Statement of Financial Position (SFP)
the owner into a business, affected by withdrawals
A Statement of Financial Position is a document that
records the company's resources through its assets
while also providing records of its debts and other
liabilities and the interest of the company's owners in
the business. It has a lot of different uses inside and
outside of a company, but it is generally used to know
how a business is positioned financially. From this
financial statement, users of accounting information can
make decisions concerning a business’s liquidity and
solvency.
The Statement of Financial Position shows a business's
financial condition as of a given period. It shows what
a business owns and what it owes to its creditors and
owners. Hence, the Statement of Financial Position
records the assets, liabilities, and equity of a company.
Through this financial statement, users of accounting
information can assess a company's ability to pay its
short-term (liquidity) and long-term debts (solvency).
Elements of Statement of Financial Position
Assets = Liabilities + Equity
Assets
Assets are the things that a company owns. They are
used to generate revenue by producing goods or
offering services. Assets are divided into two categories:
current and noncurrent assets. Current assets are easy
to liquidate and can be used within a year. Examples of
current assets are cash, accounts receivable, cash
equivalents, and inventories. In contrast, non-current
assets are difficult to dispose of and can be used for
more than a year, such as land, equipment, building,
and the like.
Liabilities
Liabilities are obligations or debts of a business to
other entities, individuals, or institutions. There are two
types of liabilities, namely, current/short-term liabilities
and non-current/long-term liabilities. Current liabilities
are due to be paid within the next 12 months. Some
examples are accounts payable, short-term loans,
interest payable, and the like. Non-current liabilities, on
the other hand, are debts that will mature beyond the
one-year period, such as long-term loans, mortgages,
and bonds.
Equity
Equity is the total amount of the capital invested by
made by the owner and the net income or net loss that
the business entity gained or incurred during its
operations. It is the residual interest after liabilities are
deducted from the assets. Through equity, a company
can secure loans from financial institutions. Banks and
creditors compare a business's equity to its liabilities
and determine if a business is running through the
owner's capital or debts.
In a partnership, the equity section lists the capital
balances of each of the partners. While in
corporations, the equity section contains the shares of
stocks and the retained earnings. The shares of stocks
can be common stock or preferred stock, and the
retained earnings are the accumulated profits of the
corporation during its operations.
The Importance of Statement of Financial Position
The preparation and analysis of financial statements,
particularly the Statement of Financial Position, are
essential for the management and stockholders. The
Statement of Financial Position reflects the success and
competence of a company. Potential investors use the
Statement of Financial Position to decide whether or
not to invest in a company, while stockholders use it to
decide whether to pull out or retain their investments.
For the management, it can provide insight into ways to
boost a company's revenue. Moreover, a Statement of
Financial Position illustrates a company's financial
standing and potential.
Preparation of a Statement of Financial Position
1. Prepare the list of balances from the Trial Balance or
the worksheet as of reporting date and the Ending
Capital from the Statement of Changes in Owner’s
Equity.
2. Write the headings. The headings consist of:
a. Name of the Business
b. Type of Financial Statement, i.e., Statement of
Financial Position
c. Date of the end of the reporting period, written with
the phrase, “As of” followed
by the Month, Day, Year e.g. As of December 31, 2021
3. Prepare the Asset section of the financial statement.
a. Include all asset accounts, classified as current and
non-current.

b. Compute the total current assets and total non-

current assets.

c. Compute the total assets. Double-rule the amount.

4. Prepare the Liabilities and Owner’s Equity section of

the financial statements.

a. Include all liabilities accounts first, classified as

current and non-current.

b. Compute the total current liabilities, total non-

current liabilities, and total liabilities.

c. In the Owner’s Equity section of the financial

statement, copy the ending capital computed from the
Statement of Changes in Owner’s Equity.

d. Compute the Total Liabilities and Owner’s Equity.

Account Form
Double-rule the amount.
On the contrary, a Statement of Financial Position in
5. Check if the Total Assets is equal to the Total
account form follows the accounting equation format.
Liabilities and Owner’s Equity. They must be equal.
The accounts are presented horizontally, where Assets
Otherwise, double check the amounts and the
are listed on the left side while Liabilities and Equity are
computations.
listed on the right side.
Forms of a Statement of Financial Position

Some prefer the report form of Statement of Financial

Position because it is “easier to read” than the account
form.

Report Form

The report form presents assets, liabilities, and equity

vertically. Assets are listed first and are classified as
current and non-current, followed by liabilities, also
classified as current and non-current. On the other
hand, Equity is listed last.

Statement of Comprehensive Income (SCI)

The Statement of Comprehensive Income (SCI) is the

financial statement that shows a business's
performance in terms of profit or loss for a specific
period. It is also known as the income statement of the
business. SCI summarizes the revenues earned and the
expenses incurred for the given period. It is most
helpful in assessing the company's profitability to
determine the potential future changes in its assets and
resources.
An SCI can present both the standard net income and
other comprehensive income (OCI). The net income is
obtained by preparing an income statement, where
revenues, expenses, gains, and losses are presented
over a given period. Meanwhile, OCI consists of all
unrealized gains and losses that are not reflected in
the income statement. It is a more thorough document
that large and listed corporations often use with
investments in multiple countries.
Functions
Investors use the income statement to assess a specific
company's profitability and value for investment.
Prospective lenders also use it to determine the
creditworthiness of the firm. Profitability provides
insight into how the company utilizes its assets to create
wealth. Investors and lenders need this assurance as
they are interested in the returns and repayment in the
future. Overall, the income statement allows users to
determine the company's value and acts as an
investment analysis tool and a summary of the
business's revenue information.
Limitations
The SCI also has its limitations. Since accounting
standards require adherence to the accrual method
instead of the cash basis, misrepresentation may occur
if deferrals and accruals are not estimated and adjusted
accordingly. Wrong information may also be presented if
proper timing and reasonable valuation are ignored.
Nevertheless, the SCI, which may include both income
statements and the OCI, is still a beneficial tool for
internal and external users of information. Different
approaches are used in presenting the statement
according to business needs.
Elements of the Statement of Comprehensive Income
Single-Step Approach
The single-step approach is the simpler way of
presenting a business’s income statement. It is ideal for
presenting the financial performance of service
businesses. It is called single-step because all revenues
or income are listed down in one section while all the
expenses are listed in another. Then, the net
income/loss is computed using the simple formula of:
There are different elements that can be found in an
income statement that use a single-step approach:
● Income/Revenue is the total amount that the
business generated from rendering services to the
customers.
● Expenses are the total amount of money spent or
incurred by a business to generate income. The table
below summarizes some of the common expenses
incurred by businesses.
● Net Income/Net Loss is the result of a business’s
operation for a specific period. Net Income is the
positive result where the total revenues are greater
than the total
expenses. Net Loss is the negative result where the total
expenses are greater than the total revenues.
Multi – Step Approach
The multi-step approach reports the same profit/loss
performance of a business. However, it is more
detailed in presenting revenues and expenses. It also
uses multiple formulas to determine the net income.
Compared to the single-step approach, it provides two
subcategories of expenses: operating and non-operating
expenses. Thus, it is best used for merchandising
businesses that compute the Cost of Goods Sold and
Gross Profit.
You can find different elements in an income statement
that uses a multiple-step approach:
● Sales are the total amount that the company
generates from selling goods.
○ Contra Sales is called "contra" because it is found
on the opposite side of the sales account and
decreases sales. The sales account is on the credit side,
while the deductions to the sale are on the debit side.
The contra sales accounts are sales returns and
allowances and sales discounts.
■ Sales Returns and Allowances involve amounts
recorded when customers return their items for reasons
such as, but not limited to, defects.
■ Sales Discounts are the amounts used to
record the early payments made by the customers.
○ Net Sales are computed by deducting the total
amount of Sales Returns and
Allowance and Sales Discounts from the Sales.
● Cost of Goods Sold is the total cost incurred in
producing the goods sold to customers. It only involves
direct expenses such as raw materials, labor, and
shipping costs. For example, if a business sells coffee,
the costs include raw coffee beans, wages, and
packaging. Indirect expenses like utilities and rent are
not included in this category.
○ Beginning Inventory is the total amount of
inventory at the beginning of the period. It also
represents the ending inventory from the previous
period.
○ Net Cost of Purchases
■ Purchases are the total amount of goods
bought during the current accounting period.
■ Contra Purchases are the accounts that are
being credited as an opposite to the normal balance of
purchases. Therefore, they decrease purchases. The
contra purchases accounts are purchase discounts and
purchase returns and allowances.
● Purchase Discounts are used to record
discounts availed for early payments made to the
suppliers of a business. .
● Purchase Returns and Allowances is the
account a business uses to return the merchandise to
the supplier.
■ Freight In is the account used in recording the
transportation costs of merchandise purchased by a
company. It is called freight-in because it is recorded
when all merchandise is transported into the company.
○ Ending Inventory is the amount of inventory
presented on the balance sheet. It also represents the
remaining amount of inventory at the end of the period.
● Gross Profit is computed by deducting the Cost of
Goods Sold from Sales.
○ Expenses
■ Operating Expenses are expenses related to
the business's function: sale and delivery of the
merchandise.
■ Non-operating Expenses are expenses that are
not directly related to the merchandising function of a
business, but these are necessary to the operation of
the business.
● Net Income/Net Loss results from a business's
operation for a specific period. Net Income is the
positive result where the total revenues are greater
than the total expenses. Net Loss is the negative result
where the total expenses are greater than the total
revenues.
Notes:
The key to preparing a statement of comprehensive
income lies in how businesses generate income. A
service business generates income from providing
services to customers and
treats the cost of labor as Salaries Expense. On the
other hand, a merchandising business generates
income from the sale of goods and treats the labor
cost as part of the Cost of Goods Sold.
In preparing an income statement, a service business
uses the single-step approach where it separates
revenues from expenses to determine whether the
company will gain profit or incur losses. Meanwhile, a
merchandising business will determine its profit or loss
by presenting the gross profit first, followed by the
expenses categorized into operating expenses and
non-operating expenses. The gross profit is the Statement of Changes in Equity (SCE)
difference between the sales and the cost of goods sold,
The Statement of Changes in Equity (SCE) is a financial
both of which are presented before the gross profit
statement showing the changes that occurred to the
amount. This method is known as the multi-step
equity portion of the balance sheet. It provides a
approach.
detailed view of what transactions or events caused the
equity balance to change within a particular accounting
period.

As one of the financial statements used in accounting,

the SCE has various uses for internal and external users
of accounting information. For owners, it provides them
with information regarding their investments. Users can
use it to examine the detailed description of the equity
balance reported on the balance sheet. Management
can utilize this financial statement to understand the
events that occurred, affecting the equity of the
business owners. It is usually reported monthly,
quarterly, or yearly, depending on the requirements of
the management. It also helps decide future investment
strategies that the business will apply.

Sole Proprietorship

A sole proprietorship is a form of business organization

that is owned and managed by one person. In this case,
the business is not legally considered a separate entity.
It means that the business and the business owner are
treated as one and the same (Dauderis and Annand,
2017). Thus, profit or loss in a sole proprietorship setup
directly goes to the single owner of the business. It is
important to note, however, that as far as the
accounting of business transactions is concerned, the
transactions of the business should be accounted for
separately from the owner's personal transactions.

In terms of liability, the owner of such a business

organization has unlimited liability. Effectively, the
business's debt is also the owner's debt. If the company
is unable to pay off all its debt, the owner is obliged to
pay it off, even if it means selling off personal and non-
business-related properties (Wood and Horner, 2010).

Regarding the decision-making and management of the

business, the single owner has total control and
freedom over how to conduct the activities of the
business.

In terms of longevity, the business can be classified as

uncertain. Numerous reasons can easily affect the
continuation of the business. It may cease to exist if the
owner wishes to discontinue its operations due to
changes in priority, health issues, or death.
Partnership
A partnership is a form of business organization owned
by two or more individuals legally associated as
partners. These people are usually also the managers of
the business. Professions such as physicians, lawyers,
and accountants typically form partnerships
(Hermanson, Edwards, and Maher, 1989). Partnerships
are formed and operated based on mutual trust and
confidence among the partners.
Profit, loss, and liability sharing are usually
determined based on a predetermined agreement
among the partners. Each partner acts on behalf of the
whole partnership and decides based on the authority
vested upon them as managers.
Partnerships also have a limited life. The most common
occurrence resulting in the dissolution of a partnership
is the admission of a new partner or when an existing
partner withdraws or dies.
Corporation
A corporation is a juridical entity created by law and
considered separate from its owners. You may think of
it as an artificial person created to distinguish the
business from its owners. Thus, a corporation has legal
rights and obligations and can sue and be sued
separately from its owners.
The owners of corporations are usually called
shareholders. This term is used because owners hold a
portion of the business called a share.
Profit or loss sharing depends on the overall
performance of the corporation. Dividends are
approved by the board of directors for release. Each
owner's share of the dividends will depend on the
number of shares they hold.
Should the corporation fail and pay off its debts, the
liability of the shareholders will only be up to the
amount they invested in share capital.
The shareholders do not necessarily manage the
corporation; instead, they elect a set of board of
directors to represent the interests of the shareholders.
The board of directors, in turn, selects a group of
officers to manage the corporation's day-to-day
operations.
This form of business organization is also unique in that
the life of a corporation is perpetual. Generally, it may
last up to 50 years and be renewable for another 50
years.
Elements of the Statement of Owner’s Equity
Beginning balance of owner’s equity is the value of the
owner’s equity from the previous accounting period.
Profit or loss is a very important concept in business
(Jonick 2018). It basically shows the performance of the
business in a given accounting period. When the total
revenue is greater than the total expenses incurred,
then the business gains a profit. The reverse, where the
total expenses are greater than the total revenue, is a
loss.
Additional investment can be in the form of cash,
equipment and other assets that come directly from the
owner and not a result of the operations of the
business. For example, you already have ₱10,000.00 of
equity, but you added ₱5,000.00 from your own savings
account and deposited it to be used by your business. It
will result in an additional investment amounting to
₱5,000.00.
Drawings are withdrawals made by the owner from the
business. It serves as a contra account charged to the
equity portion of the business.
The owner’s equity is the residual value after deducting
the total liabilities from the total assets of the business.
The ending equity is computed by adding the profit and
additional investments to the beginning balance and
deducting any withdrawals made by the owner. If the
business incurred a loss instead of generating a profit,
the loss is to be deducted from the beginning balance of
the owner’s equity.