Financial Statements

Statement of Financial Position

(Balance Sheet)
Most Essential Learning competencies

 identify the elements of the SFP

and describe each of them
(ABM_FABM12- Ia-b-1 )
 prepare an SFP using the report
form and the account form with
proper classification of items as
current and noncurrent
(ABM_FABM12- Ia-b-4 )
Learning Objectives

At the end of the topic, the learner should be able

to
Identify the elements of the SFP and describe
each of these items for a single/sole
proprietorship business
Prepare an SFP for a single/sole
proprietorship business using the report form
Prepare an SFP for a single/sole
proprietorship business using the account
form
Basic Purpose of the Financial Statements

The basic purpose of accounting is to provide

information that is useful in making economic
decisions.

Accounting information is most commonly

communicated to users through the financial
statements.

FINANCIAL STATEMENTS are the structured

representation of an entity’s financial position and
results of operations. Financial statements are the
 Users of Accounting Information

External Accounting Internal

Users Information Users
• Creditors
• Investors • Owners
• Government and Tax
Authorities
• Managers
• Regulatory Agencies • Employees and
• Customers and Consumers Trade Unions
• Competitors
• Lawmakers and Economic
Planners
 1 – Analyze business
transactions

9 – Prepare post 2 – Journalize the

closing trial balance transactions

8 – Journalize and post 3 – Post to ledger

closing entries accounts

7 – Prepare financial 4 – Prepare a trial

statements balance

6 – Prepare an 5 – Journalize and post

adjusted trial balance adjusting entries
The financial statements provide information
on:

1. How much resources are controlled by an

entity and how these resources were
generated – (financial position).

2. How well the entity performed during a

certain period – (results of operations).
Complete Set of Financial Statements
TYPE OF FINANCIAL DESCRIPTION
STATEMENT
Statement of - Also called the Balance Sheet or Statement of
Financial Position Position
- A balance sheet reports the assets, liabilities, and
owner’s equity at a specific date

Statement of Profit - Also called the Income Statement or Statement

and Loss of Comprehensive Income
- Provides information on income and expenses

Statement of - The owner’s equity statement reports the

Changes in Equity changes in owner’s equity for a specific period
of time.
 Complete Set of Financial Statements

TYPE OF DESCRIPTION
FINANCIAL
STATEMENT
Statement of Cash - Provides information on how cash and cash
Flows equivalents were generated and used
during the period
Notes / Notes to - Provides narrative disclosures and other
Financial information required by the standards but
Statements were not presented in the other financial
statements
Information on financial position is primarily provided by
the statement of financial position.

Information on results of operation is provided by the

other components of a complete set of financial
statements as follows:
1. Information on financial performance is provided by
the statement of comprehensive income.
2. Information on changes in financial position is
provided by the statement of changes in equity and
statement of cash flows.

The notes are used in conjunction with the other

financial statements.
Elements of Financial Statements

1. Assets
2. Liabilities
3. Equity (Capital, Net Assets or Net
Worth)
4. Income
5. Expenses
Assets, Liabilities and Equity are the elements directly
related to the measurement of financial position in the
Statement of Financial Position.

Income and Expenses are the elements directly related

to the measurement of financial performance in the
Statement of Comprehensive Income.

Other financial statements usually reflect income and

expenses and changes in the balance sheet elements.
Accordingly, there are no elements that are unique to
these statements.
 Elements of Statement of Financial Position

Financial position simply refers to the

condition of an entity’s assets, liabilities and
equity and their interrelationships.

The Statement of Financial Position (Balance

Sheet) provides information on an entity’s
financial position.
Elements of Statement of Financial Position

Assets – are the resources

that the company controls
that have resulted from past
events and can provide you
with future benefits.
Essential Elements in the definition of
Assets

Control
Past Events
Future Economic Benefits
Economic benefits – means the potential of the
business to provide you, directly or indirectly,
with cash.

The resource can be:

- Sold or exchanged for other assets
- Used singly or in combination with other
assets to produce goods for sale
- Used to settle liability
- Distributed to owners
Liabilities – are your present
obligation that have resulted
in past events and can require
you give up resources when
settling them.
Essential Element the definition of
Liabilities

Present Obligation – means that, right

now, you have a responsibility to pay
someone because of an obligating event
that has already transpired.
An obligating event is an event that creates either (a) a
legal obligation (b) a constructive obligation.

Legal obligation arises from:

a. contract;
b. a law; or
c. operation of law

Constructive obligation arises from the past business

practices or published policies that have created a valid
expectation on the part of others that you will pay for
them.
Equity – is simply assets
minus liabilities. Other terms
for equity are “capital,” “net
asset,” and “net worth.”
Presentation of Statement of Financial Position (Balance Sheet)
A statement of financial position is presented either as:

Classified (current/non-current distinction) – a classified balance

sheet shows information on current and noncurrent assets and
liabilities

Unclassified (based on liquidity) – an unclassified balance sheet

does not show distinction between current and noncurrent
assets and liabilities.

Common presentation of the SFP is classified. Entities that

usually uses the unclassified balance sheet are banks and
financial institutions.
 Current and Noncurrent Assets

Current Assets Noncurrent Assets

Cash Land
Accounts Receivable (including Building (including
Allowance for Doubtful Accumulated Depreciation)
Accounts) Equipment (Including
Inventory Accumulated Depreciation)
Prepaid Assets

Assets that are classified as current when they are expected to

be realized within 12 months from the end of reporting period.
All other assets are classified as noncurrent. Realized means
converted into cash or claim for cash.
Current and Noncurrent Liabilities

Current Liabilities Noncurrent Liabilities

Accounts Payable Long-term notes payable (non
Salaries Payable trade payable that matures
Utilities Payable beyond 1 year from the end
Unearned Income of reporting period)

Assets that are classified as current when they are expected to

be realized within 12 months from the end of reporting period.
All other assets are classified as noncurrent. Realized means
converted into cash or claim for cash.
A statement of financial position is presented either as:

Classified (current/non-current distinction) – a classified balance

sheet shows information on current and noncurrent assets and
liabilities

Unclassified (based on liquidity) – an unclassified balance sheet

does not show distinction between current and noncurrent assets
and liabilities.

Common presentation of the SFP is classified. Entities that

usually uses the unclassified balance sheet are banks and
financial institutions.
Trade and Non Trade Receivables and
Payables

Some receivables and payables are

presented as current even if they are
collectible or payable beyond 12
months. These are called trade
receivables and trade payables.
Trade and Non Trade Receivables

Trade receivables are receivables arising

from the sale of goods or services in the
ordinary course of business. These include
trade accounts receivable and trade notes
receivable. Receivables arising from other
sources are classified as nontrade receivable.
In a classified statement of financial
position:
a. Trade receivables are presented as
current assets if they are collectible
within the normal operating cycle, even
if the normal operating cycle is longer
than 12 months.
b. Nontrade receivables are presented as
current assets only if they are collectible
within 12 months from the end of the
reporting period.
The normal operating cycle of an entity is
the time between the acquisition of assets
for processing and their realization in cash.

When the entity’s normal operating cycle is

not clearly identifiable, it is assumed to be 12
months.
Trade and Non Trade Liabilities

Trade payables are obligations arising from

purchases of inventory that are sold in the
ordinary course of business. Payables
arising from other sources are classified as
non trade receivables.
In a classified statement of financial position:
a. Trade payables are presented as current
liabilities if they are payable within the
normal operating cycle, even if the
normal operating cycle is more than 12
months.
b. Nontrade payables are presented as
current liabilities only if they are
payable within 12 months from the end
of reporting period.
 Assets

Kinds of Assets
CASH
RECEIVABLES
INVENTORY
PREPAID EXPENSES
PROPERTY, PLANT AND EQUIPMENT
INTANGIBLE ASSET
Cash and Cash Equivalents

Cash ₱ XX
Cash Equivalents XX
Cash and cash equivalents ₱ XX
Cash is money owned by the company. Cash kept in the
company’s premises is called cash on hand. Cash in bank
refers to money in bank which can be kept in savings or
checking account.

- 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.
- Cash is sourced from contribution of owners, proceeds
from borrowings, sale of assets or collections from
customers
Cash on hand includes bills, coins and bank checks kept in the
premises of the company.

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 a
receivable rather than cash.
Not all bank deposits are considered as cash.
Some accounts are not readily available for use
such as a time deposit account.
Time deposit account is a deposit in the bank the
earns a higher interest because the depositor
commits not to withdraw the funds over the
agreed upon time. Given the withdrawal
restrictions, time deposits are not classified as
cash. Those with a term up to 90 days are
reported as cash equivalents while those that will
mature longer than 90 days are reported as
investments.
ABM store is managed by Albert Rein. Albert asked you to determine the
balance of his cash account as of December 31, 20X1. You determine the
following:

1. He kept some cash in the store as change fund (sukli). The cash count
revealed 3 pieces of 100 peso bills, 5 pieces of 50 peso bills, 5 pieces of 20
peso bills, 5 pieces of 10 peso coins, 10 pieces of 5 peso coins, 10 pieces of 1
peso coins and 25 pieces of 25 centavo coins.
2. Two of his regular customers gave Albert the following checks in payment of
debts
- P1,540 check dated December 29, 20X1
- P2,432 check dated January 3, 20X2
3. There are two bank accounts in the name of the store with the following
balances:
a. Balance of the savings account on December 31, 20X1 according to
the passbook is P26,780
b. A time deposit certificate for P100,000 for 90days
Receivables is a general term that refers to the company’s right to collect or
claim payment.

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. Accounts receivables normally has a term of 30 days which means a
customer should pay 30 days from date of delivery. Some sellers give terms
of 30, 60 or 90 days.

Notes receivable is another kind of receivable. It is evidenced by promissory

notes (PN). PN 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.
Albert Rein asked you to compute how much Aries Jay
owed the store. Albert sells to Aries on credit. Aries pays
every 15th and 30th of the month.
Inventories consist of raw material, work-in-
process and finished goods which are held by
a business in ordinary course of business,
either for sale or for the purpose of using
them in the process of producing goods and
services.
 Types of Inventory

Raw Material. Raw material is a type of inventory which acts as the basic
constituent of a product. For example cotton is raw material for cloth
production and plastic is raw material for production of toys. Raw material is
usually held by manufacturing companies because they have to manufacture
goods from raw material.

Work-In-Process. Work in process is a type of inventory that is in the process

of production. This means that work-in-process inventory is in the middle of
production stage and it is partly complete. Work-in-process account is used by
manufacturing companies.

Finished Goods. Finished goods is a type of inventory which comes into

existence after the production process in complete. Finished goods is ready for
sale inventory.

(http://accountingexplained.com/financial/inventories/)
Consignment is an important issue in inventory
accounting. The owner places his goods “on
consignment” in the premises of the store owner. The
store is not obligated to purchase the goods. The owner
may also withdraw his unsold goods from the store at any
time. The store owner on the other hand, will remit to
the merchandise owner’s income from his transaction
maybe in the form of commission form the sale and/or
rent from the store space used to display the consigned
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.
Recording Inventories

In periodic inventory system, merchandise

inventory and cost of goods sold are not updated
continuously. Instead purchases are recorded in
Purchases account and each sale transaction is
recorded via a single journal entry. Thus cost of
goods sold account does not exist during the
accounting period. It is determined at the end of
accounting period via a closing entry.
(http://accountingexplained.com/financial/inventories/perpetual-vs-periodic-system)
Recording Inventories

In perpetual inventory system, merchandise inventory

and cost of goods sold are updated continuously on each
sale and purchase transaction. Some other transactions
may also require an update to inventory account for
example, sale/purchase return, purchase discounts etc.
Purchases are directly debited to inventory account
whereas for each sale two journal entries are made: one
to record sale value of inventory and other to record cost
of goods sold. Purchases account is not used in perpetual
inventory system.
(http://accountingexplained.com/financial/inventories/perpetual-vs-periodic-system)
 INVENTORY
Difference between perpetual and periodic inventory
system

• Sale Transaction is recorded via two journal entries in

perpetual system. One of them records the sale value
of inventory whereas the other records cost of goods
sold. In periodic inventory system, only one entry is
made.
• Closing Entries are only required in periodic inventory
system to update inventory and cost of goods sold.
Perpetual inventory system does not require closing
entries for inventory account.
Assets
Assets
INVENTORY
 INVENTORY
Before Juana dela Cruz opened the store on January 1, 20X2, she asked you to
help her count the merchandise inside the store. The result of the count are as
follows:

Note:
1. The chocolate bars were on consignment from Tsokolate-Eh.
2. Of the 5 notebooks inside the store, one is used for listing customer
credit.
Please provide the balance/total of the merchandise inventory of the store.
 Assets
INVENTORY

Note:
1. The chocolate bars are not owned by the store. It was on consignment.
2. Only 4 notebooks are for sale. One was used as office supplies in the
store.
 Prepaid Expenses

Prepaid expense (also called prepayment) is an

asset which arises when a business pays an
expense in advance.

In accordance with the matching principle, the

advance payment is not recorded as an expense at
the time of payment because it relates to future
expenses. It is recorded as an asset initially and
written-off as expense through an adjusting entry
when the expense is actually incurred.
 Prepaid Expenses

Prepaid expenses are reported on a balance

sheet as a current asset when they relate to
expenses that are expected to be incurred
within the next 12 months and non-current
asset otherwise.

Common prepaid expenses include prepaid

rent, prepaid utilities expense, prepaid
lease rentals, etc.
Prepaid Expenses
 Property, Plant and Equipment (PPE)

• Property, Plant and Equipment or PPE, are long-

term assets that are used in the operations of
the company.
• PPE is classified as long-term asset (or non-
current asset) because these assets will be used
in the business for more than one year.
• Only those assets owned and controlled by the
company will be reported as PPE. Rented
facilities and equipment are excluded from PPE
 Property, Plant and Equipment (PPE)

The cost of the PPE is not

immediately reported as expense,
rather, it is reported as asset. As
the asset is used, a portion of the
cost is transferred to expense.
 Property, Plant and Equipment (PPE)

Cost

Fixed assets are recognized by a company when

it gains control over economic benefits
generated from the assets. All fixed assets are
recognized at their historical cost which is the
reliable estimate of all costs that are necessary
to bring it to its intended use. The capitalized
cost of a fixed asset has different components
depending on the class of asset:
 Property, Plant and Equipment (PPE)
Cost of land includes: purchase price, transaction fees i.e.
all legal fees, commissions, registration fees, etc.
related to the purchase of land, cost of demolishing old
buildings, etc.
Cost of buildings includes: architect’s fee, building permit
fee, construction contract price, excavation cost, etc.
Cost leasehold improvement include: refurbishing, interior
improvements, modifications, etc.
Cost of plant: purchase price, labor cost, inspection cost,
test run cost (less any profit on test run), etc.
 Property, Plant and Equipment (PPE)
Useful life
Each fixed asset has a certain useful life, i.e. number of years for
which the fixed asset is expected to generate economic benefits
through continued use.

Salvage value

Salvage value (also called scrap value or residual value) is the

expected value a fixed asset will have at the end of its useful life.

Fixed assets lose value as they get older due to wear and tear,
obsolescence, etc. However, their value normally does not drop to
zero even at the end of their useful life, because they normally have
some secondary use or because the material used in the asset could
be recycled into another fixed asset.
 Property, Plant and Equipment (PPE)

Depreciable amount

Since a fixed asset’s value will never drop below

its salvage value, the amount that is charged to
the income statement over the useful life of the
asset is lower than its cost, this amount is called
depreciable amount.

Depreciable amount = cost – salvage value

 Property, Plant and Equipment (PPE)

Depreciation expense

Since a fixed asset is expected to generate economic

benefits over more than one period, the depreciable
amount of the asset is written off over the useful life of
the asset through a process called depreciation.
Depreciation expense is the amount subtracted from
revenue in an accounting period on account of wear and
tear, obsolescence, etc. of the asset.

Depreciation expenses = depreciable amount/useful life

 Property, Plant and Equipment (PPE)

Accumulated depreciation

Accumulated depreciation is a contra-asset account which

accumulates total depreciation expense charged on a fixed asset over
its useful life. It is subtracted from the cost of the asset to arrive at
carrying value of the asset on the balance sheet.

Carrying value

Carrying value is the amount at which a fixed asset is presented on a

balance sheet.

Carrying value = cost - accumulated depreciation - accumulated

impairment losses
 Property, Plant and Equipment (PPE)
Tommy bought an equipment for the factory on June 1,
20X1 on credit. The amount of the equipment was Php
1,500,000. The equipment can be used for 5 years.

Please determine the following:

1. Initial journal entry.

2. Cost of Equipment
3. Annual Depreciation
4. Accumulated depreciation as of December 31, 20X1
5. Net book value of equipment as of December 31,
20X1
 Assets
Property, Plant and Equipment (PPE)
 Assets
Property, Plant and Equipment (PPE)
 Intangible Asset

• Intangible assets are long term assets similar

to PPE
• These assets will be used by the business for
more than one year
• The allocation of the cost of intangible assets
to the year it was used is called amortization
• Amortization is computed similar to
depreciation such that the cost of the asset is
amortized evenly over its useful life.
 The Accounting Equation

Liabilities
Assets
Owner’s Equity
 LIABILITIES

Kinds of Liabilities
PAYABLES
ACCRUED EXPENSES
UNEARNED INCOME
LONG-TERM LIABILITIES
 Payables

The opposite of right to collect is the obligation to

pay. Receivables are the right to collect payments
from debtors while payables are obligations to
make payments to creditors.

General types of payables:

1. Accounts Payable (AP)

2. Notes Payable (NP)
 Payables

Accounts Payable (AP)

- Normally refers to obligations to suppliers

of inventories
- Evidenced by the supplier’s invoices and
delivery receipts

Most suppliers give credit terms of 30 to 90 days.

Suppliers may also give discount for early
payments like 2/10 n/30.
 Payables

Notes Payable (NP)

- Normally refers to obligations evidenced by

promissory note (PN)
- The issuer of the PN reports this as Notes
Payable in his accounting books. The
holder of the PN, on the other hand, has to
right to collect and reports Notes
Receivable in his books
Accrual Concept

In accounting, business transactions must be

recorded at once when income is earned or
expenses are incurred even though no actual
money is received or paid yet.

- Revenue Recognition Principle

- Expense Recognition Principle
- Matching Principle
Conservatism Concept

Accountants apply the conservatism

concept when they choose the worst case
scenario for the company when it is faced
with significant uncertainties about an
accounting problem. This leans to the
direction of caution so that the users of
financial information will not have false
expectations.
 Accrued Expenses

Accrued Expenses refers to the unpaid

expenses of the company as of cut-off date
of the SFP.

Kinds of Accrued Expenses:

• Salaries Payable
• Utilities Payable
• Rent Payable
• Interest Payable
Accrued Expenses
 Unearned Income

Customer deposits or down payments are customer

payments received before the delivery of goods or service.
They will not count as sales until deliveries are made.
These payments are initially recorded as Unearned Income
- a liability payable in goods or services
Unearned income is a liability. However, unlike regular
liability, the settlement of Unearned Income is not through
direct cash payment to the customer. Rather, it is
settlement by the delivery of goods or rendering of
services. The settlement of this liability is dependent on
the contractual agreement between the seller and the
buyer.
Unearned Income
 Long-term Liabilities

Long-term liabilities (also called non-

current liabilities) are financial
obligations of a company that are due
after a year or more. Long-term
liabilities are presented on a balance
sheet of a company together with
current liabilities which represent
payments due within one year.
 Long-term Liabilities

Classification of liabilities into current and non-

current is important because it helps users of the
financial statements in assessing the financial
strength of a business in both short-term and
long-term. While information about current
liabilities of a company (together with its current
assets) provide vital information about liquidity of
a company, long-term liabilities (together with
non-current assets) are critical for assessment of
its long-term solvency.
 Long-term Liabilities

In order to construct the store, Juana borrowed P50,000 from

Universal Bank and P25,000 from United Bank. Terms of loans are
as follows:

Universal Bank: The bank requires Juana to pay interest of 7%

payable monthly. The principal is payable on October 1, 20X3.

United Bank: The bank requires Juana to pay five monthly

installments of P5,000 plus interest on the unpaid balance. The
loan was taken on November 1, 20X1 and first installment is due on
November 30, 20X1.

Which of the two loans should be reported as Long-Term Liability

on the Store’s calendar year 20X1 SFP
 Long-term Liabilities

1. While interest is payable monthly, the principal on

the Universal Bank loan is payable on October 1,
20X3. The due date is one year and 10 months from
the date of the SFP December 31, 20X1. This loan is
classified as long term liability because the due date
is beyond one year of SFP date.

2. Given the monthly principal payments, the United

Bank loan will be fully paid by the end of March 20X2.
This is only three months from the SFP date of
December 31, 20X1. Hence, the United Bank loan is a
current liability.
 The Accounting Equation

Liabilities
Assets
Owner’s Equity
 Equity

Equity is the net assets of the

business. It is composed of the
owner’s investments and the
accumulated net income of the
company, net of any distributions to
the owners. It reflects the portion of
the assets that belongs to the
owners of the business.
 Equity

An organization is defined as
having two or more individuals
working together toward the
attainment of a goal or goals.
 Equity

Sole proprietorship – only one individual owns

the business

Partnership – is an association of two or more

persons to carry on as co-owners of a business
for profit

Corporation – is a separate body consisting of at

least five or more individuals and treated by law
as a unit
Equity