FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

Grade 12 ABM

Week 1

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

At the end of the lesson, the learner is able to:

➢ identify the elements of the SFP and describe each of them
➢ classify the elements of the SFP into current and noncurrent items
➢ prepare the SFP of a single proprietorship
➢ prepare an SFP using the report form and the account form with
proper classification of items as current and noncurrent

In the boxes below, write what you know and what you want to know about
this week’s lesson, the Statement of Financial Position or most commonly
known as the Balance Sheet. At the end of this week, go back and write in the
3rd box, What I have learned.

What I know What I want to know What I have learned

BALANCE SHEET BALANCE SHEET BALANCE SHEET

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Blast from the past!

Can you identify, what type

of businesses are in the
pictures? 🤓

Excellent!

What about these? Can you identify the forms of business ownership of the businesses in the
pictures?

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In Fundamentals of Accountancy, Business and Management 1, you were introduced to the Accounting
Equation and the five (5) major elements of the accounting equation or most commonly known as the
five (5) major accounts.

Can you write the Accounting Equation on the board and list the 5 major accounts?

Good job!

Now, can you remember the particular accounts under the five major accounts? Can you write them in
the boxes below?

THE ACCOUNTING EQUATION

________________________________________________

THE FIVE (5) MAJOR ACCOUNTS

____________ ____________ ____________ ____________ ____________

Awesome! Good job!

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Learning Activity
Get a clean sheet of paper!

On your sheet of paper, list the following:

A. Things that you own and their corresponding amount
B. The amount you owe (utang) to your family, friends,
classmates

After you have done that, get the total amount of the things you
own and the amount you owe.

Deduct the amount you owe from the amount you own.

How much did you get? What do you call the amount left?

Can you relate that to our previous lesson from FABM 1?

What do you call, the things you own?

What about the things you owe?

Do you have an idea of what you have just prepared?

If you do, then you are

ready for our new topic!

Let’s go!

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STATEMENT OF FINANCIAL POSITION

The Statement of Financial Position or most commonly known as the Balance Sheet is a financial
report that shows the financial standing, value of a business as of a given date or period, normally at
the end of a calendar year or fiscal year.

Financial experts say that it is a snapshot of the financial condition of a business as of a given time. It
means that it shows what the business owns, what it owes and the claim of the owners in the business.

The balance sheet lists in detail the assets and liabilities of the business and shows the residual
interest of the owner as of a specific date.

It contains the following major accounts:

Asset, Liabilities and Owner’s Equity. That is
also the reason it is called the Accounting
Equation Statement.

The accounts in the Balance Sheet or Statement of Financial Position (SFP) are real accounts or
permanent accounts and contra asset accounts.

Real accounts or permanent accounts are retained and are forwarded in the succeeding accounting
period. The ending balance of real accounts in an accounting period becomes the beginning balance
of the succeeding or next accounting period.

They are called permanent because these accounts are maintained until their balances become zero.

Contra Asset accounts on the other hand are deductions from the business’ asset accounts. These
contra asset accounts are Allowance for Bad Debts or Doubtful Accounts and Accumulated
Depreciation.

Allowance for Bad Debts account is a deduction from the Accounts Receivable.

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Accumulated Depreciation is a reduction on the fixed assets of the business. It is the added or the
build up of the cost of wear and tear of fixed assets.

Below are examples of Fixed Assets!

Among the list of the fixed assets above, Land is the only fixed asset that
does not depreciates. In fact, it is an asset the appreciates over time.
It appreciates because of the economic development that happens around it.

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Example of a Statement of Financial Position

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Another example of a Statement of Financial Position

Let us look at the accounts in the balance sheet or statement of financial position.

ASSETS
➢ resources owned and/or controlled by the enterprise from which future economic benefits are
expected
➢ things of value and rights owned by the business

Classification of Assets:
• Current Asset
• Investments
• Property, Plant or Equipment (or Fixed Assets or Non-current Assets)
• Other Assets (Intangible Assets)

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Current Assets
An asset shall be classified as current when it satisfies any of the following criteria:
• It is expected to be realized in, or is intended for sale or consumption in the entity’s normal
operating cycle.
• It is held primarily for the purpose of being traded.
• It is expected to be realized within 12 months after the balance sheet date.
• It is cash or cash equivalent (as defined in IAS 7 Cash Flow Statements), unless it is restricted
from being changed, or used to settle a liability for at least 12 months after the balance sheet
data.

Investments
These are assets not directly identified with the operating activities of a company (as distinguished from
inventories, supplies, plant, property and equipment). They are expected to contribute to the success
of the business by making independent contributions to earnings or exercising a certain favorable effect
upon the sales and operation of the company.

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Property, Plant and Equipment or Non-Current Assets or Fixed

Assets
These are assets needed to support the operation of the business, not
intended for sale and can be used for a long period of time.

Examples of Intangible Assets are brands,

goodwill, and intellectual property such as
copyright, patents and trademarks.
They have no form and shape but they have value.
They are generally, long term in value.

Source: https://www.investopedia.com/terms/i/intangibleasset.asp

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Current Liabilities
Debts or obligations reasonably expected to be liquidated or paid within a short period of time by the
use of current assets or the creation of other current liabilities.

Classification of Liabilities:
⮚ Current Liabilities
⮚ Long Term Liabilities (or Non-current Liabilities)

Current Liabilities
Debts or obligations reasonably expected to be liquidated or paid within a short
period of time by the use of current assets or the creation of other current
liabilities.
▪ Accounts Payable – To trade creditors for purchase of goods or services on credit supported by the
oral or implied promise of the business.
▪ Notes Payable – Debt or obligation evidenced by promissory notes.
▪ Loans Payable – To banks and financing institutions for financial assistance received from them
▪ Utilities Payable – To utility companies such as Meralco, PLDT, etc
▪ Taxes Payable – obligations to the government
▪ Other Payables – Such Such as interest payable for interest bearing promissory notes, salary
payable to employees

Long Term Liabilities

Obligations payable longer than 1 year.
➢ Mortgage Payable – obligations secured by real estate
➢ Bond Payable – is a liability supported by a formal contract
containing the face value of the bond, the interest rate the
interest payment date and the maturity date

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Represents the claim of the owner over the assets of the business
after all liabilities have been paid.

Owner’s Capital – Value of cash and other assets contributed to the business by the owner. This
account is increased by the profits not taken out of the business or decreased by the losses of the
business.
Owner’s Drawings – Deductions from owner’s equity when the owner makes withdrawal from the
business.

Forms of Balance Sheet

The Statement of Financial Position or Balance Sheet have to forms or ways of being presented.
These two forms are the account form and the report form.

Account Form
Following the accounting equation, lists the assets on the left side column with the liabilities and
owner’s equity on the right side column.

Report Form
Shows the assets first, followed by the liabilities and the owner’s equity in one straight column.

Example of Account Form

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Observe the following rules in preparing the balance sheet:

➢ The heading consists of three lines
o Name of the Business
o Title of the Report
o Date
➢ Margin on the left side
➢ The extreme margin is used for the major classifications like current assets or current liabilities
and the inner margin is used for the detailed computations.
➢ Money columns on the right side.
➢ The placement of the amounts usually follows the margins on the left side: extreme money
columns for the major amounts and an inner money column for the details.
➢ In the final money column, the peso sign is placed on the first and last amounts; in the inner
money columns, the peso sign is placed on the first figure of every column of figures to be
added or subtracted.
➢ A single line or rule is placed under the last figure to be added or subtracted and a double line
or rule is placed under the final figure.
➢ The current assets and current liabilities are arranged according to liquidity. Liquidity is the
ability or ease of an item to be converted into cash.
➢ For fixed or non-current asset, land is usually placed first, with the other assets arranged from
the highest to the lowest amount.

Statement of Financial Position of a Merchandising Business

In a merchandising busines the main activity is the buying and selling of goods.
There is another account which is the Merchandise Inventory account.

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Merchandise Inventory refers to the goods that a seller or reseller are offering to the market or to the
consuming public.

An example will be, if the business is engaged in the trading or buying selling of school and office
supplies then the bond paper, ballpen, notebooks are considered merchandise inventory.

If the business is a grocery or sari-sari store, then the canned goods, candies, softdrinks, juices, etc are
merchandise inventory.

Another example is a pharmacy, the medicine that it sells are considered merchandise inventory.

Learning Activity
Look at the pictures below, name the merchandise of the business.
Can you give other examples of inventory?

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Merchandise Inventory account is a current asset account whose normal

balance is debit.
This account can be found both in the balance sheet or statement of
financial position and income statement or statementof comprehensive
income (SCI). The statement of comprehensive income will be discussed
thoroughly in the next chapter.

There are two methods or systems of maintaining merchandise inventory: a) Periodic and b)
Perpetual.

Periodic Inventory
Periodic inventories do not maintain an ongoing balance of the quantities and overall valuation of the
inventory on hand. The amounts on hand and valuation are only determined at the point a physical
inventory is taken. That valuation is used to update the inventory balance in the General Ledger.

Perpetual Inventory
Perpetual inventories maintain an ongoing balance of the quantities and overall valuation of the
inventory on hand. This is done by keeping detailed records of each item held in stock and increasing
the quantity and valuation of the item when stock is purchased or otherwise added, and reducing the
quantity and valuation of each item when stock is sold or returned to vendors.
Source: https://www.obfs.uillinois.edu/bfpp/section-22-self-supporting-revenue-generating/methods-merchandise-inventory-
valuation#:~:text=The%20two%20systems%20for%20maintaining,also%20be%20used%20for%20perpetual

How does it work?

If the business is using the Periodic Inventory system, every time the business buys/purchase inventory
they use the account “Purchases”. The account Purchase is debited. If there are items that are
defective and need to be returned or there are items that are slightly defective and will require
reductions in cost then the account Purchase Return and Allowances are credited since they are
decrease or reduction on Purchases.

For periodic Inventory.

Anne Sunga is engaged in the buying and selling of various RTW (ready-to-wear) apparels. The
business is known as Glam Fashion by Anne S.
She buys her products from different RTW manufacturers in Cavite and Laguna.
One of her suppliers for blouses and T-shirts is Rizza Garments Enterprises located in Binan, Laguna.

On June 1, 2023, she sent a purchase order to Rissa Garments Enterprises.

On the same date, Rissa Garments Enterprises responded on the received purchase order from Glam
Fashion by Anne S. and delivered the ordered items together with the sales invoice.

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If using a general journal, below will be the journal entry.

GENERAL JOURNAL

Date Account Ref Debit Credit

June 1 Purchases 26,785.71
Input Tax (VAT) 3,214.29
Freight In 200
Accounts Payable 30,200
To record purchase of goods PO#2023-6006,
Inovice#1267 terms 2/10, n/30

If using a special journal, entry will be like this.

PURCHASE JOURNAL
Charge Debit Debit Debit Credit
Invoice # or Input Tax Freight
Date Supplier’s Name Ref Accounts
Sales Invoice Purchases
# Payable
June 1 Rissa Garments SI#1267 26,785.71 3,214.29 200 30,200.00
Enterprises

For perpetual inventory

GENERAL JOURNAL

Date Account Ref Debit Credit

June 1 Merchandise Inventory 26,985.71
Input Tax (VAT) 3,214.29
Accounts Payable 30,200
To record purchase of goods PO#2023-6006,
Inovice#1267 terms 2/10, n/30

PURCHASE JOURNAL
Charge Debit Debit Credit
Invoice # or Input Tax
Date Supplier’s Name Ref
Sales Invoice Merchandise Accounts
# Inventory Payable
June 1 Rissa Garments SI#1267 26,985.71 3,214.29 30,200.00
Enterprises

Did you see the difference between periodic and perpetual inventory system/method?

In a service type of business, normal inventory will be office supplies, cleaning

supplies, beauty supplies and other supplies used in the operation of the business.
They are under current assets.
In a merchandising business, inventory pertains to goods that are intended for
resale. They are also under current assets. There are, however merchandise
inventory account that can also be found in the income statement; these are
Merchandise Inventory Beginning and Merchandise Inventory Ending. They are
found in the Cost of Goods Sold section.
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Example of Statement of Financial Position of Merchandising Business

The Green Valley Merchandising

Balance Sheet
As of December 31, 20XX

ASSETS
Current Assets
Cash P 39,000.00
Accounts Receivable 56,250.00
Less: Allowance for Uncollectible Accounts 5,625.00
Net Accounts Receivable 50,625.00
Merchandise Inventory 98,000.00
Store Supplies 650.00
Office Supplies 375.00
Prepaid Insurance 2,150.00
Total Current Assets 190,800.00

Fixed Assets
Store Equipment 66,000.00
Less: Accumulated Depreciation 23,900.00
Net Book Value Store Equipment 42,100.00
Office Equipment 25,000.00
Less: Accumulated Depreciation 10,500.00
Net Book Value Office Equipment 14,500.00
Total Fixed Assets 247,400.00
==============

LIABILITIES
Current Liabilities
Accounts Payable 33,350.00
Salaries Payable 2,500.00
Unearned Rent 10,200.00
Total Current Liabilities 46,050.00

Long Term Liabilities

Long Term Loan 52,500.00
Total Liabilities 98,550.00

OWNER'S EQUITY
G. Ramos Capital 77,300.00
Less: G. Ramos Drawing 20,000.00
Net Capital 57,300.00
Add: Net Income 91,550.00
G. Ramos, Ending Capital 148,850.00

Total Liabilities & Owner's Equity 247,400.00

=========

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What I have learned

Now that we have discussed the Statement of Financial
Position (SFP) or Balance Sheet, can you discuss the
importance or role of this financial report in the business?

Can you explain why, as an ABM student, you need to study

and be familiar with the Statement of Financial Position or
Balance Sheet?

Learning Activities
Direction: Read and understand the problem carefully. Give the correct answer.

1. FABM 2 Enterprises had current assets amounting to P1,234,500. Its fixed or non-current assets
totaled P3,895,000.00. It also has various invesments in shares of stocks in publicly listed
corporations with a value of P697,000.00. How much is the company’s total assets.

2. Jeguk Enterprises’ total liabilities amounted to P987,654.00. Total equity had an ending balance of
P654,321.00. How much is Jeguk’s total assets?

3. The liabilities of Hazel Grace Beauty Salon are equal to one-third of the total assets. The owner’s
equity is P2,400,000.00. What is the amount of liabilities? Assets?

4. At the beginning of the year, Pitch Perfect Musical School’s assets amount to P11,000,000.00 and
the owner’s Equity is P5,000,000.00. During this year, assets increased by P3,000,000.00, while
liabilities decreased by P500,000.00. How much is the owner’s equity at the end of the year?

Group Work

You were hired by Dr. Andy Wong as his bookkeeper for his dental clinic, Beautiful Smiles. At the end of
the accounting period you were able to identify the following assets, liabilities and capital of Dr. Andy
Wong. Prepare the Statement of Financial Position or Balance Sheet of Beautiful Smiles Dental Clinic
as of August 31, 2023.
The clinic has a bank account with a balance of P309,500.00.
Accounts receivable from clients totaled P35,000.00.
Remaining dental supplies are at P18,600.00

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Prepaid rent is still at P45,000.00

Dental equipment owned is P600,000.00
Furniture owned by the clinic is P50,000.00
The clinic has outstanding balance of P18,600.00 from suppliers.
The company owes Meralco, Maynilad and PLDT a total of P5,050.00
Dr. Andy Wong's ending capital is P1,034,450.00

Prepare the SFP or balance sheet in account and report form.

REFERENCES

Manuel, Zenaida Vera Cruz. The Accounting Process. Raintree Trading & Publishing Inc.1989

Frias, Solita A. & Pefianco, Erlinda C. Fundamentals of Accountancy, Business & Management: A
Textbook in Basic Accounting 1. Phoenix Publishing House.2016

Baguino, Armando D.et. al. Principles of Accounting. Allen Adrian Books Inc. 2014.

Rabo, Joy S., et.al. Fundamentals of Accountancy, Business and Management 1. Vibal Group Inc.
2016.
Garcia, Percy C., et.al., Basic Accounting Concepts & Procedures. Rex Bookstore Inc. 2006.

https://www.accountingtools.com/articles/what-is-the-statement-of-financial-position.html
https://www.wallstreetmojo.com/statement-of-financial-position/#h-what-is-a-statement-of-financial-
position
https://www.accountingtools.com/articles/what-is-a-real-
account.html#:~:text=A%20real%20account%20is%20an,assets%2C%20liabilities%2C%20and%20eq
uity.
https://www.freeagent.com/en/glossary/statement-of-financial-position/

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https://www.investopedia.com/terms/i/intangibleasset.asp
https://courses.lumenlearning.com/suny-finaccounting/chapter/merchandise-inventory-
2/#:~:text=Merchandise%20inventory%20(also%20called%20Inventory,period%2C%20management%
20needs%20inventory%20information.
https://www.obfs.uillinois.edu/bfpp/section-22-self-supporting-revenue-generating/methods-
merchandise-inventory-
valuation#:~:text=The%20two%20systems%20for%20maintaining,also%20be%20used%20for%20perp
etual

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