
CURRENT LIABILITIES
– liabilities which are due and payable within one year; also known as short-term liabilities. Examples include Notes Payable, Accounts
Payable, Accrued Expenses (example: Utilities Payable), Unearned Income, Interest Payable, Income Taxes Payable, and other short -term
loans.