Fundamentals of Accountancy, Business, and Management 2

Statement of Financial Position (SFP)

Course Description: The course deals with the preparation and analysis of financial
statements of a service business and merchandising business using horizontal and
vertical analyses and financial ratios. Knowledge and skills in the analysis of financial
statements will aid the future entrepreneurs in making sound economic decisions.

Content Standards
The learners demonstrate an understanding of account titles under the assets,
liabilities, and capital accounts of the Statement of Financial Position, namely,
cash, receivables, inventories, prepaid expenses, property, plant and
equipment, payables, accrued expenses, unearned income, long-term
liabilities and capital that will equip him / her in the preparation of the SFP
using the report form and account form.

Performance Standards
The learners shall be able to solve exercises and problems that require
preparation of an SFP for a single/sole proprietorship with proper classification
of accounts as current and noncurrent using the report form and the account
form.

INSTRUCTION/DELIVERY (140 MINS)

1. Define the term Statement of Financial Position and introduce the term Permanent
Accounts

STATEMENT OF FINANCIAL POSITION – Also known as the balance sheet. 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.

PERMANENT ACCOUNTS – As the name suggests, these accounts are permanent in a sense
that
their balances remain intact from one accounting period to another.
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.

2. sample SFP

IN REPORT FORM

Assets
Current Assets

Cash Php 100,000.00

Accounts Receivable Php 500,000.00
Less: Allowance for Doubtful Accounts (50,000.00) 450,000.00
Accrued Income 300,000.00
Inventory 200,000.00
Prepaid Expenses 50,000.00
Total Current Assets Php 1,100,000.00

Noncurrent Assets
Long Term Investments Php 1,250,000.00
Intangible Assets 500,000.00
Property, Plant and Equipment
Cost Php 1,000,000.00
Less: Accumulated Depreciation (300,000.00) 700,000.00
Total Noncurrent Assets Php 2,450,000.00
Total Assets Php 3,550,000.00

Liabilities and Owner's Equity

Current Liabilities

Accounts Payable Php 250,000.00

Accrued Expenses 100,000.00
Unearned Income 80,000.00
Notes Payable 150,000.00
Total Current Liabilities 580,000.00

Noncurrent Liabilities

Mortgage Payable Php 1,500,000.00

Loans Payable 1,000,000.00
Total Noncurrent Liabilities Php 2,500,000.00

Total Liabilities Php 3,080,000.00

Owner's Equity 470,000.00

3. Differentiate the
Total Liabilities and Owner's Equity Php 3,550,000.00
Report Form and Account
Form
Report Form – A form of the SFP that shows asset accounts first and then liabilities and owner’s equity
accounts after. The balance sheet shown earlier 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.

a. the two are only formats and will yield the same amount of total assets, liabilities and equity
b. Assets should always be equal to liabilities and equity

4. Group accounts under Current Assets, Noncurrent Assets, Current Liabilities, Noncurrent Liabilities
and Owner’s Equity

Current Assets – Assets that can be realized (collected, sold, used up) one year after year-end
date. Examples include Cash, Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.

Current Liabilities – Liabilities that fall due (paid, recognized as revenue) within one year after yearend
date. Examples include Notes Payable, Accounts Payable, Accrued Expenses (example: Utilities
Payable), Unearned Income, etc.

Current Assets are arranged based on which asset can be realized first (liquidity). Current assets and
current liabilities are also called short term assets and shot term liabilities.

Noncurrent Assets – Assets that cannot be realized (collected, sold, used up) one year after yearend
date. Examples include Property, Plant and Equipment (equipment, furniture, building, land), Long Term
investments, Intangible Assets etc.

Noncurrent Liabilities – Liabilities that do not fall due (paid, recognized as revenue) within one
year after year-end date. Examples include Loans Payable, Mortgage Payable, etc.

Noncurrent assets and noncurrent liabilities are also called long term assets and long term liabilities.

5. Difference of the Statement of Financial Position of a Service Company and of a Merchandising

Company

The main difference of the Statements of the two types of business lies on the inventory account. A
service company has supplies inventory classified under the current assets of the company. While a
merchandising company also has supplies inventory classified under the current assets of the company,
the business has another inventory account under its current assets which is the Merchandise Inventory,
Ending.

6. The different parts of the Statement of Financial Position

 a.

Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “as of”)