II.

THE STATEMENT OF FINANCIAL POSITION

By the end of this topic, the student should be able to:

1. Understand the purpose of the Statement of Financial Position (SFP);

2. Enumerate the basic elements of the Statement of Financial Position;
3. Describe the nature of the accounts reported on the Statement of Financial
Position;
4. Prepare Statement of Financial Position using a Classified Statement of
Financial Position; and
5. Determine the normal balances of the Statement of Financial Position
accounts.

Discussion questions:
1. What is the other name for SFP?
2. Differentiate an “as-of” and “for the period” report.
3. Discuss how the other financial statements are linked to the SFP.

It was previously referred to as Balance Sheet. What is the original of the

name Balance Sheet?
The balance sheet is divided into two parts.
a. The assets are on one side and the claims are on the other side.
b. Claims of the creditors are called liabilities while claims of owners are
referred to as equity. The total of the assets should equal the total of the claims.
Hence, the statement was endearingly referred to as Balance Sheet because it is
a statement where the two parts must balance.

Assets = Liabilities plus Equity

(The Accounting Equation)

TITLE.
At the topmost part of the SFP is the title.
a. The first line of the title shows the name of the company. It allows easy
identification of the reporting entity.
b. The second line identifies the financial statement which is the Statement
of Financial Position.
c. The third line is the date of the SFP. It states “as of the year ended.” It
tells the reader that the balances reported on the SFP is the net effect of all
transactions related to the specific account from the date of establishment of the
company up to the date of the SFP.

Elements of the Statement of Financial Position.

The SFP is a report based on the accounting equation:
Assets = Liabilities + (Owner’s) Equity.
Most students endearingly refer to the accounting equation as ALOE.
 2

ASSETS
Assets are resources with future benefits that are within the control of the
company. Resources are classified into asset accounts based on its future use to
the company. There are many kinds of assets:

1. Cash.
Cash is money owned by the company. Strictly speaking, cash refers only
to funds readily available to be spent for the company’s operations. It is used for
buying assets, paying suppliers, utilities, employee salaries and others. It is also
used for settlement of obligations.
On the other hand, cash are sourced from contribution of owners,
proceeds from borrowings, sale of assets or collections from customers.
a. Cash on Hand. Cash kept in the company’s premises.
b. Cash in Bank refers to money in the bank which can be kept in a savings
or checking account.
c. Cash equivalents. Time deposit account is a deposit in the bank that
earns higher interest because the deposit 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 restrictions, 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 under non-current assets.
The line account is Cash and cash equivalents.

2. Receivables.
Receivables is a general term that refers to the company’s rights to collect
or claim payment. The right to collect comes from unpaid sales or lending
activities. Generally, the company collects cash from its receivables. There are
also receivables that may be settled in other assets or services. For example,
receivable from suppliers may be settled in merchandise.
A sale agreement may require a customer to pay the seller immediately
upon delivery of goods. This is called cash on delivery (COD). In contrast to COD,
a customer may instead promise to pay the seller at some future time after
delivery. This is a credit sales agreement and it gives rise to Accounts
Receivable. Normally referred to as AR, this account means receivable from
customers. It is evidenced by sales invoice and delivery receipts. Accounts
receivable normally has a term of 30 days which means customers should pay 30
days from date of delivery.
Notes receivable is another kind of receivable. It is evidenced by a
promissory note. Promissory note is a legal document that says the borrower
promises to pay, on scheduled payment dates, a specific sum called the principal
and interest based on principal and stated interest rate.
 3

3. Inventory.
The inventory account reports the cost of unsold merchandise. The
inventory account of a trading business contains merchandise held for resale. A
manufacturing company will have more complex inventories composed of raw
materials, unfinished inventories in the middle of the manufacturing process
(may also be called work in process), and unsold finished goods.
The store should not report the consigned goods as inventory even if they
are held in the store premises. Rather, the consigned merchandise will be
reported as inventory by the merchandise owner.
Only merchandise held for sale are reported as inventory. Those items that
are to be used in the day to day activities of the company are supplies and not
inventory.

4. Prepaid Expenses.
Prepaid expenses refer to future expenses that the company had for in
advance. It is placed in this account until the services or items are used and
become expenses.
Prepaid insurance is one kind of prepaid expense. The insured will pay
premium at the beginning of the contract period and the insurer (insurance
company) will reimburse the insured party for losses if the insured event occurs.
The advance payment of the insured is at first a prepaid expense. It is transferred
to expense evenly over the contract period.

5. Property, Plant, and Equipment.

Property, plant, and equipment or PPE for short, are long term assets that
are used in the operations of the company for more than one year. The cost of
purchasing PPE is not immediately reported as expense, rather, it is recognized
as asset. As the asset is used, a portion of the cost is transferred to expense.
The process of recognizing the asset is called capitalization. While
depreciation refers to transferring the cost of asset to expense. The depreciation
will increase the expense account and decrease the asset account. It is a normal
accounting practice not to directly decrease the PPE account. Rather, a contra-
asset account (also called a valuation account) called Accumulated depreciation
is used to catch the depreciation and decrease the asset value to be reported in
the SFP. The cost of the PPE, net of the balance of accumulated depreciation as
of the SFP date is called Net Book Value of the PPE.
Not all PPEs are subject to depreciation. Land is not depreciated because
this asset does not have a useful life. More so, the value of land increases with
the passage of time.
 4

6. Intangible Assets.
Some examples of intangible assets are patent, brand name and trademark.
A patent is a grant conferred by the government to the creator of an
invention.
Brand name refers to word or words used to identify a specific product and
its manufacturer. Famous brands include Jollibee, McDonalds, Apple, Coca-Cola,
Samsung, Sony and Nike.
Trademark is the symbol that represents the brand. Take the case of the
happy red bee that represents Jollibee and the swoosh checkmark of Nike.
Intangible assets are long-term assets similar to PPE. These assets will be
used in the business for more than one year. The allocation of the cost of
intangible assets to the year it was used is called amortization.

LIABILITIES
Liabilities are obligations that the company is required to pay. Payment for
liabilities may be in cash, goods, or services. Entities to whom the company is
indebted are called creditors. There are many different kinds of liabilities:

1. Accounts payable.
Accounts payable normally refers to obligation to the suppliers of
inventories. It is evidenced by the supplier’s sales invoice and delivery receipts.
Most suppliers give credit terms of 30 to 90 days.

2. Notes payable.
Notes payable refers to an obligation evidenced by a promissory note.
Promissory Note (PN) is a document that expresses the borrower’s promise to
pay. The issuer of the promissory note reports this as NP in his accounting
books. On the other hand, the holder of the promissory note has the right to
collect and reports Notes receivable in his accounting book.

3. Accrued expenses.
Accrued expenses refer to the unpaid expenses of the company as of the
cut-off date of the Statement of Financial Position. There are many kinds of
accrued expenses such as Salaries payable, Utilities payable, Rent payable, and
Interest payable.

4. Unearned income.
Customer deposits or down payments are customer payments received
before the delivery of goods or services.
 5

Unearned income is a liability. The settlement of unearned income is not

through direct cash payments to the customer. Rather, it is settled by the delivery
goods or through rendering of services.

5. Long-term liabilities.
Long-term liabilities refer to obligations with due dates that fall more than
one year from the date of the SFP.

EQUITY
Equity is the net assets of the business. It is composed of the owner’s
investment and the accumulated net income of the company, net of any
distributions to the owners. It reflects the portion of the asset that belongs to the
owners of the business. For a sole proprietorship, the SFP will reflect only one
equity account – Owner’s Capital. This one line account reflects all transactions
of the business with its owner in his capacity as the owner. This account will
reflect the balance of the owner’s investments in the business such as cash
contributions. The net income earned by the company is also closed to the
capital account. While a separate Drawings account may be maintained to follow
the withdrawals of the owners during the year, this too is closed to the capital
account at the end of the year.

Discussion questions.
1. What is the other name for SFP?
2. Differentiate an “as-of” and “for the period” report.
3. What are the elements of the SFP?
4. What is an asset?
5. What is a liability? Differentiate liability from equity.
6. Identify the assets described below:
a. Money in the bank or money in the premises of the company.
b. Asset that can be used in the company’s business operation
over many years.
c. Unsold goods that were purchased to be sold to the company’s
customers.
d. The company’s right to claim payments as evidenced by a promissory
note signed by the debtor.
e. Advance payment for expenses such as cellphone loads.
f. A class of PPE that is not subject to depreciation.
7. Identify the name of the liability that matches the description below:
a. Obligations payable after one year.
b. Obligations to pay suppliers of merchandise inventory.
c. Unpaid expenses such as utilities and salaries.
d. Liabilities supported by a legal document that promises to pay a
 6

specific amount to the creditor.

e. Cash deposit received from customers.

Presentation of Statement of Financial Position.

There are two acceptable format of the SFP – the account form and the
report form.

Account Form.
The account form mimics the general ledger T-account format. The assets
are reported on the left and the list of liabilities and equity are on the right.

Assets Liabilities and Equity

Cash xxx Accounts payable xxx
Receivables xxx Notes payable xxx
Inventory xxx Accrued expenses xxx
Prepaid Expenses xxx Unearned income xxx
Property, Plant and Equipment xxx Long-term liabilities xxx
Intangible Assets xxx
Owner’s Capital xxx
Total assets xxx Total liabilities and equity xxx

Report Form.
The report form is a simple list. All the assets are listed first, followed by
liabilities and finally the equity account.

ASSETS
Cash xxx
Receivables xxx
Inventory xxx
Prepaid Expenses xxx
Property, Plant and Equipment xxx
Intangible Assets xxx
Total Assets xxx
LIABILITIES AND EQUITY
Accounts payable xxx
Notes payable xxx
Accrued expenses xxx
Unearned income xxx
Long-term liabilities xxx

Owner’s Capital xxx

Total liabilities and equity xxx

Classified Statement of Financial Position.

 7

A modification of this statement is called the classified Statement of

Financial Position. This means that assets and liabilities are classified as to
current or non-current.
a. On the asset side, assets are classified as current if it can be used or
converted to cash within one year. Examples of current assets are cash, accounts
receivable and inventory. Prepaid expenses may be classified as current if the
advance payment is expected to be used within one year.
b. The classification of notes receivable is dependent on the term of
payments on the promissory note. The payments collectible within one year are
classified as current. Those collectibles after one year are reported as non-
current.
c. Property, plant, and equipment and Intangible assets are classified as
non-current given their long-term nature.
d. Liabilities may also be classified in similar terms. Current liabilities are
payable dues to be paid within one year of the SFP date. Examples of current
liabilities are accounts payable and accrued expenses.
e. Unearned income is current if the delivery of goods or services for the
settlement of the advance payment is to be made within one year.
f. Similar to notes receivable, the classification of notes payable is
dependent on the terms of payment on the promissory note.
g. Long-term liabilities are generally classified as non-current. If the long-
term liability is to be settled in installment, then those scheduled to be paid within
twelve months are classified as current and referred to as current portion of
long-term debt. The remaining installments are reported as non-current.
h. Current liabilities are those obligations that are coming due in the next
twelve months.

Normal Balances.
Asset accounts have debit normal balances.
Liability accounts have credit normal balances
Equity accounts have credit normal balances.

Allowance for doubtful accounts and Accumulated depreciation are contra

asset accounts.

TRUE OR FALSE: Read each sentence carefully and determine whether the
statement is true or false.
1. The SFP provides readers with the information as to the company’s financial
position as of a specified date. _______
2. Assets = Liabilities + Owner’s Equity is the governing equation of the SFP.
___
3. Asset is an element of the SFP that has a normal balance of credit. ______
4. Debit means to increase an account. _____
 8

5. T-account is a representation of the general ledger account used in teaching

accounting. _____
6. An entry on the opposite side of the normal balance of an account means to
decrease the account by the amount entered. ______
7. The normal balance of liabilities and equity is credit. _____
8. The normal balance of notes receivable is debit. _____
9. Credit means to decrease an account. _____
10. The normal balance of unearned income is debit. _____

Statement of Financial Position.

Case Analysis.

The following transactions of “Sure Repair Shop occurred in the month of

October, 2019.
Oct. 2 Mr. Topher Morales began the business by investing P750,000 cash.
2 Paid rent for two months, P20,000.
2 Purchased repair supplies P4,500 on cash.
4 Bought table and chairs from Kahoy Furniture on credit, P40,000.
5 Purchased repair tools from Tibay Co. on credit, P85,000.
7 Completed repair works for John Mayor and received P7,300 cash.
12 Paid P450 for newspaper ads, announcing the opening of his shop.
13 Billed N. Bermejo P5,000 for the repair works rendered.
15 Paid Gigi Relos for the repairs of repair tools, P2,500.
17 Purchased additional repair tools from Layoc Trading, P22,500 on
credit.
19 Paid Kahoy Furniture P15,000 cash, and issued promissory
note for the balance.
21 Received P30,000 from various customers for repairs
rendered.
23. Received P4,000 from N. Bermejo
24. Rendered repair works to P. Esguerra on credit, P9,000.
25. Paid Kahoy Furniture in full.
29. Received P15,000 from ABC Co. for repair works rendered.
30. Paid half of what is due to Layoc Trading.
30. Mr. Topher Morales withdrew P15,000 for personal use.
30. Paid P5,000 for salaries.
30. Paid the monthly utility bills, P7,500.

CHART OF ACCOUNTS
ASSETS PROPRIETORSHIP
CASH TOPHER MORALES, CAPITAL
ACCOUNTS RECEIVABLE – N. BERMEJO TOPHER MORALES, DRAWINGS
ACCOUNTS RECEIVABLE – P. ESGUERRA
 9

PREPAID RENT
REPAIR SUPPLIES
OFFICE FURNITURE AND FIXTURES
REPAIR TOOLS
LIABILITIES INCOME
ACCOUNTS PAYABLE – TIBAY CO. SERVICE INCOME
ACCOUNTS PAYABLE – LAYOC TRADING EXPENSE
ACCOUNTS PAYABLE – KAHOY FURNITURE ADVERTISING EXPENSE
NOTES PAYABLE REPAIRS AND MAINTENANCE
SALARY EXPENSE
UTILITY EXPENSE

Required:
1. Posting 3. Statement of Comprehensive Income
2. Trial balance 4. Statement of Financial Position