FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

CHAPTER I: Statement of Financial Position

Most Essential Learning competencies

a. identify the elements of the SFP and describe each of them

b. prepare an SFP using the report form and the account form with proper classification of items as current and
noncurrent

THE FINANCIAL STATEMENTS

Financial statements are the structured representation of an entity's financial position and results of its
operations. The end product of accounting process.

The basic purpose of accounting is to provide information that is useful for making economic decisions.

Accounting information is most commonly communicated to users through the financial statements.

Financial Statements provide information on:

1. How much resources are controlled by an entity and how these resources were generated - (financial
position).
2. How well the entity performed during certain period - (results of operation).

Entity refers to the reporting entity.

Reporting entity is the one whose FS are being prepared.

Complete set of Financial Statements:

Elements of Financial Statements

1. Assets
2. Liabilities
3. Equity (also called Capital or Net worth)
4. Income/Revenue
5. Expenses

Elements of Financial Position

1. Assets - are the resources you control that have resulted from past events and can provide you with future
economic benefits.

Essential elements in the definition of asset:

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Prepared by: CHRISTNA M. SORIANO
SST II, Subject Teacher
a. control
b. past events
c. future economic benefits

CLASSIFICATION OF ASSETS

a. Classified (current/non-current)
b. Unclassified (base on liquidity)

Current and Noncurrent Assets:

Current assets are classified when they are expected to be realized within 12 months from the end of reporting
period.

Realized means coverted to cash or claim for cash.

1.1Cash

a. Cash on hand – includes undeposited checks and cash, travel checks, bank drafts and money orders.
b. Cash in bank – money deposited in bank which is unrestricted as to withdrawal.
c. Cash Fund – set aside for current purposes such as petty cash fund, payroll fund and dividend fund
d. Cash Equivalents (PAS 7) – is a short term and highly liquid investment that are readily converted into cash
and so near their maturity that they present insignificant risk of changes in value.

Highly liquid – investment that are acquired three months before maturity can qualify as cash equivalents

1.2 Receivable ( PAS 39 )

Represent amounts collectible from customers , clients and person for goods, services or money given. It must
be “non-derivative financial assets with fixed or determinable payments that are not quoted in active market”

Characteristic

 Fixed or determinable payments

 May or may not have a fixed maturity or term
 Not quoted in active market

a. Trade receivable – refers to claims arising from sale of merchandise or service in ordinary course of
business operation. Usual types are accounts receivable and notes receivable.

Accounts Receivable – are open accounts or those not supported by promissory notes.
Allowance for doubtful accounts – contra-asset account that reduces accounts receivable

Notes receivable – are those supported by formal promises to pay in the form of notes

b. Non-trade Receivable – claims arising from sources other than the sale of merchandise or services in the
ordinary course of business operation.

 Accrued interest receivable

 Advances to Officer and Employees
 Dividends Receivable

1.3. Inventory (PAS 2)

Assets that are held for sale in ordinary course of business. It is the process of production for such sale or in the
form of material or supplies to be consumed in the production process or in rendering of services.

1.4 Prepaid Expenses

Are expenses paid and recorded as an assets before they are used or consumed.

Examples:
Prepaid Rent
Prepaid Insurance
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Prepared by: CHRISTNA M. SORIANO
SST II, Subject Teacher
 Prepaid Advertising

Note: Sub-classification is Supplies.

1.5 Marketable Securities

Temporary Investment – Short term investments of funds which are available for current operations and
intended to be held for not more than 1 year.

Non-current Asset

Any asset that cannot be classified as current.

Fixed Assets – known as PPE or Property, Plant and Equipment. These are tangible assets which are
held by an enterprise for used in production and services and expected to be used for more than one
accounting period.

The tangible assets with an estimated useful life beyond one year, used in the conduct of business, and
are not intended for sale in the course of business. (PAS 40)

Accumulated Depreciation – contra-asset account representing usage of asset or expired cost of the asset
up to the present. This is a deduction from the appropriate fixed asset account except for the Land.

Note. ADA is not an asset but rather contra-account. Process of allocation and not a valuation (PAS 40

This include tangible and intangible, operating and financial assets of a long term in nature.
 Land
 Building
 Equipment
 Machinery
 Furniture and Fixtures
 Office Equipment
 Store Equipment
 Delivery Equipment

Intangible Assets – identifiable non-monetary assets without physical substance held for use in the production
or supply of goods and services, for rental to others or administrative purposes. (PAS 38)

Example: Software, Trademarks, Patent, Goodwill, Copyrights, Franchise

Long-lived assets without physical substance whose value lies in the rights, privileges, and competitive
advantages that give to the owner.

Criteria of Intangible assets

 Identifiable
 Control
 Future economic Benefits

Other Non-current Asset

 Advances to Officers and Employees not collectible within 1 year

 Restricted cash Accounts such as Cash in closed Banks
Closed bank – this are cash held by the bank as investment.
 Long-term installment receivable
 Non-productive property – IDLE ASSETS
 Damaged inventory not yet declared as loss by the enterprise

2. Liabilities

Current Liabilities (PAS 1) – expected to be settled in the normal course of business operation and
obligations which are due to be settled within 1 year.

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Prepared by: CHRISTNA M. SORIANO
SST II, Subject Teacher
  Accounts Payable – refer to the indebtedness that are arise from using the operation of business
which are open charge accounts.
 Notes Payable
 Communication Payable
 Utilities Payable
 Taxes and Licenses Payable
 Unearned Income/Revenue – obligation arising from advance payment from a customer.
 Accrued Expenses – Expenses that have been incurred but not yet paid.

Non-current Liabilities – more than 1 year or normal course of business operation.

 Long-term Notes payable

 Bonds Payable – liability supported by formal unconditional promise made under seal to pay.
 Mortgage Payable – secured by real properties.
 Chattel payable – secured by personal properties.

3. Capital/Owner’s Equity

3.1. (Name of the owner), CAPITAL

3.2. (Name of the owner, DRAWING
3.3. Income/Revenue
 Service Revenue/ Professional Fees/ Income from Fees
 Rent Income
 Interest Income
 Commission Income
 Sales – principal revenue of both merchandise and manufacturing concerns in selling of goods

Activity 1

FORMAT OF STATEMENT OF FINANCIAL POSITION

Account Form

Assets are listed on the left-hand side of the report while liabilities and owner’s equity on the right-hand side in
horizontal order

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Prepared by: CHRISTNA M. SORIANO
SST II, Subject Teacher
Report Form

Lists the accounts in a vertical or downward sequence. Thus, assets are listed at the top and liabilities and
owner’s equity below.

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Prepared by: CHRISTNA M. SORIANO
SST II, Subject Teacher
Activity 2

Solution:

1.

2.

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Prepared by: CHRISTNA M. SORIANO
SST II, Subject Teacher