NAME: GRADE & STRAND:

Fundamentals of Accountancy, Business and Management 2

LESSON 1: STATEMENT OF FINANCIAL POSITION

WHAT I NEED TO KNOW?

In this lesson, you will be able to;
 Identify the elements of SFP and describe each of them
 Prepare an SFP using the report form and the account form with proper classification
of items as current and noncurrent.

WHAT IS IT?
Let’s go back with our activity it is the miniature or other
way to guess what is our topic is all about?. Any guess?. .
Yes, your write our topic is part of the financial statement. Also
it is known as the “Balance Sheet”. Then, it is composed of the
three fundamental elements of accounting – assets, liabilities
and capital. Assets are the things owned, liabilities are the
debts owed by the business to persons other than the owner
and lastly, capital refers to the investment or equity of the
owner in the business.
The topic I already building up through the given
e.com/search? information is none other than the “Statement of Financial
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Position or as we called the SFP”.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.

CLASSIFICATION OF SFP ELEMENTS INTO CURRENT AND NONCURRENT

For a business, owner, knowing when his or her assets will be collected in cash and when
his or her liabilities will be paid in cash is important. He or she needs to classify assets and
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liabilities into current and noncurrent. A business owner’s guide in classifying assets and liabilities
as current and noncurrent is the length of normal operating cycle of the business or one year,
whichever is longer. If the assets is not restricted in use, readily convertible to cash or to be sold or
consumed within the normal operating cycle of the business, or one year whichever is longer, it is
classified as a current assets. Those assets that do not qualify as current are categorized as
noncurrent assests.

ASSETS
CURRENT NONCURRENT

Cash Land

Trading account securities Building

Receivables ( Accounts, Notes etc.) Equipment

Merchandise Inventory Furniture and Fixtures

Prepaid Accounts Leaseholds Rights

Table 1. Examples of Current and Noncurrent Assets

Current Liabilities are debts or obligations normally expected to be settled in the normal
course of the company’s operating cycle or within one year by using current assets or creating
other current liabilities. Noncurrent liabilities are long – term debts which will be settled beyond
one year.

LIABILITIES
CURRENT NONCURRENT

Account payable Notes Payable (due more than one year)

Loans payable Mortgage payable
Utilities payable Bond payable
Interest payable

Table 2. Examples of Current and Noncurrent Liabilities

CONCEPT OF NORMAL OPERATING CYCLE

To understand the concept of a normal operating cycle, look and try to understand the given
illustration.
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 COLLECTION CASH
ACTIVITY

ACCOUNT PURCHASING
RECEIVABLE ACTIVITY

REVENUE ACTIVITY PRODUCTS OR

SERVICES

Figure 1. Normal operating cycle for a service or merchandising business

PREPARATION OF THE STATEMENT OF FINANCIAL POSITION

In preparing the SFP of a single proprietorship, the following steps must be applied:

1. The SFP must have a heading comprising the name of the business, title of the report, and
date covered by the report
2. Its left margin is usually subdivided into two; extreme margin for major subheadings (e.g..,
current assets; plant, property and equipment; pther noncurrent assets; current liabilities;
noncurrent liabilities and owner’s equity) and inner margin fpr s[ecific acount titles
3. At the right margin, the extreme money column is also major for subheadings while the
inner margin id for specific accounts
4. A double rule is placed under “total assets” and “total liabilities and owner’s equity”. As
expressed in the accounting equation, assets must equal to liabilities and owner’s equity,

PREPARATION OF THE SFP USING REPORT FORM AND THE ACCOUNT FORM
The account form follows the style of the accounting equation (i.e. assets are on the left side
of the SFP while liabilites and owner’s equity are on the right side). However, another form called
report form is also used. In this form, the account are presented in one straight coloumn – assets
first followed by liabilities and finally, the owner’s equity. According to Philippines Accounting
Standard (PAS), there is no prescribed form for financial reporting, but the form should be
appropriate to the nature of business and transaction of the entity.
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 De Guzman Copiers
Statement of Financial Position
31 December 2018
Assets

Current Assets:
Cash P14,
700.00
Account Receivable 3,
200.00
Supplies 1,
200.00
Total Current Assets P19,
100.00
Noncurrent Assets:
Copying Machines P58, 200.00
Less: Accumulated Depreciation (3,200.00)
Total Noncurrent Assets 55,
000.00
Total Assets P74,
100.00

Liabilities and Owner’s Equity

Current Liabilities:
Account Payable P8,
200.00
UtilitiesPayable
300.00
Total Current Liabilities P8,
500.00
Noncurrent Liabilities:
Notes Payable
P50,000.00
Total Liabilities P58,
500.00

Owner’s Equity:
De Guzman, Capital (ending) 15,
600.00

Total Liabilities and Owner’s Equity P74,

100.00

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Illustration 1: SFP presented in Report Form

Line Items
- Accounts are presented in
the financial statements using
“line items.” A line item is a
caption used to
describe a group of accounts
with similar nature. Examples
of line items in the balance
sheet
ASSET:
a. Cash and cash
equivalents
⮚ Cash – includes cash on
hand and cash in bank.
⮚ Cash equivalents – are
some short term debt

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securities that are acquired 3
months prior
the maturity date.
b. Trade and other
receivables
⮚ Account Receivable
⮚ (Less) Allowance for Bad
debts
⮚ Notes Receivable - only
the current portion is
included, noncurrent portion
is presented
separately.
⮚ Advance to Suppliers – is
an account used to record
advance payment made to
suppliers
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for purchase of inventories
that have not yet been
delivered by the supplier.
c. Inventory – consist of
goods held for sale in the
ordinary course of business.
d. Prepaid Assets
⮚ Prepaid Supplies
⮚ Prepaid Rent
⮚ Prepaid Insurance
e. Property Plant and
Equipment
⮚ Land
⮚ Building
⮚ (Less) Accumulated
Depreciation – Building
⮚ Equipment
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Line Items
- Accounts are presented in
the financial statements using
“line items.” A line item is a
caption used to
describe a group of accounts
with similar nature. Examples
of line items in the balance
sheet
ASSET:
a. Cash and cash
equivalents
⮚ Cash – includes cash on
hand and cash in bank.
⮚ Cash equivalents – are
some short term debt
securities that are acquired 3
months prior
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the maturity date.
b. Trade and other
receivables
⮚ Account Receivable
⮚ (Less) Allowance for Bad
debts
⮚ Notes Receivable - only
the current portion is
included, noncurrent portion
is presented
separately.
⮚ Advance to Suppliers – is
an account used to record
advance payment made to
suppliers
for purchase of inventories
that have not yet been
delivered by the supplier.
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c. Inventory – consist of
goods held for sale in the
ordinary course of business.
d. Prepaid Assets
⮚ Prepaid Supplies
⮚ Prepaid Rent
⮚ Prepaid Insurance
e. Property Plant and
Equipment
⮚ Land
⮚ Building
⮚ (Less) Accumulated
Depreciation – Building
⮚ Equipment
Line Items
- Accounts are presented in
the financial statements using
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“line items.” A line item is a
caption used to
describe a group of accounts
with similar nature. Examples
of line items in the balance
sheet
ASSET:
a. Cash and cash
equivalents
⮚ Cash – includes cash on
hand and cash in bank.
⮚ Cash equivalents – are
some short term debt
securities that are acquired 3
months prior
the maturity date.
b. Trade and other
receivables
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⮚ Account Receivable
⮚ (Less) Allowance for Bad
debts
⮚ Notes Receivable - only
the current portion is
included, noncurrent portion
is presented
separately.
⮚ Advance to Suppliers – is
an account used to record
advance payment made to
suppliers
for purchase of inventories
that have not yet been
delivered by the supplier.
c. Inventory – consist of
goods held for sale in the
ordinary course of business.
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d. Prepaid Assets
⮚ Prepaid Supplies
⮚ Prepaid Rent
⮚ Prepaid Insurance
e. Property Plant and
Equipment
⮚ Land
⮚ Building
⮚ (Less) Accumulated
Depreciation – Building
⮚ Equipment

WHAT’S MORE?

The account balances of Convergence Inc. as of December 31, 2018 are given below.
Prepare the SFP for the entity in Report Form. Write your answer and solution on one whole sheet
of yellow sheet. Note: the arrange of account titles must follow the order in chart of account.
Account Title Debit (in Pesos) Credit (in Pesos)
Notes Payable, due after 10 P477, 850.00
yrs.
Prepaid Rent P90, 900.00
Cash 27, 700.00
Allowance for Doubtful 5, 800.00
Accounts
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 Property and Equipment 1, 230,000.00
Chen, Drawing 30, 000.00
Accounts Receivables 95, 300.00
Account Payable 30, 000.00
Chen, Capital 960, 250.00
Total P1, 473, 900.00 P1, 473, 900.00

WHAT I HAVE LEARNED?

Studying how to prepare SFP have you an idea in business if they will continue or not in
operating the business. Also the financial health of a business can be diagnosed for its SFP. A
proprietor needs to validate the SFP to monitor the condition of his or her business and promptly
spot any erroneous report that pertains to it.

The Statement of Financial Position or SFP carries this name because it summarizes the
assets owned, the liabilities owed, and the capital or residual interest of the owner in the business.
Aside from giving this information to the owner, other users are also aided by the classification of
assets and liabilities into current and noncurrent in the SFP. Such a classification is useful in
determining the account’s proximity to cash collection (in case of assets) or cash payments (in
case of liability). The SFP in the report form arranges assets, liability, and capital in one column like
an outline, while SFP in the account form follows the style of the accounting information with assets
on the left side and owner’s equity on the right side of the statement.

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