STATEMENT OF

FINANCIAL POSITION
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2
 STATEMENT OF FINANCIAL
POSITION
It is also called Balance Sheet, reports the permanent accounts as of the end of the
accounting period.

For example on this specific date, December 31, 20x5, the statement of financial
position reports the assets, liabilities, and owner’s equity.

Assets - are what the business owns

Liabilities - are what the business owes or claims against assets.
Owner’s equity - - is what the business is worth.

The accounts in the balance sheet are called permanent accounts or real accounts.
Their balances are forwarded as balances in the next accounting period.
 CONTENTS STATEMENT OF
FINANCIAL POSITION
A. The Heading
1. Name of the Business
2. Title of the Report
3. Date of the Report (Specific date)
4. Currency
For example:
DMT Trading
Statement of Financial Position
December 31, 201x5
(in Philippine Peso)
B. The Asset Section
C. The Liability Section
D. The Owner’s Equity Section
 STATEMENT OF FINANCIAL
POSITION
Title – it is the name of the company which allows easy identification of the
reporting entity

The second line identifies the FS which is the SFP

The third line is the date of the SFP. It states “as of the year ended”. It tells the
reader that the account from the date of the establishment of the company up to the
date of the SFP
 ACCOUNTING PROCESS

INPUT PROCESS OUTPUT

 

Analyzing Income Statement

Transaction and Recording Balance Sheet
Economic Events Classifying Cash Flows
Summarizing Statement Interpretations
 STEPS IN ACCOUNTING CYCLE
1. Journalizing – Journalize the economic transactions and events.
2. Posting – Post the journal entries in number 1 to the general ledgers.

3. Trial Balance – Prepare the trial balance from general ledgers.

4. Adjusting – Adjust the ledger balances.

 STEPS IN ACCOUNTING CYCLE
5. Financial Statements – Make income statement and balance
sheet from the adjusted trial balance.
6. Closing – Close or transfer the income and expense accounts
summary account and the latter account to owner’s drawing, the
owner’s drawing to owner’s equity
7. Post Closing Trial Balance – Make a trial balance of all
assets, liabilities, and owner’s equity.
 ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity

Assets – Liabilities = Owner’s Equity

Two Elements Affecting Owner’s Equity

1. Revenue - refers to sales or gross income

2. Cost - the cost of products sold or the services rendered, and expenses
are those incurred to run the entity
 ACCOUNTING EQUATION

 When revenue exceeds costs and expenses, the result is net

income
 When the revenue is less than cost and expenses, the result is a
net loss
 Net income increases owner’s equity and net loss decreases
owner’s equity
 NATURAL BALANCES IN THE
GENERAL LEDGER ACCOUNTS
   
NATURAL BALANCES
Assets Debit Balance
Liabilities Credit Balance
Owner’s Equity Credit Balance
Revenue or Income Credit Balance
Cost and Expenses Debit Balance
 RULES OF DEBITS AND CREDITS

Debits Credits
1. Debit asset account for increase in 1. Credit asset account for decrease in
asset. asset.
2. Debit liability account for decrease 2. Credit liability account for increase
in liability in liability
3. Debit owner’s equity account for 3. Credit owner’s equity account for
decrease in owner’s equity increase in owner’s equity
4. Debit income account for decrease 4. Credit income account for increase
in income in income.
5. Debit expense account for increase 5. Credit expense account for
in expense decrease expense
 T - ACCOUNT
 It is a diagram that represents the general ledger account
 Left side is for debits and right side is for credits
 The ledger balance of an account is the difference between the total of
the debit entries and the total of the credit entries.
 To compute for the balance of an account, compute for the total postings
on the left. Do the same on the right side.
 The sum of the left minus the sum of the right is debit balance
 The sum of the right minus the sum of the left side is the credit
balance.
 T - ACCOUNT

When debit total exceeds credit total in an

account, the balance has a debit balance.
When the credit total exceeds debit total, the
account has a credit balance.
 REPORT FORM AND ACCOUNT FORM

REPORT FORM - A form of the SFP that shows asset accounts first and
then liabilities and owner’s equity accounts after. (Haddock, Price, &
Farina, 2012). The balance sheet shown earlier is in report form.

ACCOUNT FORM – A form of the SFP that shows assets on the left side
and liabilities and owner’s equity on the right side just like the debit and
credit balances of an account. (Haddock, Price, & Farina, 2012)
 ELEMENTS OF FINANCIAL
STATEMENTS
Asset It is a resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise.

Liability It is a present obligation of the enterprise arising from past events. The settlement of which is
expected to result in an outflow of resources from the enterprise embodying economic benefits.

Equity It is the residual interest or remainder of the asset of the enterprise after deducting all its
liabilities.
Income These are increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.

Expenses These are decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incidences of liabilities that result in decreases in equity; other than
those relating to distribution to equity participants.
 CLASSIFICATION OF BALANCE
SHEET ACCOUNTS
Current Assets – An asset can be classified as current when it satisfies any of the
following criteria:

o It is expected to be realized, or is intended for sale or consumption within the entity’s normal
operating cycle.
o It is help primarily for the purpose of being traded.
o It is expected to be realized within the twelve months after the balance sheet date.
o It is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a
liability for at least twelve months after the balance sheet date.
 CLASSIFICATION OF BALANCE
SHEET ACCOUNTS
Current Liabilities – An liability can be classified as current when it satisfies
any of the following criteria:

o It is expected to be settled in any entity’s normal operating cycle.

o It is held primarily for trading.
o It is due to be settled within twelve months after the balance sheet date.
o The entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the balance sheet date.
 FACE OF THE BALANCE SHEET

Assets
a. cash and cash equivalents
b. Receivables
c. Inventory
d. Prepaid expenses
e. Property, plant and equipment
f. Intangible Assets
 CASH / CASH EQUIVALENTS

o Money owned by the company

o Cash kept in the company’s premises is called cash on hand
o Cash in bank refers to money in the bank which can be kept in a savings or checking account.
o Generally, time deposit is not categorized as cash.
o It refers only to funds readily available to be spent for the company’s operations.
o It is used for buying assets, paying suppliers, utilities, employee salaries, etc.
o It is also used for settlement of obligations.
o Cash are sourced from contribution of owners, proceeds from borrowings, sale of assets, or collections
from customers.
 CASH / CASH EQUIVALENTS
o Cash on hand includes bills, coins and bank checks kept in the premises of the company
o Bank checks, or checks are bank documents used by the issuer to instruct the bank to pay the
assigned payee from funds in the issuer’s bank account.
o Checks may be reported as cash because these documents are accepted as payments and
deposits.
o A check is classified as cash if the date of the check is on or before the SFP date.
o A check dated after SFP date is a post-dated check and classified as receivables rather
than cash.
 CASH / CASH EQUIVALENTS
o Not all bank deposits are classified as cash.
o Time deposit account – is a deposit in the bank that earns higher interest because the
depositor commits not to withdraw the funds over the agreed upon time.
o Penalties are imposed if the depositor withdraws before the maturity of the deposit.
o Given the withdrawal restrictions, time deposits are not classified as cash.
o Those with a term of up to 90 days are reported as cash equivalents while those that
will mature longer than 90 days are reported as investments.
 CASH / CASH EQUIVALENTS
o Cash equivalents are technically not cash because it is not immediately available for use.
o It is almost cash in the sense that it will become cash within the next 90 days .
o Time deposits with term maturities of ninety days or less are examples of cash equivalents.
o It is generally reported on the SFP together with cash.
o The line account is cash and cash equivalents. However, the components of cash and cash
equivalents (cash on hand, cash in bank, cash equivalents) are required to be disclosed in
the accompanying notes to financial statements.
 FRIENDLY CONVENIENCE STORE: CASH

Friendly Convenience Store is managed by Juana Dela Cruz asked you to determine the balance of her cash account as of December
31, 20x1. You determined the following:

1. She kept some cash in the store as change fund (sukli). The cash count revealed 3 pieces of 100 peso bills, 5 pieces of 50 peso
bills, 5 pieces of 20 peso bills, 5 pieces of 10 peso coins, 10 pieces of 5 peso coins, 10 pieces 1 peso coins and 25 pieces of 25
centavo coins.
2. Two of her regular customers gave Juana the following checks in payment of debts:
a. P1,540 check dated December 31, 20x1
b. P2,342 check dated January 3, 20x2.
3. There are two bank accounts in the name of the store with the following balances:
a. Balance of the savings account on December 31, 20x1 according to the passbook is P26,780
b. A time deposit certificate for P100,000 for 90 days.
Report to Juana Dela Cruz the balance of the cash and cash equivalents account of friendly convenience store.
 FRIENDLY CONVENIENCE STORE:
CASH
     
Denomination Number of Bills Peso Amount
P100 3 P300.00
P50 5 250.00
P20 5 100.00
P10 (coins) `5 50.00
P5 (coins) 10 50.00
P1 (coins) 10 10.00
P0.25 (coins) 25 6.25
 Checks   1,540.00
Total Cash On Hand P2,306.25
Cash In Bank P26,780.00
Total Cash P29,086.25
Cash Equivalents 100,000.00
Total Cash and Cash equivalents 129,086.25
 RECEIVABLES
 Receivables is a general term that refers to the company’s right to collect or collect payment.
 The right to collect comes from unpaid sales or lending activities.
 There are also receivables that may be settled in other assets or services. Example, receivable from
suppliers may be settled in merchandise.
 A sale agreement may require a customer to pay the seller immediately upon delivery of goods (Cash
on delivery COD)
 Accounts Receivable means receivables from customers. It is evidenced by sales invoices and delivery
receipts.
 Normally has a term of 30 days which means a customer should pay 30 days from date of delivery.
Some sellers are more lenient and give terms of 60, 90, and 180 days.
 RECEIVABLES

o PROMISSORY NOTES – is a legal document that says the borrower promises to

pay, on scheduled payment dates, a specific sum called the principal and interest
based principal and stated interest rate.

o Customers who are unable to pay their accounts on due dates are sometimes required
to sign a PN.

o The company may also lend money to its employees or other companies if the
company has excess cash.
 FRIENDLY CONVENIENCE STORE: ACCOUNTS RECEIVABLE
 
(continuation)
 
Juana asked you to compute how much Maria Reyes owed the store. Juana sells to Maria on credit. Maria
pays every 15th and 30th of the month. Maria’s listings are reproduced below:
Maria Reyes
Balance P124.00
September 5 2 bottles of cola (P12.00 each)
September 15 1 bar of laundry soap (P50)
October 3 1 sachet of fabric softener (P50)
October 8 1 small can of sardines (P25)
October 15 Payment: P200.00
October 25 2 bag of chips (P30.00 each)
October 30 Payment P100.00
November 16 1 sachet of laundry soap (P50)
November 22 2 kilo of rice (P44.00 per kilo)
November 30 Payment: P100
December 1 5 sachets of shampoo (P15)
December 15 Payment P100.00
December 22 1 small can of sardines (P25)
December 27 2 kilo of rice (P44)
December 28 1 small bar of bath soap (P20)
December 29 5 sachets of shampoo (P15)
December 30 Payment: P100.00
 Maria Reyes  

Balance P124.00 P124.00

September 5 2 bottles of cola (P12.00 each) 24.00
September 15 1 bar of laundry soap (P50) 50.00
October 3 1 sachet of fabric softener (P50) 50.00
October 8 1 small can of sardines (P25) 25.00
October 15 Payment: P200.00 (200.00)
October 25 2 bag of chips (P30.00 each) 60.00
October 30 Payment P100.00 (100.00)
November 16 1 sachet of laundry soap (P50) 50.00
November 22 2 kilo of rice (P44.00 per kilo) 88.00
November 30 Payment: P100 (100.00)
December 1 5 sachets of shampoo (P15) 75.00
December 15 Payment P100.00 (100.00)
December 22 1 small can of sardines (P25) 25.00
December 27 2 kilo of rice (P44) 88.00
December 28 1 small bar of bath soap (P20) 20.00
December 29 5 sachets of shampoo (P15) 75.00
December 30 Payment: P100.00 (100.00)
Net Receivable P154.00
 INVENTORY
o It reports the cost of unsold merchandise.
o The inventory account of a trading business contains merchandise held for resale.
o Consignment – the owner is not obligated to purchase the goods. The store owner will remit to the
merchandise owner the proceeds from the sale of the consigned items.
o The store owner’s income from this transaction maybe in the form of commissions from the sale and/or
rent from the store space used to display the consigned goods.
o The store should not report the consigned goods as inventory even if they are held in the store premises,
rather, the consigned merchandise will be reported as Inventory by the merchandise owner.
o Only merchandise held for sale are reported as Inventory. Those items that are to be used in the day to
day activities of the company are Supplies and not Inventory.
 FRIENDLY CONVENIENCE STORE: INVENTORY
 
(Continuation)
 
Before Juan opened the store on January, 20x2, she asked to help her count the merchandise inside the
store. The result of the count are given below:

Merchandise Cost
2 bags of candy P30 per bag
10 sachets of coffee P6 per sachet
10 sachets of laundry powder P15 per sachet
1 sack of rice (50 kilos) P1,800 per sack
10 cans of sardines P15 per can
10 chocolate bars P20 per bar
5 notebooks P25 per notebook
Note:
1. The chocolate bars were on consignment from Tsokolate – Eh.
2. Of the 5 notebooks inside the store, one is used for listings of customer credit.
 
Report to Juana De la Cruz the balance of the merchandise Inventory count of Friendly Convenience Store.
 FRIENDLY CONVENIENCE STORE: INVENTORY
 
ANSWER

Merchandise Cost Total

2 bags of candy P30 per bag P60.00
10 sachets of coffee P6 per sachet 60.00
10 sachets of laundry powder P15 per sachet 150.00
1 sack of rice (50 kilos) P1,800 per sack 1,800.00
10 cans of sardines P15 per can 150.00
4 notebooks P25 per notebook 100.00
Merchandise Inventory as of December 31, 20x1 P2,320.00

Note:
1. The 10 chocolate bars are not owned by the store. It was consignment from Tsokolate-Eh.
2. Only 4 notebooks were for sale. One was used as office supplies in the store
 PREPAID EXPENSES
o Prepaid Expenses refer to the future expenses that the company had paid for in
advance.
o Expenses are recorded only when purchased goods and services are used.

FRIENDLY CONVENIENCE STORE: PREPAYMENTS

 
Juana paid premium of P2,500 for one-year fire insurance in the name
of the store on October 1, 20x1. How much should prepaid insurance
be on December 31, 20x1?
 ANSWER
Insurance premium is paid in advance. In the case of Friendly Convenience Store,
the P2,500 premium payment was fro insurance from October 1, 20x1 ro
September 30, 20x2. As of December 31, 20x1, 3 months had already passed and
considered expense. Therefore, only 9 months is Prepaid expense.

We compute the Prepaid Insurance Expense as P2,500 x 9/12 = P1,875

 PROPERTY, PLANT AND
EQUIPMENT
• PPE are long-term assets that are used in the operation of the company. (non-current assets)
• The process of recognizing is called capitalization while depreciation refers to transferring of cost of asset
to expense.
• Depreciation is linked to usage
• The depreciation will increase the expense account and decrease the asset account
• Contra-asset account called accumulated depreciation is used to catch the depreciation and decrease the
asset value to be reported in the SFP.
• The cost of the PPE, net of the balance of accumulated depreciation as of the SFP date is called Net Book
Value of the PPE.
 ILLUSTRATION
FAMILY Convenience Store: Property, Plant and Equipment
(Continuation)

On January 1, 20x0, Juana purchased an electronic cash register to be used in the Friendly Convenience
Store. The cash register was purchased at a cost of P15,000. Juana depreciates the cash register over five
years. Determine the following:

a. Equipment
b. Annual depreciation
c. Accumulated depreciation as of December 31, 20x1
d. Net book value of Equipment as of December 31, 20x1
 ANSWER

Cost of electronic cash register P15,000 (1)

Estimated Useful Life 5

Annual depreciation (P15,000 / 5 years) P3,000 (2)

Number of years depreciated (20x0 20x1) 2

Accumulated depreciation (P3,000 x 2) P6,000 (3)

Net book value (P15,000 – P6,000) P9,000 (4)

 INTANGIBLE ASSETS
• Intangible Assets are long term assets similar to PPE and will be used in the business for more than one
year.
• The allocation of the cost of intangible assets to the year it was used is called amortization.
• These are assets that you cannot see or touch.
• Some examples of the intangible assets are patent, brand name and trademark.
• A patent is a grant conferred by the government to the creator of an invention for a specified period of time.
• Brand-name refers to word or words used to identify a specific product and its manufacturer
• Trademark is a symbol that represents the brand.
 LIABILITIES

• Liabilities are obligations that the company is required to pay.

• Payment for liabilities may be in cash, goods, or services.
• Entities to whom the company is indebted are called creditors.
 KINDS OF LIABILITIES
• Payables – are obligations to make payments to creditors.
• Accounts Payable (AP) – normally refers to obligation to suppliers of inventories. It is evidenced by
the supplier’s sales invoices and delivery receipts. Most suppliers credit terms of 30 to 90 days. The credit
term 2/10, n/30 (reads: two ten net thirty) means payment of full amount is due in 30 days but a 2% discount
may be taken if paid within ten days after delivery.

• Notes Payable (NP) refers to an obligation evidenced by a promissory note.

• Promissory Note (PN) is a document that expresses the borrower’s promise to pay. The issuer of the
promissory note reports this as NP in his accounting books. The holder of the promissory note has the right to
collect and reports NR in his accounting books.
 ILLUSTRATION
Friendly Convenience Store: Accounts Payable

(Continuation)

On November 15, 20x1, Juana Dela Cruz purchased five sacks of rice at P1,800 per sack. The credit term
is 2/10, n/30. Determine how much Juan should pay given the following payment dates:

1. November 25, 20x1

2. December 15, 20x1
 ANSWER
If Juana will pay anytime from November 15, 20x1to November 25, 20x1, payment due is:

Full cost of one sack of rice P1,800

Number of sacks purchased 5
Total cost of purchase 9,000
Discount in % 2%
Discount in Peso 180
Discounted cost to be paid P8,820 
If Juana will pay after November 25, 20x1, she is liable for the ful cost of P9,000. She will forego the
savings of P180
 NOTES PAYABLE
Friendly Convenience Store: Notes Payable
Read the excerpt of the Promissory Note below:

Promissory Note
November 1, 20x1
1. Promise to Pay – For value received, Friendly Convenience Store, represented by Juana Dela Cruz, the manager
(Borrower) promises to pay United Bank (Lender) P25,000 (Twenty-five thousand pesos) and interest at the yearly rate of
6% on the unpaid balance as specified below.
2. Installments – Borrower will pay five payments of P5,000 each at monthly intervals on the 30 th day of the month. First
payment is due on November 30, 20x1.
3. Application of Payments – Payments will be applied first to interest and then to principal.
4. Prepayment – Borrower may prepay all or any part of the principal without penalty.
5. Loan Acceleration – If borrower is more than five days late in making payment, Lender may declare that the entire balance
of unpaid principal is due immediately together with the interest that has accrued.
 ANSWER THE FOLLOWING
QUESTIONS

1. Who will record the Notes Payable?

2. Who will record the Notes Receivable?
3. Compute for the payment due on November 30, 20x1 and
December 30, 20x1
4. Determine the balance of Notes Payable as of December 31, 20x1.
 ANSWER

1. According to the PN, the borrower is Friendly Convenience Store. A

Note Payable will be reflected on the SFP of the Store.
2. According to the PN, the lender is United Bank. A Note Receivable
will be reflected on the SFP of the bank.
 PAYMENT DUE OF THE
FOLLOWING DATES
  November 30, 20x1 December 30, 20x1
Unpaid balance, beginning P25,000 P20,000
Stated Interest 6% 6%
Interest period* 1/12 1/12
Interest to be paid 125 100
Monthly principal payment 5,000 5,000
Payment due P5,125 P5,125

• Stated interest of 6% is expressed on a per annum basis. Simply put, it means 6% per twelve months period. To get
interest for one month, its 6%/12 months.

The balance of the note Payable on December 31, 20x1, is P15,000. Following the payment schedule, Juana should
have already made two payments of P5,000, each as of December 31, 20x1. Hence, the remaining unpaid balance is
(P25,000 – P10,000) P15,000
 ACCRUED EXPENSES

• Accrued Expense refers to the unpaid expenses of the company as of

the cut-off date of the Statement of the Financial Position
• The different kinds of Accrued expenses are: Salaries Payable,
Utilities Payable, Rent Payable, and Interest Payable.
 ILLSUTRATION – ACCRUED
EXPENSES
Friendly Convenience Store: Accrued Expense

Continuation:

Juana hired Elena Reyes as storekeeper with salary of P400 per day. Elena is
paid every Saturday for work rendered during the week. Sunday is her day-off.
December 31, 20x1 falls on a Thursday. Determine the balance of the Salaries
payable to be reported on the Store’s SFP as of December 31, 20x1.
 ANSWER

Daily Salary rate

P400
Number of Unpaid days (Monday to Thursday)
4
Salaries Payable, December 31, 20x1
P1,600
 UNEARNED INCOME

• Unearned Income – is a liability payable in goods or services. Customer deposits

or down payment are customer payments before the delivery of the goods or services. These
will not count as sales until deliveries are made
• The settlement of unearned income is not through direct cash payments to the customer.
Rather, it is settled by the delivery of goods or rendering of services. The settlement of this
liability is dependent on the contractual agreement between the seller and the buyer.
 ILLUSTRATION
FRIENDLY CONVENIENCE STORE: UNEARNED INCOME

Pedro Benitez, a neighbor of Juana, operates a coffee vending machine

business. On October 1, 20x1, he entered in a contract with Juana to rent a small
space on the countertop of the Store where he can put his coffee vending machine.
The rent is P500 per month. Pedro paid six months advance rent on October 1,
20x1. How much should be reflected as Unearned Rent Income on the Store’s
SFP as of December 31, 20x1.
 ANSWER

Monthly rental rate P500

Remaining unused months (January to 3

March)

Unearned rent Income, December 31, P1,500

20x1
 LONG-TERM LIABILITIES
• Long-term Liabilities – refer to obligations with due dates that fall more than one
year from the date the SFP. Bank loan is a common example.
• It is documented by a promissory note. The company pays interest periodically.
• The repayment of the principal is based on the contractual agreement.
• It can be paid at the maturity or in statement over term of the loan.
• Long-term liability is part of the financing activities of the company.
 ILLUSTRATION
In order to construct the store, Juana borrowed P50,000 from Universal bank and P25,000 from United
Bank. Terms of the loans are as follows:

Universal Bank: The bank requires Juana to pay interest of 7% payable monthly. The principal is payable
on October 1, 20x3.

United Bank: The bank requires Juana to pay five monthly installments of P5,000 plus interest on the unpaid
balance. The loan was taken on November 1, 20x1 and first monthly installment is due on November 30, 20x1.

Which of the two loans should be reported as Long-term Liability on the Store’s calendar year 20x1
SFP?
 ANSWER

1. While interest is payable monthly, the principal on the Universal Bank loan is payable on
October 1, 20x3. The due date is one year and 10 months from the date of the Statement of
Financial Position December 31, 20x1. This loan is classified as long-term liability because the
due date is beyond one year of SFP date.

2. Given the monthly principal payments, the United Bank loan will be fully paid by the end of the
March 20x2. This is only three months from the SFP date of December 31, 20x1. Hence, the
United Bank loan is a current liability. It may be reported as a Notes Payable.
 EQUITY

• Equity – is the net assets of the business. It is composed of the owner’s investments
and the accumulated net income of the company, net of distributions to the owners. It
reflects the portion of the asset that belongs to the owners of the business.
• For a sole proprietorship, the SFP will reflect only one equity account – Owner’s
Capital . This one line account will reflect the balance of the owner’s investments in
the business such as cash contributions.
• The net income earned by the company is also closed to the capital account.