Fundamentals of Accountancy, Business, and Management 2

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Statement of Financial Position Part I

Module 002Statement of Financial Position Part

I

The information accumulated and processed in financial accounting is

periodically communicated to the users by means of Financial Statements. In
this Chapter, one of the financial statements, which is the Statement of
Financial Position will be discussed. At the end of this module, you will be
able to:
1. To be able to describe the Statement of Financial Position or SFP.
2. To identify the elements of the SFP and describe each of them.

3. To classify the elements of the SFP into current and noncurrent items.
The SFP is a primary financial statement of any business. It shows the assets,
liabilities, and capital of any company

Statement of Financial Position

A Statement of Financial Position, also known as balance sheet, is a formal

statement presenting the three accounting elements which are the assets,
liabilities and equity.

A statement of financial position is one of four business documents a public

company must file every year in order to retain their status. The other three are an
income statement, a statement of retained earnings, and a cash flow statement.

Most often statements of financial positions are called ‘balance sheets.’ However,
when a company is a government or non-profit organization, the original term
‘statement of financial position’ is used.

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 Most often this statement is prepared and released as one of the last events for the
specific accounting period. This means that all the transactions in the three
sections listed above are given on a single document and posted to a general
ledger. More simply, a statement of financial position is a single picture of a
company’s entire financial position for a given period of time. Its goal is to
summarize the changes in financial activity.

Components of a Balance sheet (A = L + C)

The Heading

Heading is the first component of the balance sheet. It is extremely important

since it tells the readers of the balance sheet three important pieces of
information:

1. The company name;

2. The type of statement to follow (Balance Sheet);
3. The date at which account value applies.

Ex: THE TOY COMPANY

Balance Sheet
As of December 31, 2017

Assets
Assets are a company's resources—things the company owns. These are
economic resources of the business.
Some characteristics of assets are:
a. Assets are resources owned and/or controlled by the enterprise.
b. Assets are acquired by an enterprise as a result of a past transaction or
event.
c. The enterprise should have the capacity to restrict or prevent other
entities from enjoying the economic benefits arising from the use of the
resource or item.
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Statement of Financial Position Part I

Liabilities

Liabilities are a company's obligations—amounts the company owes to other

business, government, shareholders, employees, and others.

Some characteristics of liabilities are:

a. A liability is a present obligation arising out of past event.
Examples of events are a purchase transaction, or a borrowing
transaction.
b. A liability is required to be settled in the future.

Liabilities can be viewed in two ways:

1. as claims by creditors against the company's assets, and

2. a source—along with owner or stockholder equity—of the company's
assets.

Capital

Capital or Owner’s Equity is the amount left over after liabilities are deducted
from assets:

Assets - Liabilities = Owner's (or Stockholders') Equity.

Equity –the original and additional investments of the owner of the business
is recorded in entity or Capital. Net income earned during the year increases
capital and is decreased by net loss.

Withdrawals – Any amount of money or other assets withdrawn by the

owner of the business for personal use are reflected in the “withdrawals”

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 account. Other accounting references use the term “drawings” or “personal”
instead of “withdrawals”

<Figure 1.Capital is also known as residual assets since they are what are left of the asset after the company pays
all of its liabilities..>

Current and Noncurrent Assets and Liabilities

Assets are classified in the balance sheet as current and noncurrent. It is

considered as current if it is expected to be used for the next 12 months.

Those assets which will not fall in the above criteria are considered as
noncurrent. Examples of noncurrent assets are:
1. Property, plant and equipment
2. Long-term investments
3. Intangible assets
4. Others

Intangible Assets

Intangible assets are recognized at fair value when they are acquired and
amortized over their useful lives except goodwill which has unlimited useful
life. They are periodically tested for impairment. These are fixed assets that
have no physical existence such as copyright, patents, goodwill, etc.
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Statement of Financial Position Part I

Property, Plant and Equipment

Property, plant and equipment (also called tangible fixed assets) are those
fixed assets that have some physical existence. They are grouped into
different classes such as land, land improvements, buildings, vehicles, etc.
based on their function and depreciated over their useful lives except land
which has unlimited useful life (unless it is a land obtained on lease).
Property, plant and equipment are presented on balance sheet net of
accumulated depreciation and accumulated impairment losses.

Long-term Investments

Long-term investments are investments which are not expected to be

realized (sold or otherwise converted to cash) within next 12 months. These
include investments in common stock of companies, purchases of bonds
issued by companies, etc.

Liabilities are also classified in the balance sheet as current and noncurrent.
It is considered as current if it shall be paid or due within the next 12 months.

Settlement comes either from the use of current assets such as cash on hand
or from the current sale of inventory. Settlement can also come from
swapping out one current liability for another.

At present, most liabilities show up on the balance sheet at historic cost

rather than fair value. And there’s no GAAP requirement for the order in
which they show up on the balance sheet, as long as they are properly
classified as current.

The big-dog current liabilities, which you’re more than likely familiar with
from previous accounting classes, are accounts payable, notes payable, and

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unearned income. Keep in mind that any money a company owes its
employees (wages payable) or the government for payroll taxes (taxes
payable) is a current liability, too.

Here’s a brief description of each:

 Short-term notes payable: Notes due in full less than 12 months

after the balance sheet date are short term. For example, a business
may need a brief influx of cash to pay mandatory expenses such as
payroll. A good example of this situation is a working capital
loan, which a bank makes with the expectation that the loan will be
paid back from collection of accounts receivable or the sale of
inventory.

 Accounts payable: This account shows the amount of money the

company owes to its vendors.

 Dividends payable: Payments due to shareholders of record after the

date declaring the dividend.

 Payroll liabilities: Most companies accrue payroll and related payroll

taxes, which means the company owes them but has not yet paid
them.

 Current portion of long-term notes payable: If a short-term note

has to be paid back within 12 month of the balance sheet date, you’ve
probably guessed that a long-term note is paid back after that 12-
month period. However, you have to show the current portion (that
which will be paid back in the current operating period) as a current
liability.

 Unearned revenue: This category includes money the company

collects from customers that it hasn’t yet earned by doing the
complete job for the customers but that it anticipates earning within
12 months of the date of the balance sheet.
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Statement of Financial Position Part I

Those liabilities which will not fall in the above criteria are considered as
noncurrent Examples of noncurrent liabilities are:

1. Noncurrent portion of long-term debt

2. Capital or finance lease liability
3. Deferred tax liability
4. Long-term obligations to company officers
5. Long-term deferred revenue

 Bonds payable: Long-term lending agreements between borrowers

and lenders. For a business, it’s another way to raise money besides
selling stock.

 Long-term leases: Capital leases (you record the rental arrangement

on the balance sheet as an asset rather than the income statement as
an expense) that extend past 12 months of the date of the balance
sheet. Because the rental arrangement is recorded as an asset, the
related lease obligation must be recorded as a liability.

 Product warranties: Report as noncurrent when the company

expects to make good on repairing or replacing goods sold to
customers and the obligation extends beyond 12 months from the
balance sheet date.

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Glossary

Assets: are a company’s own resources.

Liabilities: are a company’s obligations or debt.

Capital: also known as Equity, are the residual amounts from assets after a company pays
all of its liabilities.

Current Assets or Liabilities: assets or liabilities which are expected to be used or paid
within the next twelve months.

Noncurrent Assets or Liabilities: assets or liabilities which are expected to be used or

paid longer than the next twelve months.

References and Supplementary Materials

Books and Journals

Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House

Jimenez, C.E., &Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and

Exercises. Manila: JMS Publishing House

Online Supplementary Reading Materials

What is the Statement of Financial

Position?;https://www.accountingcoach.com/blog/what-is-the-statement-of-financial-
position; 10 April 2017

https://blog.udemy.com/the-statement-of-financial-position/; June 3, 2014

http://www.dummies.com/business/accounting/current-and-noncurrent-liabilities-on-
the-balance-sheet/

Online Instructional Videos

 Fundamentals of Accountancy, Business, and Management 2
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Statement of Financial Position Part I

5 minute Finance Lessons, Financial Statement basics; https://youtu.be/mhmaHayMha8;

23 March 2017

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