FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

AND MANAGEMENT 2
TOPIC
T
• STATEMENT OF FINANCIAL POSITION

LEARNING TARGETS
L At the end of the lesson, learners should be able to:
• Identify the elements of the SFP and describe each of them
• Prepare an SFP using the report form with proper classification of items as
current and non- current

MOTIVATION
M
https://www.youtube.com/watch?v=ixCPM5HznRU

INTRODUCTION
The Statement of Financial Position (SFP), which is also known as the Balance Sheet,
shows the financial position of a business entity at a given period or a specified date. Its
purpose is to help the financial statement users in the assessment of the financial health
and soundness of a business entity in determining its liquidity, financial, credit and
business risks.

The elements of the financial positions are as follows:

I 1. Assets are resources you control that have resulted from past events and can provide
you with the future economic benefits
2. Liabilities are your present obligations that have resulted from past events and can
require you give up resources when settling them.
3. Equity means assets minus liabilities. Other terms for equity are capital, net assets,
and net worth.

The assets, aside from the capital investment of the owners, maybe financed from
outside sources (like loans from banks and other financial institutions or from other
creditors). The total assets should always be equal to the sum of the total liabilities and
total equity.
Thus, the Accounting Equation is stated as:
Assets = Liabilities + Equity
Example:
Harvey Coffee Shop has an Equity amounting to P 200,000, Liability is P 75,000. How
much is the total Asset?

Given: L=P200,000; E=P75,000

Formula: Assets=Liabilities+Equity.
Solution: A=P200,000+P75,000
Assets=P275,000

As what you have learned from your Fundamentals of the Accountancy, Business
and Management 1 about the types of major accounts (Assets, Liabilities, Equity,
Income and Expenses), let us focus on the three major accounts which are also the
elements of the SFP or the Balance Sheet. These are the Assets, Liabilities and
Equity.

THE STATEMENT OF FINANCIAL POSITION (SFP): ITS CLASSIFICATION, ITS

PREPARATION AND ITS FORM.

As mentioned earlier, the Statement of Financial Position (SFP) or the Balance Sheet
shows the financial position of a business entity at a given period or a specific date.
Following the accounting cycle, the SFP and other financial statements (which will be
discussed in the succeeding modules) are prepared once the adjusted trial balance is
done to come- up with a fair balance sheet statement. Assets, Liabilities and Equity are
properly grouped and classified to give a meaningful information. Assets are presented
and classified by the order of its liquidity or those that are readily available for use and
can easily be converted into cash are listed first and assets that cannot be easily
converted into cash are listed last. When it comes to liabilities, maturity matters. Those
obligations that are currently due are listed first. The Balance Sheet includes permanent
and contra asset accounts. An account is said to be permanent because their balances
are carried over from one accounting date to another. The Assets, Liabilities and Equity
accounts are permanent accounts. Contra asset accounts are accounts also presented in
the SFP as a deduction to a particular asset. These are Allowance for Doubtful Accounts
and Accumulated Depreciation. The Allowance for Doubtful Accounts, a contra- asset
for Accounts Receivable, it is an allowance made by the business for estimated
uncollectible accounts. An Accumulated Depreciation is an account that represents
depreciation of Fixed Assets (except for Land) due to its usual wear and tear.

CLASSIFICATION OF ASSETS, LIABILITIES AND EQUITY

1. Assets are divided into current or non- current.

Current Assets- are items that are listed on a business’ statement of financial position
that are expected to be used or realized into cash within one accounting period or a
year. It usually includes cash, accounts receivable, inventories and prepaid expenses.
• Cash is considered the most liquid asset because it is readily available for use. It
is used as a medium of exchange in business transactions and may be held on
hand or put in banks for safekeeping.
 • Accounts Receivables are accounts due from customers as a result of sale of
goods or for services rendered that are collectible within one year.
• Inventories are regarded as a current asset because these are items held for
resale because they are readily available (either raw materials or finished goods).
• Prepaid expenses are considered current assets because they are expenses paid
in advance to be consumed within a year.

Non- Current Assets- are items that are listed on a business’ statement of financial
position that cannot be used or realized into cash within one accounting period or a
year. It includes assets that are long- term in nature like fixed assets, long-term
investments and intangibles.
• Fixed assets include Property, Plant and Equipment (Furniture, equipment, land,
building, vehicles, etc.) that are used acquired for use in operations and have an
estimated useful life of more than one year.
• Long- term investments are investments made by the owners of the business for
long- term purposes like marketable securities.
• Intangible assets are non- physical assets like Patents, Copyright and Franchise.

2. Liabilities are also divided into current or non- current.

Current Liabilities- are liabilities that should be paid and realized within a year after the
year- end date. These include Accounts Payable, Notes Payable, Accrued Expenses and
Unearned Income.
• Accounts Payable is amount due to suppliers for the purchase of goods or
services received on account to be paid within a year.
• Notes Payable is account due with supporting promissory notes with short-term
mode of payments.
• Accrued Expenses are expenses incurred but not yet paid, examples are Salaries
Payable, Taxes Payable, etc.
• Unearned Income is cash collected or given in advance from customers for
future delivery of goods or services to be performed.

Non- Current Liabilities- are liabilities that are to be paid for more than a year from the
year- end date. These include Loans Payable, Mortgage Payable, etc.
• Loans Payable is account due from third parties which was agreed to be paid for
longer terms.
• Mortgage Payable is account due from third parties with associated collaterals
to be paid for longer terms.

3. Equity or Owner’s Equity is the residual interest of the owners of the business or
what was left of the assets after paying the liabilities is the right of the owners. It
includes the Capital and Drawing accounts.
• Capital is the investment made by the owner to start- up a business in the form
of cash or other assets.
• Drawing or withdrawal is an amount taken by the owner from the business for
personal use.

Steps in preparing a simple Statement of Financial Position (SFP):

1. You should start with a heading. The heading includes the name of the business or
entity (ex. JD Gardens), name of the financial statement (ex. Statement of Financial
Position) and the reporting date/ period (ex. As of December 31, 2019). We use as of in
SFP because the amounts (in Philippine Peso) of the items are cumulative from the start
of the operations of the business up to the accounting date.
2. Assets are presented first. These are classified into current and non- current assets.
3. Next is to present the Liabilities. These should also be classified into current and non-
current liabilities
4. Equity/ Owner’s Equity is then added after the liabilities to complete the accounting
equation (Assets= Liabilities + Equity).

Forms of Statement of Financial Position (SFP)

The Statement of Financial Position (SFP) has two forms, the Report form and the
Account Form. The format in the preparation of the SFP depends on the preference but
most financial users prefer to use the report form because it is easier to read especially
when comparing multiple years SFP.

Report Form- it is a form of SFP wherein accounts are presented vertically, the Assets
first, followed by the Liabilities and then the Equity.

The table below shows the Report form format for the statement of financial position.
Assets, liabilities and owner’s equity accounts are in one direction. You must place the
assets first, then the total liabilities and owner’s equity account. 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.

Account Form- it is a form of SFP wherein accounts are presented horizontally, the
Assets are presented on the left side while the Liabilities and the Equity are on the right
side of the Balance Sheet. It will look like the debit and credit balances of an account.

The format given below is the Account form. All assets are found on the left side of the
account and the liabilities and owner’s equity account are found on the right side of
then account.
 INSTRUCTION

LET’S CLASSIFY
Directions: Determine the classification of the following
accounts as to ASSET, LIABILITY AND EQUITY. For Asset and
Liability accounts, determine also how it is treated as to
CURRENT OR NON- CURRENT.

INTERACT

LETS ANALYZE
Direction: The class will be divided into Five Groups.
1. Guess the account title being described in each
INVOLVE sentence.
2. Identify what element of SFP (Assets, Liabilities or
Equity) it is listed/ included.
3. Write your answers on the columns provided.
 PROBLEM SOLVING
Directions: Analyze the given situations, solve and give the
appropriate answers. Use a separate sheet of paper.

1. Ben n Ben Cafe has liabilities of Php 395,000.00 and

assets of Php 524,000.00. How much is the ice cream
parlor owner’s equity?

2. An accounting firm has owner’s equity of Php

5,000,000.00 and liabilities of Php 2,560,000.00. How
much is the company’s total assets?

3. Good Book Store has assets of Php 2,000,000.00 and

INTEGRATE
owner’s equity of Php 600,000.00. How much is the book
shop’s total liabilities?

4. Clever Tutorial Center has Current Assets is P50,000,

Non- Current Assets is P150,000.00, Current Liabilities is
P10,000 and Non- Current Liabilities is P40,000, How much
is the Equity of the company?

5. Total assets amounted to Php575,000. Total equity

amounted to Php 250,000. Accounts Payable amounted to
Php 50,000 while Unearned Income totaled Php 85,000.
Assuming there are no other current liabilities, compute
for the company’s noncurrent liabilities?
 6. to 10. As of December 31, 2018, Soveylle Company
reported total assets of P2,165,000. Total assets reported
as of December 31, 2019 is higher by P1,000,100 than
2018. On the other hand, 2018 total liabilities of
P1,854,800 decreased by P200,200 in 2019. Determine
Soveylle Company’s capital as of year-end 201
Dec. 31, 2019 Dec. 31,
2018 Increase 2019
(Decrease)
Total
assets
Total
liabilities
Total
Equity

PROBLEM SOLVING
Directions: Analyze the given situations. Prepare a SPF for
the company using report form.

Mr. Miranda who has a Coffee Shop hired you to prepare

his Chito Coffee Shop’s Statement of Financial Position for
the year 2020. In order to prepare the statement, you
identified the following assets and liabilities of Mr.
Miranda after he made a capital of P200,000.00.

a. His coffee shop has cash deposited in a bank account

amounting to P60,000
b. His coffee shop has a lot of uncollected sales from
customers amounting to P70,000
c. The total amount of merchandise left inside the store is
INTELLECTUALIZE P30,000
d. He already paid one year’s rent in advance amounting
to P12,000
e. The value of all the company’s furniture amounted to
P100,000
f. SSS, Phil health and Pag-big payables for his one
employee totaled P9,000
g. The coffee shop had outstanding liabilities to utility
companies amounting to P3,000
h. He had a loan from the bank amounting to P60,000 to
be paid in 3 years

GOD BLESS AND LIVE MARY!

Prepared by:
Jessica Marie Ngo-Remulla, MBA, LPT