Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 1

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 10 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

PREPARATION OF FINANCIAL STATEMENTS

Learning Objectives:
At the end of this module, student must be able to:
a) recognize the elements of a financial statement; and
b) prepare and complete set of financial statement.

Common Types of Financial Statement

Financial statements are written records that convey the business activities and the financial
performance of a company. Financial statements are often audited by government agencies,
accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.

1. Statement of Financial Performance or Income Statement

An income statement is one of the three important financial statements used for reporting a
company's financial performance over a specific accounting period, with the other two key
statements being the balance sheet and the statement of cash flows (will be discussed further in
FABM 2).

Also known as the profit and loss statement or the statement of revenue and expense, the
income statement primarily focuses on the company’s revenues and expenses during a particular
period.

2. Statement of Changes in Equity

Statement of Changes in Equity, often referred to as Statement of Retained Earnings, details
the change in owners' equity over an accounting period by presenting the movement in reserves
comprising the shareholders' equity.

3. Statement of Financial Position or Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities and
shareholders' equity or capital at a specific point in time, and provides a basis for computing rates
of return and evaluating its capital structure. It is a financial statement that provides a snapshot of
what a company owns and owes, as well as the amount invested by shareholders.

It is used alongside other important financial statements such as the income statement and
statement of cash flows in conducting fundamental analysis or calculating financial ratios.

Note: Other types of financial statements will be discussed in higher accounting subjects.

Preparation of Financial Statements

Let us begin by presenting a finished worksheet where balances from the “Adjusted Trial
Balance Column” are copied/moved to the columns in the Income Statement, Statement of
Changes in Equity, and Balance Sheet.

Illustrative problem:
Company Name: Ah Rees Pogi Company (2020)

(Please see illustration on the next page.)

Fundamentals of Accountancy, Business & Management - 1 Page 1 of 4


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 10 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Notice how each account’s amount was spread to different columns. The amount of the
Expense and Revenue accounts were placed under the Income Statement Column; Net
Income/Loss, Capital Account, and Drawing Account were placed on the Changes in Equity
Column; and then the amount of the Asset Accounts, Liability, and the Final Capital Account were
placed under the Balance Sheet.
Starting off with the Income Statement, always remember that it will always include revenue
and expense accounts only. From the adjusted trial balance column, copy the amounts of accounts
related to revenue and expenses. Hence we have the result as shown above. Get the total of the
debit side and credit sides respectfully and then get the difference. If the debit side (expenses) is
higher than the credit side (income), the difference will be treated as a Net Loss and Net Income if
vice versa.
And then on the Changes in Equity column, you will be copying the amounts of accounts
related to Capital, Drawings, Net Income/Loss. Get the total of each side and the result will be
treated as the ending balance of your Capital Account that will appear on the next column for the
Balance Sheet. Take note that if the Income Statement resulted to a Net Loss, it will be a deduction
to the Capital Account and will be placed on the Debit side of the Changes in Equity Column. In this
sample, we got Net Income, which is an addition to the Capital Account, hence, it was placed on
the credit side. So the ₱406,000 amount as a result of the computation was used as the value of the
Capital Account in the Balance Sheet.
Remember that a financial statement does not have a definite format that every company
uses. It will differ depending on the user of the financial statement. In this module, you will be taught
how to prepare a financial statement following a pattern common to all financial statements.

The Income Statement

To begin, create a heading for the financial statement (the same applies to other financial
statements). The heading is a three-line title of the document. On top will be the Company name, in
the middle will be the name of the financial statement you are preparing (in this case Income
Statement), and on the bottom will be the time period covered by the financial statement. For the
time period under an INCOME STATEMENT, always begin with “FOR THE PERIOD …/FOR THE PERIOD
ENDED …,” or just write the covered period. The Statement of Changes in Equity and Balance Sheet
will always begin with “AS OF …”.
The Income Statement is composed only of the REVENUE and EXPENSE accounts.
Based on the data above, this is how you will present your Income Statement.

Fundamentals of Accountancy, Business & Management - 1 Page 2 of 4


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 10 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Ah Rees Pogi Company

Statement of Financial Performance
For the period ended December 31, 20xx
Revenue:
Professional Fees Income ₱ 80,000.00

LESS Expenses:
Salary Expense 36,000.00
Doubtful Accounts Expense 5,000.00
Supplies Expense 4,000.00
Depreciation Expense 15,000.00
NET INCOME ₱ 20,000.00

Always make sure to put a double underline (it is called a DOUBLE RULE) on your final answer.
Notice also that in a financial statement, there is no longer a separation of the debit and credit
amount but there will be indications of addition or deduction of the amounts. In this case, “LESS” was
used to indicate a deduction of the amounts of expenses from the revenue. If “LESS” was not used,
you may use “(,)” as a symbol of deduction.

Statement of Changes in Equity

The same rule will be applied in preparing this financial statement. The only difference will be
the accounts. The Statement of Changes in Equity is composed mainly by the capital account,
drawing account, additional investments (if any), and net income or net loss.

Ah Rees Pogi Company

Statement of Changes in Equity
As of December 31, 20xx

R. Estoque, Capital ₱ 391,000.00

Add: Additional Investment -
Net Income ₱ 20,000.00

Less: R. Estoque, Drawings ₱ 5,000.00

Net Loss -
R. Estoque, Capital ₱ 406,000.00

The Balance Sheet

The balance sheet has two formats that we can follow. The report format and the account
format. The Balance Sheet contains the assets, liabilities, and the capital (end) account of the
company.
The Balance Sheet Statement is based on the accounting equation Assets = Liabilities +
Capital. Hence, total assets must equal the total liabilities and capital.
a. Report Format (Vertical Orientation)
The report form balance sheet is presented in a vertical orientation, and is essentially
one column that spans the entire width of a page. Starting with assets, the report form
balance sheet provides a total value at the end of the assets section, followed by liabilities
and equity, with the final line of the report form balance sheet providing the total combined
value of liabilities and equity.

Fundamentals of Accountancy, Business & Management - 1 Page 3 of 4


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 10 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Ah Rees Pogi Company

Statement of Financial Position
As of December 31, 20xx
ASSETS:
Cash ₱ 200,000.00
Accounts Receivable ₱ 100,000.00
Allowance for Doubtful Accounts (₱ 10,000.00) ₱ 90,000.00
Supplies ₱ 16,000.00
Office Equipment ₱ 160,000.00
Accumulated Depreciation ₱ 30,000) ₱ 130,000.00
TOTAL ASSETS ₱ 436,000.00

LIABILITIES:
Accounts Payable ₱ 30,000.00

CAPITAL:
R. Estoque, Capital ₱ 406,000.00
TOTAL LIABILITIES and CAPITAL ₱ 436,000.00

b. Account Format (Horizontal Orientation)

The account form balance sheet is presented in a horizontal format, with information in
two columns beside each other. The left column of the account form balance sheet lists
assets, while the right column lists liabilities and equity. Naturally, the last line in each column
lists the total value of all assets and liabilities and equity, respectively. The account form
balance sheet can be easier to use when information is being presented for multiple periods,
and it allows the reader to verify that the ledger is in balance at a glance.

Ah Rees Pogi Company

Statement of Financial Position
As of December 31, 20xx

ASSETS: LIABILITIES:
Cash ₱ 200,000.00 Accounts Payable ₱ 30,000.00
Accounts Receivable 100,000.00
Allow. for Doubtful Accts. (10,000.00)
Supplies 16,000.00
Office Equipment 160,000.00 CAPITAL:
Accumulated Depreciation (30,000.00) R. Estoque, Capital 406,000.00
TOTAL ASSETS ₱ 436,000.00 TOTAL LIABILITIES and CAPITAL ₱ 436,000.00

References:
• Banggawan, R., Asuncion, D.(2017).Fundamentals of Accountancy, Business and
Management 1. Aurora Hill, Baguio City: Real Excellence Publishing.
• Ferrer, R., Millan, Z.(2017). Fundamentals of Accountancy, Business and Management 1.
Bakakeng Sur, Baguio City: Bandolin Enterprise.
• Ong, F.(2016). Fundamentals of Accountancy, Business and Management 1. South Triangle,
Quezon City: C & E Publishing.
• Baysa, G., Lupisan, M.(2011). Accounting for Partnership and Corporation. Mandaluyong City:
Millenium books,

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