THE STATEMENT OF FINANCIAL POSITION

Statement of Financial Position - was previously referred to as Balance Sheet. The SFP
shows the company’s assets, liabilities and equity. It is divided intotwo parts (see Figure 1.1).
The assets are on one side and liabilities and equity (also referred as capital) are on the other
side. Liabilities are claim of creditors while equity are claims of owners. The SFP also
shows us the very basic formula in accounting: Assets = Liabilities plus Equity (ALE).
Thus, assets should alwaysequal to the sum of liabilities and capital. SFP is called
Balance Sheet as it shows sheet where two sides are always equal or balance.

Current and Noncurrent Liabilities and the Equity. Figure 1.2 illustrates an example of a Balance
Sheet of Single Proprietor business: (all amounts are assumed).
The above SFP is in Report Form format. Another way to present using Account Form format
where all Assets are listed in the right side and Liabilities and Equity in the left side. Is it okay to
use the “Balance Sheet” title instead of “Statement of Financial Position”? The answer is yes.
The Philippine Accounting Standards (PAS) only encourage the use of SFP but the use of such
title is not mandated. The third line “As at December 31, 2020” tells the accounting period. It
states that the figures included in the balances of assets, liabilities and equity from the start of the
operations up to December 31, 2020only. Transactions after the said date are not included.
However,the SFP doesn’t necessarily end every December 31. It depends on the reporting period
of the company.
Elements of the Statement of Financial Position
SFP is composed of the following elements: Assets, Liabilities and Equity. In other words,
SFP the accounting equation ALE shows the basic elements of the SFP. The accounts in the
balance sheet is called real accounts. Real accounts are accounts where their balances are carried
forward into the next accounting period. Hence, these accounts always have a closing
balance.
Assets – (debit is the normal balance) SFP balances start with Assets. Assets are company
resources that are expected to have future economic benefits. All assets should be owned
and within the control of the company. The asset should be useful to the company in the
future. Control means that the company can prevent others from benefiting from the asset;
control also tells that the company has the right to dispose the assets. Resources are
classified into asset account based on its future use to the company. There are many kinds of
assets and they classified as Current and Noncurrent. Below are the assets that will be discussed
in this context:
Current Assets - are assets that are expected to be converted to cash within one year.
Examples of current assets below are the normal assets in a balance sheet.
Cash - The first line item in the balance sheet is the Cash. Cash means money. A currency in
its physical form. Cash must be owned and controlled by the company. It is categorized
as Cash on hand and Cash in bank. Cash on Hand is cash in the form of bills, coins
or checks inside the Company’s premises. It usually under the vault and kept by the company’s
employee known as cash custodian. Bills and coins are the normal currency used in the
business that are readily available for use. Bank checks, or checks, are bank documents
used by the issuer to instruct the bank to pay the assigned payee from funds in the
issuer's bank account. Checks maybe reported as part of cash because these
documents are accepted as payments and deposits. A check is classified as cash if the date
of the check is on or before the SFP date. A check dated after the SFP date is a post-dated
check and is classified as receivables rather than cash. On the other hand, Cash in bank is
money in the bank which could be in the form of savings or checking account. Cash in Bank
earns interest at its respective bank interest rates. Thus, cash deposited in bank increases
due to the interest earned from the bank. Interest varies for every bank. Cash refers only to
currency readily available to be used for the company's operations. It be used to buy
inventories, machines, furniture, and other assets; pay suppliers, rent, utilities, employee
salaries and other operating expenses. Cash initially comes owners’ contribution. Cash
also comes from collections from the sale of inventories or rendering services, proceeds from
sale of other assets, and proceeds from borrowings. Not all bank deposits are
classified as cash. Some accounts are not readily available for use such as a time deposit
account. A time deposit account is a deposit in the bank that earns higher interest because the
depositor commits not to withdraw the funds over the agreed upon time. Penalties are imposed
if the depositor withdraws before the maturity of the deposit. Given the withdrawal restriction,
time deposits are not classified as cash.Those with a term of up to 90 days are reported as cash
equivalents while those that will mature longer than 90 days are reported as investments.
Cash Equivalents - short-term highly liquid investments that are readily convertible into
cash. Cash equivalents are technically not cash because it is not immediately available for use.
It is almost cash in the sense that it will become cash within the next 90 days. Thus, only highly
liquid investments that are acquired three months before maturity can qualify as cash
equivalents. Time deposits with term maturities of ninety days or less are example of
cash equivalents. It is generally reported on the SFP together with cash. The line account is
cash and cash equivalents. However, the components of cash and cash equivalents (cash on
hand, cash in bank, cash equivalents) are required to be disclosed in the accompanying notes
to financial statements.
Receivables - is a general term that refers to the company's right to collect payment from third
parties, such as customers and employees. Hence, receivables arise from contractual
rights to receive cash or other assets from third parties.
Trade Receivables - are claims from suppliers from unpaid sales or services rendered in
advance to customers. Trade Receivables came from the normal operating activities of
the company. This is usually the largest receivables of an entity. Trade Receivables arise
when a company sold inventories or rendered services to its customers. It is evidenced by
sales invoice or statement of account and other documents such as delivery receipt. Trade
Receivables are subject to terms such as discount rate within the discount period.
Discount is amount to be deducted in a customer payment. Discount period is a period where
the customer could avail a discount. Hence, if a company sold goods to customer on January 1
and the discount period is within 10 days, the customer couldavail a discount up to January 11
only. To fasten the company’s collections, the company could impose a “pay early, pay less”
policy. It means the earlier the payment, the higher the discount. A company may also enforce a
credit limit where its customers could borrow up to a certain amount. As a rule, the collections of
the company’s receivables must be in cash. However, some company’s exchange other
assets or services other than cash to settle its receivables. For example, a company may
accept land to settle the receivables from a client or customer.
Notes Receivable - is a receivable evidenced by a note. It is a piece of paper signed by the
borrower where it promises to pay a certain amount at a certain time. This is called
promissory note (PN). Promissory notes usual bear interest.

Receivables that should be presented must be at its net realizable value. This means
the total amount where the collection is probable and certain. Not all receivables are collectible.
There are some receivables where collection is uncertain due to some reasons such as
customer’s bankruptcy. In some cases, receivables became worthless. Thus, in order to arrive
atreceivables’ net realizable value, an Allowance for Bad Debts account must be set-up. This
account is a deduction from the gross amount of the receivables and known as a contra-asset
account.
Inventories - This balance sheet account represents cost of unsold merchandise.
Inventories are company’s assets that are sold in the normal course of its business. For
example, a trading business that buys and sells cellphones, categorizes cellphones and
cellphone accessories as inventories. A business that manufactures clothing classifies its
clothing as inventories. Service Company usually doesn’t have inventories as they sell services,
not merchandise. However, not all inventories of a company in its premises are owned by the
company. A company (the consignor) may consign its inventories to another company
(consignee). This means that the inventories of the consignor are placed at the consignee’s
premises (usually in the consignee’s store or sales outlet). The consignee did not buy the
consignors inventories. Instead, the former needs to sell the inventories of the latter. In
return, the consignor will pay commission to the consignee based on the sold merchandise.
Inventories are held primarily for sale. Those that are to be used in the day-to-day operations of
the business such as Office supplies are not Inventories. It is classified as an asset called
Supplies or Office supplies.
Prepaid Expenses - Prepaid Expenses are expenses not yet incurred but paid in advance. One
of the best examples of a prepaid expense is the mobile prepaid load. If you pay P100
load for your mobile, such load is prepaid expense. It will be expensed once you have used it
to text or call someone. Another example is the prepaid rent. A lessee generally pays
advance rent to its landlord, usually a two-month advance. Prepaid rent represents rent paid
in advance but not yet consumed. Thus, this expense is an asset until such expense is
consumed.
Noncurrent Assets - Noncurrent Assets are assets that are expected to be used for
more than one year. Typical examples are as follows:
Property, Plant, and Equipment - (Property, Plant and Equipment must be presented at their
respective carrying amounts. Carrying amounts simply means cost less accumulated
depreciation.) A typical example of noncurrent asset is the Property, plant, and
equipment (PPE).The old term is fixed assets. These assets are long-term assets that
are used in the operations of the company.PPE should be owned and controlled by the
company. Leased properties are excluded from PPE. The purchased of PPE is recorded
as assets and will not automatically recorded as expense as these assets will be used
for more than one year. Expenses for these assets will be recorded through
depreciation. This depreciation will accumulate and will be charged to Accumulated
Depreciation account, which is also a contra-asset account. Costs of buying a fixed asset
should be allocated during the lifetime of the asset benefited by their use. This is the theory of
matching costs with the revenue. Examples of PPEare:

Intangible Assets - Intangible assets are also long-term assets like PPE. The only
distinguishing feature of these assets is that they are untouchable or cannot be seen by
the naked eyes. These assets don’t have physical substance. Intangible assets will be used in
the business operations for more than one year. Their costs are allocated similar to PPE. Its
cost allocation is called amortization. Typical examples are: 1. Trademarks –this is a
distinguishing mark such as brand names, logo and symbols. A lot of companies are
using their trademarks such as Jollibee, McDonalds and Coca-Cola.
Liabilities – (credit is the normal balance) - These are obligations of the company. The
company is expected to pay cash or exchange other assets to settle the obligations. Below
are the assets that will be discussed in this context:
Current Liabilities - Liabilities are obligations of the company that are expected to be paid
within one year. As discussed before, assets could also originate from liabilities.
Trade and Other Payables - Trade Payables are payables arise from purchased of
merchandise from suppliers. Thus, trade payables are company obligations due to purchase of
inventories. Trade Payables are similar to trade receivables in the sense that they are
also subject to discounts and credit limit. Trade Payables is actually the opposite of
Trade Receivables. Trade Payables is a requirement to pay the supplier while Trade
receivables is a requirement to pay the customer. On the other hand, a company may also
write a promissory note to the supplier. This is called the Notes Payable. This is the
opposite of the Notes Receivable. Other receivable represents miscellaneous payables
such as advances from officers and employees. Notes Payable could be current or
noncurrent.
Accrued Expenses - The opposite of prepaid expense. This account represents expenses
already incurred but not yet paid. For example, the company’s electricity bill for the month of
January is received in the early weeks of February. We will assume that payment will be
made within February. Utilities expense must be recorded in January because the
company already used the electricity in January though payment will be made the next month.

Unearned Income - This represents income received in advance but not yet earned. In short,
collection are already made but services are not yet rendered. Example is advance rent
received by the landlord from the lessee.
Noncurrent Liabilities - long-term obligations payable for more than one year. Examples
are:

Equity (credit is the normal balance) - Equity is the excessof assets over liabilities.
Hence, equity is the net assets of the business. This represents capital contributed by the
owners. It will increase due to accumulated income and additional investments; It will decrease
because of accumulated loss and owner’swithdrawals. This will be discussed in Unit 3.
Preparation of Statement of Financial Position - SFP is prepared from the Trial balance.
In the Trial balance, Assets are usually at the top, followed by Liabilities, Equity, Revenue
and Expenses. Take note that balance sheet consists of Assets, Liabilities and Equity
only. Revenue and Expenses will be presented in detail in the Statement of Comprehensive
Income. The difference of Revenue over Expenses will be presented in the Statement of
Financial Position under Equity account. Theeasiest way to prepare a balance sheet is to
identify the account if itan asset, liability or equity. Before you prepare the Balance Sheet, ask
yourself a question: “Is this account an Asset? A Liability? Or is it an Equity?