Identify the element of the

Statement of Financial Position

(SFP) and describe each of Them

The Statement of Financial Position (SFP), which is also known as the Balance Sheet, shows the financial position of
a business entity at a given period or a specified date. Its purpose is to help the financial statement users in the
assessment of the financial health and soundness of a business entity in determining its liquidity, financial, credit
and business risks. It has three (3) elements: 1. Assets (resources owned and controlled by the business); 2. Liabilities
(obligations owed to someone by the business); and 3. Equity or Owner’s Equity (residual interest of the owners of
the business or what was left of the assets after paying the liabilities is the right of the owners). The assets, aside
from the capital investment of the owners, maybe financed from outside sources (like loans from banks and other
financial institutions or from other creditors). The total assets should always be equal to the sum of the total liabilities
and total equity. Thus, the Accounting Equation is stated as: Assets = Liabilities + Equity.

The Statement of Financial Position (SFP): its classification, its

preparation and its form.

As mentioned earlier, the Statement of Financial Position (SFP) or the Balance

Sheet shows the financial position of a business entity at a given period or a

specific date. Following the accounting cycle the SFP and other financial

statements (which will be discussed in the succeeding modules) are prepared once

the adjusted trial balance is done to come- up with a fair balance sheet statement.

Assets, Liabilities and Equity are properly grouped and classified to give a

meaningful information. Assets are presented and classified by the order of its

liquidity or those that are readily available for use and can easily be converted into

cash are listed first and assets that cannot be easily converted into cash are listed

last. When it comes to liabilities, maturity matters. Those obligations that are

currently due are listed first. The Balance Sheet includes permanent and contra

asset accounts. An account is said to be permanent because their balances are

carried over from one accounting date to another. The Assets, Liabilities and Equity

accounts are permanent accounts. Contra asset accounts are accounts also

presented in the SFP as a deduction to a particular asset. These are Allowance for

Doubtful Accounts and Accumulated Depreciation.

The Allowance for Doubtful Accounts, a contra- asset for Accounts Receivable, it is an allowance made by the
business for estimated uncollectible accounts.
 An Accumulated Depreciation is an account that represents depreciation of Fixed Assets (except for Land) due to
its usual wear and tear.

Classification of Assets, Liabilities and Equity

1. Assets are divided into current or non- current.

Current Assets- are items that are listed on a business’ statement of financial position that are expected to be used
or realized into cash within one accounting period or a year. It usually includes cash, accounts receivable, inventories
and prepaid expenses.

Cash is considered the most liquid asset because it is readily available for use. It is used as a medium of exchange in
business transactions and may be held on hand or put in banks for safekeeping.

Accounts Receivables are accounts due from customers as a result of sale of goods or for services rendered

that are collectible within one year.

Inventories are regarded as a current asset because these are items held for resale because they are readily available
(either raw materials or finished goods).

Prepaid expenses are considered current assets

because they are expenses paid in advance to be consumed within a year.

Non- Current Assets- are items that are listed on a business’ statement of
financial position that cannot be used or realized into cash within one accounting
period or a year. It includes assets that are long- term in nature like fixed assets,
long-term investments and intangibles.

Fixed assets include Property, Plant and Equipment (Furniture, equipment, land, building, vehicles, etc.)
that are used acquired for use in operations and have an estimated useful life of more than one
year.

Long- term investments are investments made by the owners of the

business for long- term purposes like marketable securities.

Intangible assets are non- physical assets like Patents, Copyright and Franchise.

2. Liabilities are also divided into current or non- current.

Current Liabilities- are liabilities that should be paid and realized within a year
after the year- end date. These include Accounts Payable, Notes Payable, Accrued
Expenses and Unearned Income
. Accounts Payable is amount due to suppliers for
the purchase of goods or services received on account to be paid within a year.
Notes Payable is account due with supporting promissory notes with short-term
mode of payments.
Accrued Expenses are expenses incurred but not yet paid,
examples are Salaries Payable, Taxes Payable, etc.
Unearned Income is cash
collected or given in advance from customers for future delivery of goods or services
to be performed.
Non- Current Liabilities- are liabilities that are to be paid for more than a year
from the year- end date. These include Loans Payable, Mortgage Payable, etc.
Loans Payable is account due from third parties which was agreed to be paid for
longer terms. Mortgage Payable is account due from third parties with associated
collaterals to be paid for longer terms.

2. Equity

Equity or Owner’s Equity is the residual interest of the owners of the business or
what was left of the assets after paying the liabilities is the right of the owners. It
includes the Capital and Drawing accounts. Capital is the investment made by the
owner to start- up a business in the form of cash or other assets. Drawing or
withdrawal is an amount taken by the owner from the business for personal use.

Steps in preparing a simple Statement of Financial Position (SFP):

1. You should start with a heading. The heading includes the name of the business or entity (ex. JD
Gardens), name of the financial statement (ex. Statement of Financial Position) and the reporting date/
period (ex. As of December 31, 2019). We use as of in SFP because the amounts (in Philippine
Peso) of the items are cumulative from the start of the operations of the business up to the accounting
date.

2. Assets are presented first. These are classified into current and non- current
assets.

3. Next is to present the Liabilities. These should also be classified into current
and non- current liabilities.

4. Equity/ Owner’s Equity is then added after the liabilities to complete the
accounting equation (Assets= Liabilities + Equity).
The illustration is an example of a simple statement of financial position of a single/ sole proprietorship.
Other forms of business organizations (partnership and corporation) have different presentation
depending on the nature of its business. The total assets must be always equal to the total liabilities and
owner’s equity. The total assets, as well as, the total liabilities and equity are double ruled showing that
it is the end part of a financial statement.

Forms of Statement of Financial Position (SFP)

The Statement of Financial Position (SFP) has two forms, the Report form and the

Account Form. The format in the preparation of the SFP depends on the preference

but most financial users prefer to use the report form because it is easier to read

especially when comparing multiple years SFP.

Report Form- it is a form of SFP wherein accounts are presented vertically, the

Assets first, followed by the Liabilities and then the Equity. The above presented

Balance Sheet is an example of a Report Form SFP.

Account Form- it is a form of SFP wherein accounts are presented horizontally,

the Assets are presented on the left side while the Liabilities and the Equity are on

the right side of the Balance Sheet. It will look like the debit and credit balances of

an account.

Statement of Comprehensive Income (SCI) of a

Merchandising Business
Every business entity, especially in this time of COVID-19 pandemic must exert
effort in ensuring that their company remain in the market or at least earn a fair
share of revenue and income. With the help of the Statement of Comprehensive
Income (SCI), a company can determine if it is earning income or not. SCI can also
determine if the earnings for the period has increased or decreased.

Engaging in business is a very risky venture. With increasing number of

competition and some business nowadays can easily enter into the market, one
must be certain that his venture is profitable. More so, one must be knowledgeable
on the preparation of Statement of Comprehensive Income to know if his business
is earning or not.
Elements of SCI

1. Net Sales (Sales less Sales returns and Sales discount)

i. Sales – this is the amount of revenue that the company was able to
generate from selling products

ii. Sales returns – this account is debited in order to record returns of

customers or allowances for such returns.(Haddock, Price, & Farina,
2012) Sales returns occur when customers return their products for
reasons such as but not limited to defects or change of preference.

iii. Sales discount - this is where discounts given to customers who pay
early are recorded. (Haddock, Price, & Farina, 2012) Also known as
cash discount. This is different from trade discounts which are given
when customers buy in bulk. Sales discount is awarded to customers
who pay earlier or before the deadline.

Notes:
Sales returns and sales discount are called contra revenue account because
it is on the opposite side of the sales account. The sales account is on the
credit side while the reductions to sales accounts are on the debit side.
This is “contrary” to the normal balance of the sales or revenue accounts.
(Haddock, Price, & Farina, 2012

Cost of Goods Sold – this account represents the actual cost of

merchandise that the company was able to sell during the year. (Haddock,
Price, & Farina, 2012)

i. Beginning inventory – this is the amount of inventory at the

beginning of the accounting period. This is also the amount of ending
inventory from the previous period.

ii. Net Cost of Purchases (Net Purchases + Freight In)

a. Net Purchases = Purchases – (Purchase discount and purchase
returns)

b. Purchases – amount of goods bought during the current

accounting period

c. Purchase discount – account used to record early payments by

the company to the suppliers of merchandise. (Haddock, Price, &
Farina, 2012) This is how buyers see a sales discount given to them
by a supplier.
d. Purchase returns – account used to record merchandise
returned by the company to their suppliers. (Haddock, Price, &
Farina,2012) This is how buyers see a sales return recorded by their
Supplier

e. Freight In – this account is used to record transportation costs

of merchandise purchased by the company. (Haddock, Price, &
Farina, 2012). It is called freight in because this is recorded when
goods are transported into the company.

iii. Cost of Good available for Sale – add Beginning inventory and Net
cost of Purchases

iv. Ending inventory – amount of inventory presented in the Statement

of Financial Position. This is the total cost of inventory unsold at the
end of the accounting cycle.

Notes:
• Purchase returns and purchase discounts are called Contra
Purchases account that is credited being “contrary” to the normal
balance of Purchases account.
• Gross Profit = Sales less Cost of Goods Sold
• Sales (benta); Cost of Goods Sold (puhunan sa benta)
• Net Purchases does not include Freight-in while Net Cost of
Purchases include Freight-in

3. Selling Expenses – these expenses are those that are directly related to the
main purpose of a merchandising business such as the sale and delivery of
merchandise. However, this does not include cost of goods sold and contra
revenue accounts. (Haddock, Price, & Farina, 2012)

4. General and Administrative Expenses – these expenses are not directly

related to the merchandising function of the company but are necessary for
the business to operate effectively. (Haddock, Price, & Farina, 2012

Notes:

• Gross Profit less General and Administrative Expenses less Selling

Expenses is Net Income for a positive result while Net Loss for a

negative result

• Examples of selling expenses include sales commissions, delivery

expenses, advertising expense

• Examples of general and administrative expenses include utilities

and rent for home office, salaries of admin personnel

Preparing Statement of Changes in Equity is a very important aspect of managing
business whether single/sole proprietorship, partnership, and corporation.
“Statement of Changes in Equity”, or Statement of Owner’s Equity for single
proprietorship, Statement of Changes in Partners’ Equity for Partnership business,
and Statement of Shareholders’ Equity for Corporation, is prepared after you have
done preparing your statement of comprehensive income (SCI). The statement of
Changes in Equity is now a required statement, which is needed to be prepared by
every form of business organizations.

What is Equity and Statement of Changes in Equity?

EQUITY - Equity /capital-is the residual interest of the owners in the assets of the

business after considering all liabilities. It is equal to total assets minus total

liabilities.

This account is used to record the original and additional investments of the owner

of the business entity. It is increased by the amount of profit earned during the

year or is decreased by a loss. Cash or other assets that the owner may withdraw

from the business ultimately reduce. This account title bears the name of the

owner.

STATEMENT OF CHANGES IN EQUITY

The statement of Changes in Equity or Statements of Owner’s Equity shows the

changes in the capital account due to contribution, withdrawals, and net income or

net loss.

Capital is increased by owner contribution and income and decreased by

withdrawals and expenses.

All changes, whether increase or decrease to the owner’s interest on the company

during the period. This statement is prepared prior to preparation of the Statement

of Financial Position to be able to obtain the ending balance of the equity to be

used in the SFP. (Haddock, Price, & Farina, 2012).

The statement of changes in equity summarizes the changes that occurred in

owner’s equity. This statement is now required statement. Changes in an

enterprise’s equity between two balance sheet dates reflects the increase or decrease

in its net assets during the accounting period.

In the case of sole proprietorships, increases in owner’s equity arise from additional

investments by the owner and profit during the period. Decreases result from

withdrawals by the owner and from loss for the period. The beginning balance and

additional investments are taken from the owner’s capital account in the general

ledger.

The profit or loss figure comes directly from the income statement while the

withdrawals from the balance columns in the worksheet.

Different parts of the Statement of Changes in Equity

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

2. Increases to Equity
i. Net income for the year
ii. Additional investment

3. Decreases to Equity
i. Net loss for the year
ii. Withdrawals by the owner

Statement of Changes in Owner’s Equity for a Single/Sole Proprietorships

The “Statement of Owner’s Equity or Statement of Changes in Owner’s Equity”
summarizes the items affecting the capital account of a sole/single proprietorship
business.

A sole proprietorship’s capital is affected by four items: owner’s contributions,

owner’s withdrawals, income and expenses.
The following are the steps in preparing a statement of Changes in Owner’s Equity
by using the unadjusted trial balance:

STEP 1: Gather the needed information.

The statement of Changes in Owner’s Equity is prepared second to the Income
Statement. Take note, that the most appropriate source of information in preparing
financial statements would be the adjusted trial balance; however, any report with
a complete list of updated accounts may be used.
STEP 2: Prepare the heading.
Like any financial statement, the heading is made up of three lines. The first line is
the name of the company. The second line shows the title of the report. In this
case, the title is Statement of Changes in Owner’s Equity, Statement of Owner’s
Equity, or simply Statement of Changes in Equity. Any of the three titles would be
all right. The third line shows the period covered. The report covers a span of time;
hence we use “For the Year Ended” For the Quarter Ended, For the Month Ended,
etc. Some annual financial statements omit the “For the Year Ended” phrase.

Example: Mabait Repair Services

Statement of Changes in Equity
For the Year Ended, December 31, 2019

STEP 3. Report Capital at the beginning of the period.

Report the capital balance at the beginning of the period reported – or the amount

at the end of the previous period.

Remember that the ending balance of the last period is the beginning balance of
the current period.
 Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019

Mr. Mabait Capital, January 1, 2019 P135,000

STEP 4. Add additional contributions.

Contributions from the owner increases capital, therefore, it must be added to the
capital balance.

Mabait Repair Services

Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital Beginning P135,000
Add: Additional Investment P30,000

STEP 5. Add net income.

Net Income increases capital, therefore it is added to the beginning capital balance.
Net income is equal to all revenues minus all expenses

Mabait Repair Services

Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital Beginning P135,000
Add: Additional Investment P30,000
Net Income 19,390 49,390
Total P184,390

STEP 6. Deduct owner’s withdrawals.

Withdrawal made by the owner is recorded separately from contributions. It can

easily found in the adjusted trial balance as “Owner, Drawings”, “Owner
withdrawals”, or any other appropriate account. Withdrawals decreases capital,
therefore it must be deducted to the capital balance.
For you to understand more the Statement of Changes in Equity, you must also

know the difference of initial investment and the additional investments and define

withdrawals.

Initial Investment refers to the very first investment of the owner to the company.

Additional Investment increases the owner’s equity by adding investments by the

owner (Haddock, Price, & Farina, 2012).

Withdrawals –Decreases the owner’s equity by withdrawing assets by the owner

(Haddock, Price, & Farina, 2012).

*Distribution of Income – When a company is organized as a corporation, owners

(called shareholders) does not decrease equity by way of withdrawal. Instead, the

corporation distributes the income to the shareholders based on the shares that

they have (percentage of ownership of the company).

Tips: The use of the word “for the” in the SCE are

changes during the period. This means that what happened in

the previous years are not included in the Statemen