Lesson 1: Statement of Financial Position

Elements of the Statement of Financial Position

STATEMENT OF FINANCIAL POSITION – The SFP is a report based on the accounting equation:
Assets =Liabilities + (Owners)

It was once called a Balance Sheet because the sum of the assets should be "balanced" to the sum of the
liabilities and equity. The SFP is "balanced" as a consequence of double-entry accounting.

This statement 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)

PERMANENT ACCOUNTS – As the name suggests, these accounts are permanent in a sense that their
balances remain intact from one accounting period to another. (Haddock, Price, & Farina, 2012)
Examples of permanent account include Cash, Accounts Receivable, Accounts Payable, Loans Payable
and Capital among others. Basically, 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. This is in contrast with temporary accounts which 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.

CONTRA ASSETS – Contra assets are those 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.

Asset
The Conceptual Framework for Financial Reporting (IASB 2010) defines an asset as "a resource
controlled by the entity as result of past events and from which future economic benefits are expected
to flow to the entity" One should notice that the Framework uses the word "control instead of
"ownership". This is in line with the doctrine of substance over form. From accounting's point of view,
control is given priority over ownership for recording assets.
 Prepared by: Ma. Isabel S. Abellon, CPA

CLASSIFICATION OF ASSETS
There are many ways of classifying assets. For the purpose of this course, the classification is limited to
current and non-current. The decision rule whether an asset is current or non-current lies on the
expected collectability, realization or consumption of such assets.

Current and Non-current Assets

IAS 1, Presentation of Financial Statements, (ASB, 2013:A604) provides the following criteria for an asset
to be classified as current:
1. Expected to be realized, sold or consumed in the entity’s normal operating cycle
2. Held for trading
3. Expected to be realized twelve months after reporting period
4. Asset is cash or cash equivalent unless restricted for at least twelve months after the reporting
period
Current Asset
1. Cash and Cash Equivalents
Cash includes bill and coins on hand, bank accounts and operating funds. For example, bills and
coins inside a restaurant's cash register are included in a company's cash account. Also, cash
deposited in banks under the company's name are also classified as cash, unless they are
restricted. Finally, operating and working funds are also classified as cash. A common example
of these working funds is petty cash.
Cash equivalents are technically not cash because it is not immediately available for use. It is
almost cash in the sense that it will become cash within the next 90 days. Time deposits with
term maturities of ninety days or less are examples of cash equivalents.
 Prepared by: Ma. Isabel S. Abellon, CPA
It is generally reported on the SFP together with cash. 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

Illustration I – Friendly Convenience Store: Cash

Friendly Convenience Store is managed by Juana Dela Cruz. Juana asked you to determine the
balance of her cash account as of December 31, 2019.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 of 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, 2019.
b. P2432 check dated January 3, 2020.
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, 2019 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.

Answer:

Denomination Number of bills Peso amount

100 3 ₱300.00 50 5 250.00 20 5 100.00 Notes:
10(coins) 5 50.00 5(coins) 10 50.00 1(coins) 10
10.00 1. The ₱2,432 check dated January 3, 2020 is a
0.25(coins) 25 6.25 Checks 1,540.00 post-dated check. It is not cash as of
December 31,2019
2. The time deposit certificate for
₱100,000 for 90-days will not meet the
definition of cash. It is classified as cash
Cash in bank Trade Accounts Receivable

Total Cash ₱2,306.25 ₱26,780.00 ₱29,086.25

Cash equivalents 100,000.00 129,086.25
Total Cash on hand Total Cash and cash equivalents 2. equivalents
 These are amounts owned by customer to the entity. Ordinarily, entities sell on credit over cash.
The entity records a trade accounts receivables while waiting for the collection of cash on due
date. Trade accounts receivables are called "open accounts since they do not have documentary
support other than the sales contract.

Prepared by: Ma. Isabel S. Abellon, CPA

3. Notes Receivables
Notes receivables are evidenced by a promissory note. There are three key elements of notes
receivables. First is a principal amount. This is the amount collectible by the entity from the
customer. Second, notes receivables would have maturity dates. Conventionally, it can be for
30, 60 or 90 days upon the date of issue. Last, it must have a corresponding interest (e.g., 6%,
7% etc.).
4. Interest Receivables
Interest receivables are related to the notes receivables above. Interest receivables are amounts
collectible due to the cost of borrowing money
5. Financial Asset at Fair value through profit or loss(FAFVPL)
These assets are conventionally called trading securities. FAFVPLs are either debt or equity
instruments of another entity held by the reporting entity. The key in classifying financial
instruments as FAFVPL is the business model (intention) by the reporting entity to the financial
assets. For FAFVPL, the entity must carry them under the "trading business model. This means
that the entity must carry these instruments with short-term profit taking motives (e.g., due to
changes in market price).
6. Inventories
IAS 2, Inventories includes three items as part of inventories. First are those goods to resell in
the normal course of business. These are conventionally called finished goods. For example, a
real estate company selling land will classify their land as inventories as such are held for sale in
the normal course of business. On the other hand, assume that a manufacturing entity owns a
piece of land where its manufacturing plant stands. The land will not be classified as inventories
since such is not held for sale.
Second, IAS 2 includes goods in the process of production as inventories. These are
conventionally called as work in progress or goods in process. For example, if a furniture
manufacturing entity has half-finished furniture as at December 31, 2015 (e.g., unvarnished and
unpainted), such are still classified as inventories.
Last, IAS 2 includes materials and supplies to be consumed in the production process as
inventories. These are conventionally called raw materials. For example, a beverage
company producing bottled Orange juice will include fresh oranges and concentrates as their
raw materials.

Consignment is an important issue in inventory accounting. The owner places his goods "on
consignment" in the premises of the store owner. The store is not obligated to purchase the
goods. The owner may also withdraw his unsold goods from the store at any time. The store
owner, on the other hand, will remit to the merchandise owner the proceeds from the sale of
 the consigned items. 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. 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.

Prepared by: Ma. Isabel S. Abellon, CPA

Friendly Convenience Store: Long-Term Liability

Before Juana opened the store on January 1, 2019, she asked you to help her count the
merchandise inside the store. The result of the count are given below:
Merchandise Cost
2 bags of candy ₱30 per bag
10 sachet of coffee ₱6 per sachet
10 sachet of laundry powder ₱15 per sachet
1 sack of rice (50 kilos) ₱1,800 per sack
10 cans of sardines ₱15 per can
10 chocolate bars ₱20 per can
5 notebooks ₱25 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 Dela Cruz the balance of the merchandise inventory account of Friendly Convenience Store.

7. Supplies and other Prepaid Expense

This includes office supplies to be consumed by business. Furthermore, this also includes
prepaid assets. A common example of prepaid asset is prepaid rent. Assuming that on January 1,
2015, ABC Company pays its annual rent for P120,000. It is to be noted that the payment is in
advances since the rent is good for 2015. Therefore, as at January 1, 2015, ABC Company has a
prepaid asset of P120,000. After a month, the prepaid asset is reduced byP10,000, which now
becomes an expense. The schedule below follows the expiration for the year 2015,

ABC Company
Prepaid Rent and Rent Expense Schedule
2015
Date Prepaid Rent Rent Expense
January 15, 2015 120,000 0
January 31, 2015 110,000 10,000
February 28, 2015 100,000 20,000
March 31, 2015 90,000 30,000
April 30, 2015 80,000 40,000
May 31, 2015 70,000 50,000
June 30, 2015 60,000 60,000
 July 31, 2015 50,000 70,000
August 31, 2015 40,000 80,000
September 30, 2015 30,000 90,000
October 31, 2015 20,000 100,000
November 30, 2015 10,000 110,000
December 31, 2015 0 120,000

Non-current Asset examples

1. Property, Plant and Equipment

Prepared by: Ma. Isabel S. Abellon, CPA

These include fixed assets used in the normal operating cycle or production of the business. This
includes land and buildings being used by the Company. Manufacturing plants are also included
in this category. Finally, manufacturing equipment, vehicles, furniture and fixtures and leasehold
improvements are also included in this category. As long-lived assets, Property, plant and
equipment are depreciated over their estimated useful life. However, land is not depreciated since
such is deemed with perpetual benefit. Property, plant and equipment(PPE) are presented in the
statement of financial position after deducting the related accumulated depreciation. 2. Intangible
Assets
Intangible assets are those assets meeting the definition of an asset but without physical
substance. Common intangible assets include trade marks for brand names, patents tor
inventions and copyrights for artistic/literary works. Intangibles assets with definite useful lives
are amortized over their useful lives. Those with indefinites useful lives, however, are annually
tested for impairment.
3. Investment properties
Generally, investment properties are long-lived assets not used in production. The company's
intention for these assets is to lease out or for long-term capital appreciation. For example, if
ABC Company purchases a land and erects a building in the said land for its corporate
headquarters, then such is classified as PPE. This is because the property is to be used by the
entity.
However, if ABC Company purchases the same and erects a building to be leased out to renters,
such is an investment property. This is due to the fact that such are for rental income and not
tor company use.

4. Biological Asset
Biological assets are living plants or animals held by the business for resale or for breeding.
These includes sheep, trees in plantation, plants, dairy cattle, pigs, bushes, figs and fruit trees

Liabilities
The Conceptual Framework (IASB, 2010:A36) defines a liability as a present obligation arising from past
events the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits (assets)". There are varied sources of liabilities but the most common
sources are regulation, contracts and constructive practices. Laws and regulations may be the source of
several liabilities. The most common example is income tax liability. This liability is from the National
Internal Review Code of the Philippines. Also, liabilities can also arise from contracts. For example, in a
sales contract, the buyer is obligated to pay for the goods purchased. Hence, accounts payable is
recorded by the buyer prior to cash payment. Last, a company's constructive practices may be a source
of obligation. If a company annually pays a 14th month compensation for almost five decades, then
employees are expecting for such compensation from year to year. Hence, the company is obligated by
its past practices.

Classification: Current versus Non-current

Prepared by: Ma. Isabel S. Abellon, CPA

The rule for classifying liabilities as current and non-current are similar for that of assets, except for the
last one. Liabilities are classified as current if the "entity has no unconditional right to defer settlement
for at least twelve months"

Current Liabilities Example

1. Trade Accounts Payable
If the seller has accounts receivables for uncollected accounts, the buyer will have accounts
payable for unpaid amounts. Trade accounts payable are open accounts relating to purchase of
goods and/or raw materials. Some suppliers give discounts for early payments. 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 10 days(after delivery. This kind of credit term encourages
debtors to pay earlier than their due dates.
2. Notes Payable
Unlike trade accounts payables, notes payable are evidenced by a promissory note. If a seller
receives a note receivables, notes payable would have a principal amount, maturity date and
 interest rate.
3. Interest Payable
Interest payables are related to notes payable. Interest are computed as principal amount,
multiplied by time factor and interest rate
4. Other Accrued Expenses
These accounts pertain to expenses incurred but not yet paid. Common examples of these
accrued expenses are salaries, rent and utilities.
5. Unearned income

Prepared by: Ma. Isabel S. Abellon, CPA

Customer deposits or down payments are customer payments received before the delivery of
goods or services. These payments are initially recorded as Unearned income – a liability
payable in goods or services.
Unlike regular liability, the settlement of Unearned income is not through direct cash payment
but by delivery of goods or rendering of services.
Example:
A tailor of custom-made suits required his customer to pay a down payment upon ordering. The
tailor does this because 1) the payment received from the customer will be sent on materials for
the suits and 2) significant payment made by the customer will ensure that he will return to
claim his order and pay the full price. Can the tailor record revenue based on the amount of
down payment received from the customer? The answer is NO. He can only record when the
suits are delivered to and accepted by the customer. While these activities are not yet done, the
cash received from the customer is reported as unearned income. Upon delivery and
acceptance, the unearned income is transferred to revenue.
Entry:
Upon receipt of cash payment
Cash xxx
Unearned Revenue xxx

Upon delivery of goods/services

Unearned Revenue xxx
Revenue xxx

Non-current Liabilities
1. Long-term Debt
Long-term liabilities refer to obligations with due dates that fall more than one year from the
date of 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 all be paid at maturity or in installment over the term of the loan. Long-term
liability is part of the financing activities of the company.

Example:
Friendly Convenience Store: Long-Term Liability

Prepared by: Ma. Isabel S. Abellon, CPA

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, 2023.

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, 2020 and first monthly installment is due
on November 30, 2020.

Which of the two loans should be reported as Long-Term Liability on the Store's calendar year 2020 SFP?

Answer

While interest is payable monthly, the principal on the Universal Bank loan is payable on October 1,
2023. The due date is one year and 10 months from the date of the Statement of Financial Position
December 31, 2020. This loan is classified as long-term liability because due date is beyond one year
of SFP date.

Given the monthly principal payments, the United Bank loan will be fully paid by the end of March
2021. This is only three months from the SFP date of December 31, 2020. Hence, the United Bank
loan is a current liability. It may be reported as Note Payable.

2. Bonds Payable
Bonds are contracts of indebtedness sold to a certain individuals. As in the case of case of long-term
debt, such indebtedness will bear interest. A bond is case of long-term debt, such indebtedness will
bear interest. A bond is sometimes evidenced with bond certificate, unless it is a scrip bond.

Equity
Equity is the net assets of the business. It is composed of the owners' investments and the accumulated
net income of the company, net of any distributions to the owners. It reflects the portion of the asset
that belongs to the owners of the business.

Below is a summary of the definition and classifications of each type of business organization.
Sole Proprietorship
Partnership Corporation

Owner classification Sole Proprietor Partners Shareholder(Stockholders) Account for Contribution

Capital Account Capital Account Ordinary share, preference share, share premium
Account where net income is closed Capital Account Capital Account Retained Earning
Account where
dividend/distribution is recorded Capital Account Capital Account Retained Earning

Prepared by: Ma. Isabel S. Abellon, CPA

The Statement of Financial Position
The following section discusses the key parts of the statement of financial position and how to prepare
them. The report form of the statement of financial position is used in this section.

1. Prepare the Statement Heading

At the topmost part of the SFP is the title. The first line of the title shows the name of the company. It
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" This differentiates the SFP from the
other financial statements with the third line of the title that reads "for the year ended" How important
is the third line? It tells the reader that the balances reported on the SFP is the net effect of all
transactions related to the specific account from the date of the establishment of the company up to the
date of the SFP.

2. Prepare the Asset Section

From the given trial balance, the bookkeeper or accountant is now to determine the asset and contra
asset accounts. After which, the assets are categorized as current or non-current. Finally, the current
assets and non-current assets are arranged by liquidity. Liquidity, for this purpose, means the ease ot
converting such assets into cash.

3. Prepare the Liabilities Section

The bookkeeper or accountant is now to determine the liability accounts from the given trial balance.
After which, the liabilities are categorized as current or non-current. Finally, the current and non-current
liabilities are arranged by liquidity. Liqúidity, for this purpose, means the ease of converting such
liabilities into cash. A common arrangement of current liabilities can be found below.

4. Prepare the Owner's Equity Section

This section is basically lifted from the ending balances of accounts in the statement of changes in
equity.

5. Ensure that the Accounting Equation is Balanced

Finally, the bookkeeper ensures that toral assets will equate to toral liabilities and equities.
Furthermore, the statement is footed and tested for mathematical accuracy.
 Prepared by: Ma. Isabel S. Abellon, CPA

Prepared by: Ma. Isabel S. Abellon, CPA

Account Form vs. Report 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 above 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) a.
Emphasize that the two are only formats and will yield the same amount of total assets, liabilities and
equity
b. Emphasize that assets should always be equal to liabilities and equity

Comprehensive Illustrative Problem: Mira’s Store

On February 1, 20A4, Mira Delamar opened a store that sells school supplies. Her main Customers
are the students and teachers of Happy Students School that is situated in front of her | store.
Mira wanted to know the financial position of Mira's Store. Mira knew you were studying
accounting so she asked for your help.

The following information were made available to you:

1. To start her business, Mira opened a checking account in the name of Mira's Store. The statement of
account from the bank shows that the checking account has a balance of P31,535 as of December
31, 20A4.

2. Mira told you that she keeps P1,000, in small bills and coins, in her store which she uses as a change
(sukli) fund.

3. As of December 31, 20A4, cash on hand from sales and collections for the day amounted to
P12,000. This does not include Mira's change fund.

Prepared by: Ma. Isabel S. Abellon, CPA

4. Mira showed you a delivery receipt for P575. The receipt dated December 29, 20A4 showed that
 manila papers and color markers were delivered to a Ms. Rebecca Di who is a grade school teacher
in Happy Students School. Ms. Di noted on the delivery receipt that șhe will pay Mira on January 15,
20A5.

5. Mira's Store is located on the ground floor of à commercial building. The commercial unit costs her
P5,000 per month for rent. As of December 31, 20A4, Mira's store has a remaining one month
advance rent with the landlord.

6. Mira purchased shelves and cabinets amounting to P30,000 to be used as display racks and storage
for her store. The shelves and cabinets are expected to be used in the store for 5 years. Mira started
using the shelves and cabinets on December 1, 20A4.

7. After closing the store on December 31, 20A4, Mira counted all the unsold merchandise inside the
store. Mira does not have any other storage space except for the store premises Based on Mira's
count, the remaining unsold merchandise costs P15,345.

8. Mira showed you a folder where she kept her unpaid receipts and bills. You noted the following:
a. A sales invoice dated December 25, 20A4 from Long Lasting Ballpoint Pens Incorporated
amounting to P2,645. The invoice term is 30 days.
b. A sales invoice from Papier Paper Company dated December 15, 20A4 for P5,465. The payment
terms on the invoice are 40 days.
c. A Meralco bill for electricity consumption from December 1-31 for P3,400. The bill payable on
January 15, 20A5.
d. February PLDT bill for P600. The billis payable on January 17, 20A5.
e. Mira hired Emily to help her inside the store. Emily's salary is P500/ day. Emily's wage were paid
on December 30, 20A4 for work rendered until December 29.
9. Mira showed you an official receipt for P1,395. She told you that this is a down payment from Ms.
Benny Ling, a grade 5 teacher in Happy Students School. Ms. Ling ordered green, red, and blue
poster paints for her students. The total price of the order was P2,790. According to their
agreement, Mira will deliver the paints on January 3, 20A5.
10. On December 30, 20A4, Mira borrowed P23,000 from her bank. She took advantage of the bank's
special terms for small entrepreneurs. She signed a promissory note for her loan. The principal is
payable on December 30, 20A6. The interest is payable monthly beginning January 31, 20A5.
11. Mira started her business by depositing P30,000 to open the checking account. On October 15,
20A4, the business is in need of additional cash so Mira deposited f5,000 to the checking account.
Mira also withdrew P15,000 from the business over the year

Requirement: Prepare a classified Statement of Financial Position for Mira's Store as of December 31,
20A4.
 Prepared by: Ma. Isabel S. Abellon, CPA
Mira's Store
Statement of Financial Position
As of December 31, 20A4

Asset
Current Asset
Cash 44,535
Accounts Receivable 575
Inventory 15,345
Prepaid Rent 5,000
Total Current Asset 65,455
Non-current assets
Propert, plant and equipment 30,000
Accumulated Depreciation (500)
Net book value 29,500
Total Asset 94,955

Liabilities and Owner's Equity

Current liabilities
Accounts Payable 8,110
Salaries Payable 1,000
Utilities Payable 4,000
Unearned Income 1,395
Total current liabilities 14,505
Non-current liabilities
Long-term note payable 23,000
Total liabilities 37,505
Owner's Equity
Mira, Capital 57,450
Total liabilities and equity 94,955

Based on the accounting equation: Asset = Liabilities + Equity, it can be inferred that the balance of the
lone equity account, “Owner’s Equity” is P57, 450. Total asset is P94,955 while Total Liabilities is
P37,505. Following A=L+OE, Equity is P57,450.
Prepared by: Ma. Isabel S. Abellon, CPA