FUNDAMENTALS OF

ACCOUNTANCY AND
BUSINESS
MANAGEMENT 2
WHAT I KNOW?
GET ¼ SHEET OF PAPER AND ANSWER THE FOLLOWING SLIDE
IDENTIFY, DESCRIBE
AND CLASSIFY THE
ELEMENTS OF THE SFP
WHAT’S IN?

• Can you still recall the following terms?

• • Accounting Equation • Assets • Liabilities • Equity • Single/Sole Proprietorship
Business Can you identify the normal balances of assets, liabilities and equity?
• What about the different financial statements the you had prepared as we went through
the accounting cycle?

• This lesson will deal on the elements and the classification of the elements
in the Statement of Financial Position (SFP).
STATEMENT OF FINANCIAL POSITION

• The Statement of Financial position is also known as the balance sheet. It

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)
• The Statement of Financial Position usually consist of the following types
of accounts:
• a. Permanent Accounts
• b. Temporary Accounts
• c. Contra-assets Accounts
a. Permanent Accounts -These are the accounts that you see in the SFP. Permanent
accounts are permanent in a sense that their balances remain intact from one accounting
period to another. (Haddock, Price, & Farina, 2012) Assets, liabilities and equity
accounts are permanent accounts. They are called permanent accounts because the
accounts are retained permanently in the SFP until their balances become zero.
b. Temporary Accounts -Temporary accounts are found in the Statement of
Comprehensive Income (SCI). Temporary accounts unlike permanent accounts will have
zero balances at the end of the accounting period.
c. Contra-assets accounts- Contra-asset accounts are accounts that are presented under
the assets portion of the SFP but are reductions to the company’s assets. These include
Allowance for Doubtful Accounts and Accumulated Depreciation.
• Allowance for Doubtful Accounts is a contra asset to Accounts Receivable.
This represents the estimated amount that the company may not be able to
collect from delinquent customers.
• Accumulated Depreciation is a contra asset to the company’s Property,
Plant and Equipment. This account represents the total amount of
depreciation booked against the fixed assets of the company.
 1.1 ELEMENTS OF THE STATEMENT OF
FINANCIAL POSITION
• I. ASSETS are what the business owns. They are the resources controlled by the entity as
result of past events and from which future economic benefits are expected to flow to the
entity.
• II. LIABILITIES are what the business owes or the claims against the business. They
present obligations arising from past events, the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits {assets}.
• III. EQUITY OR OWNER’S EQUITY is what the business is worth. It is the residual
interest of the owner in the business (assets minus liabilities).
• For a single proprietorship and a partnership, the words “owner’s
equity/partner’s equity” are used on the balance sheet. For a
corporation, the words “stockholder’s equity” are used. Examples of
stockholder’s equity accounts includes common stock, preferred stock,
paid-in capital in excess of par value, paid-in capital from treasury
stock, retained earnings, accumulated other comprehensive income etc.
1.2 CLASSIFICATION OF THE ELEMENTS OF THE
STATEMENT OF FINANCIAL POSITION
CLASSIFICATION OF ASSETS:

A. CURRENT ASSETS Current assets are assets that are expected to

be converted to cash, sold or consumed during the next 12 months or
within the normal operating cycle of the business if it is longer than 1
year. Normal Operating Cycle The normal operating cycle is the period
it takes for an entity to buy its inventories, sell them and collect the
related receivables.
EXAMPLES OF CURRENT ASSETS:

1. Cash includes bills and coins on hand, bank accounts and operating funds/working
funds (e.g. petty cash fund) Cash Equivalent is a short-term, highly liquid investments
that is readily convertible to known amounts of cash and which is subject to an
insignificant risk of changes of value.
2. Trade Accounts Receivable Trade accounts receivable is an amount owed by
customers for goods bought or for services received from the entity.
3. Notes Receivable A note receivable is an asset evidenced by another party’s written
promise that entitles you the receive cash in the future. It has three elements – the
principal amount, the maturity date and the corresponding interest rate.
• 4. Interest receivable Interest receivable is the collectible amount due to the cost of borrowing
money.
• 5. Financial Assets at Fair Value through Profit or Loss (FAFVPL) Financial Asset at
Fair Value through Profit or Loss (FAFVPL) is conventionally called trading security. It is either a
debt or an equity instrument of another entity by the reporting entity.
• 6. Inventories There are three items that are considered as parts of inventories:
a. Finished goods are the goods for sale in the normal course of the business.
b. b. Work in progress or goods in process includes goods in the process of production.
c. c. Raw materials includes materials and supplies to be consumed in the production process.
• 7. Supplies and Other Prepaid Assets
• Supplies usually comprises office supplies to be consumed by the business.
• Other Prepaid Assets A common example of prepaid asset is the prepaid rent.
 B. NON-CURRENT ASSETS
Examples of Non-current Assets:

• 1. Property, Plant and Equipment Property

Plant and Equipment includes fixed assets used in the normal operating cycle or production of the business. The most common examples are land and
building being used by the company, manufacturing plants, manufacturing equipment, vehicles, furniture and fixtures, and leasehold improvements.
They are considered as long-lived assets, therefore they depreciate over their estimated useful life except for land since it deemed with perpetual
benefit. They are presented in the SFP after deducting the related accumulated depreciation.
• 2. Intangible Assets

• Intangible Assets are assets meeting the definition of an asset but without physical substance. The most common examples are trademarks for brand
names, patents for inventions and copyrights for artistic/literary works
• 3. Investment Properties

• Investment Properties are long-lived assets not used in production, intended to be leased out or for long-term asset
appreciation. An example is a piece of land with a building intended to be leased out to renters and will generate rental income
for the entity.
• 4.Biological Assets – living plants or animals held by the business for resale or breeding Examples are sheep, trees in plantation,
dairy cattle, pigs, bushes, figs and fruit trees.
CLASSIFICATION OF LIABILITIES:

• A. CURRENT LIABILITIES
Current liabilities are debts that are due to be paid within one year or within the entity’s
operating cycle if the cycle is longer than a year.
Examples of Current Liabilities
1. Trade Accounts Payable
A trade accounts payable is an unwritten promise to pay a supplier for an asset purchased or
for a service rendered.
• 2. Notes Payable
A notes payable is a formal written promise to pay a supplier or lender a specific sum of money at a definite future
time.
• 3. Interest Payable
An interest payable is related to a note payable since it is considered as cost for borrowing money. Interest are
computed as principal amount multiplied by time factor and interest rate.
• 4. Other Accrued expenses
An accrued expense is an expense that has been incurred but not yet paid in cash. The most common examples of
accrued expenses are salaries, rent and utilities.
• 5. Income Tax Payable
Income Tax Payable is composed of taxes due to the government within one year. The calculation of income tax
payable is according to the prevailing tax law in the Philippines.
 B. NON-CURRENT LIABILITIES
• Examples of Non-Current Liabilities
• 1. Long-term Debts
• Long-term debts represent bank loans as a source of financing for the entity.
They can be in a span of five years to twenty-five years.
• 2. Bonds Payable
• Bonds payable are a form of long-term debt usually issued by corporations and
the governments. The issuer to the bond makes a formal promise/agreement to
pay interest usually every six months (semiannually) and to pay the principal or
maturity amount at a specified date some years in the future.