FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 2

Chapter 1: Statement of Financial Position

Tickle Your Thoughts
You have learned in your previous accounting subject the stages where business
transactions are analyzed, systematically recorded to different kind of books and ledg-
ers, and prepare a trial balance for them. But as you might probably notice, the defini-
tion of accounting includes the process of summarizing, reporting and interpreting the
information recorded. In this semester, you will take a detailed learning of the prepara-
tion of these accounting reports, properly called as the financial statements, starting
with the statement of financial position, which is the topic of this module.

Setting Goals
As you complete understanding this lesson, you are expected to acquire the
following competencies:
 Identify the elements of the Statement of Financial Position (SFP) and de-
scribe each of them
 Classify the elements of the SFP into current and noncurrent items.
 Prepare the SFP of a single proprietorship
 Prepare the SFP using the report form and the account form with a proper
classification of items as current and noncurrent.

EXPLORE

Activity 1: Balancing Figures

It is an established rule in accounting that total assets are always equal to
the amount of combined total liabilities and equity. As a review on what you
have learned in your ABM1, classify the listed accounts by grouping all asset ac-
counts on the left side of the scale and liability and equity accounts on the right.

LIABILITIES
ASSETS

EQUITY

TOTAL WEIGHT: ______ TOTAL WEIGHT: ______

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 3

Note that each account is assigned with a specific weight. You’ll know if your
answer is correct if the weight of the assets balanced those of liabilities and equity.

Prepaid Unearned Owner’s

Expense- Equipment Equity- Cash-
Income-
2kg - 7.6kg 10kg 5.3kg
3.7kg

Accounts Accrued Accounts

Payable- Receivable- Inventory
Expense
5.8kg 4.1kg - 3kg
- 2.5kg

FIRM UP

Knowing the Statement of Financial Position

Statement of Financial Position (SFP), also known as the Balance Sheet,

presents the financial position of an entity at a given date. It is comprised of
three main components: assets, liabilities, and equity.

I C K R E V IEW!
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out vital
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at a busin
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Liab are
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existing debts rsh ip claim on total as
e o w n e
Equity represents th ng liabilities from assets.
educti
derived from d

The elements of the statement of financial position— assets, liabilities and

equity are called permanent accounts. Accounts are permanent when their bal-
ances are carried over from one accounting period to another. Unlike expenses
and revenues, which are both temporary accounts, their balances are only need-
ed to determine a business’s income in one period, and is irrelevant in the suc-
ceeding periods.

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 4

Other Elements of SFP

Assets, liabilities and equity are the basic elements of SFP. But there are
some items seen in the asset section that reduce specific accounts, namely ac-
counts receivables and property, plant and equipment. These accounts are called
contra assets. They are credit in nature, since they are reductions to asset ac-
counts. Here are two examples of the most common contra asset accounts:
 Allowance for Bad Debts– is a contra asset which is deducted to ac-
counts receivables. It records the amount of receivables expected to be
uncollectible
 Accumulated Depreciation– is a deduction to property, plant and
equipment account. It measures the cumulative depreciation or usage
of an asset up to a certain point of it’s life.

Current and Non-current Assets and Liabilities

Items in the assets and liabilities section of an SFP can be classified into
two categories: current and non-current. An asset is current if it can be reasona-
bly expected to be converted into cash within an accounting period. An ac-
counting period usually lasts for a year. Thus, non-current assets are company’s
long term investments which aren’t normally converted into cash within the ac-
counting year.
Likewise, current liabilities are obligations expected to be settled within an
accounting period (or a year), while non-current liabilities are those with longer
payment terms than a year.

Activity 2: Within the Right Time

Refer to the video tutorial as the classification of accounts to current or
non current is discussed. Write a brief explanation on why the following account
is current or non-current.

Current or Non-
Account Describe how
current?

Cash
Accounts Receivable
Inventory
Prepaid Expenses
PPE
Accounts Payable
Mortgage Payable
Loans Payable

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 5

Preparation of the Statement of Financial Position

After learning the definition and the elements of SFP, it is now time to pre-
pare one. For the discussion, a sample problem will be presented below, which
will be explained and solved in the video tutorial. The solution is not wholly pre-
sented in this module as it is meant for you take down notes on the spaces pro-
vided.

Sample Problem 1
The following is the statement of financial position provided by ABM Com-
pany for the year 2019:

ABM Company
Statement of Financial Position
December 31, 2019

Assets
Current Assets

Cash 200,000.00
Accounts Receivable 110,000.00
Less: Allowance for Bad Debts (20,000.00) 90,000.00
Inventory 60,000.00
Prepaid Expense 20,000.00
Total Current Assets 370,000.00

Non-current Assets
Property, Plant and Equipment 500,000.00
Less: Accumulated Depreciation (150,000.00) 350,000.00
Total Non-current Assets 350,000.00

Total Assets 720,000.00

Liabilities & Equity

Current Liabilities
Accounts Payable 100,000.00
Total Current Liabilities 100,000.00

Non-current Liabilities
Loans Payable 150,000.00
Total Non-current Liabilities 150,000.00

Owner's Equity
ABM, Capital 470,000.00

Total Liabilities and Equity 720,000.00

Transactions during 2020 that affects the balance sheet included the following:
1. ABM Company paid 50,000 of debts to its suppliers.
2. Received 70,000 from as customer’s payment for their debts.

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 6

3. Purchased inventories amounting to Php 30,000.00 on account.

4. Php 45,000.00 of the inventories are sold during the year.
5. Php 20,000.00 of the loans payables were paid.
Assume that all other accounts not affected by these transactions are all the same.
Instructions: Prepare the journal entries of these transactions, as well as their T-
accounts to know the updated balances of each affected accounts. Make an updated
statement of financial position for the year 2020.
SOLUTION (Make sure to take note while your teacher solves the problem)
1. Recording of transactions
Transaction 1 Transaction 2
Account Debit Credit Account Debit Credit

Transaction 3 Transaction 4
Account Debit Credit Account Debit Credit

Transaction 5
Account Debit Credit

2. Updating T– Accounts
Cash Accounts Receivable Allow. For Bad Debts
Debits Credits Debits Credits Debits Credits

200,000.00 110,000.00 20,000.00

Balance: Balance: Balance:

Inventory Prepaid Expenses PPE

Debits Credits Debits Credits Debits Credits

60,000.00 20,000.00 500,000.00

Balance: Balance: Balance:

Accumulated Depreciation Accounts Payable Loans Payable

Debits Credits Debits Credits Debits Credits

150,000.00 100,000.00 150,000.00

Balance: Balance: Balance:

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 7

3. Preparing the statement of financial position.

ABM Company
Statement of Financial Position
December 31, 2020

Assets
Current Assets

Cash
Accounts Receivable
Less: Allowance for Bad Debts
Inventory
Prepaid Expense
Total Current Assets

Non-current Assets
Property, Plant and Equipment
Less: Accumulated Depreciation
Total Non-current Assets

Total Assets

Liabilities & Equity

Current Liabilities
Accounts Payable
Total Current Liabilities

Non-current Liabilities
Loans Payable
Total Non-current Liabilities

Owner's Equity
ABM, Capital

Total Liabilities and Equity

Two Forms of The Statement of Financial Position

Account Form
Charlotte’s Designer and Tailoring shop
Statement of Financial Position
As of December 31, 2019
Assets Liabilities and Owner’s Equity

Current Assets Current Liabilities

Cash ₱168,500 Accounts Payable ₱ 20,000
Accounts Receivable 23,000 Noncurrent Liabilities
Sewing Supplies 21,250 Notes Payable (due in 2017) 80,000
Total Current Assets ₱212,750 Total Liabilities ₱100,000
Noncurrent Assets Owner’s Equity
Property, plant and Charlotte De Jesus,
Equipment (Note 1) ₱249,500 Capital ₱362, 250
Total Liabilities and
Total Assets ₱462, 250 Owner’s Equity ₱462, 250

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 8

In the account form of Statement of Financial Position, the assets are listed on
the left side of the report and the liabilities and proprietorship on the right side.

Report Form

Charlotte’s Designer and Tailoring shop

Statement of Financial Position
As of December 31, 2019
Assets

Current Assets
Cash ₱168,500
Accounts Receivable 23,000

Sewing Supplies 21,250

Total Current Assets ₱212,750
Noncurrent Assets
Property, plant and
Equipment (Note 1) ₱249,500
Total Assets ₱462, 250

Liabilities and Owner’s Equity

Current Liabilities
Accounts Payable ₱ 20,000
Noncurrent Liabilities
Notes Payable (due in 2017) 80,000
Total Liabilities ₱100,000
Owner’s Equity
Charlotte De Jesus, Capital ₱362, 250
Total Liabilities and
Owner’s Equity ₱462, 250

The report form of the SFP that shows asset accounts first and then liabili-
ties and owner’s equity accounts after. This is the usual form used in preparing
financial statements.

DEEPEN

Activity 3: Statement of Your Learning

Answer the following questions.
1. What information will the SFP provide in decision making? ________________
__________________________________________________________________
__________________________________________________________________
2. In your own words, explain how assets, liabilities and equity are permanent ac-
counts. ____________________________________________________________
__________________________________________________________________
__________________________________________________________________

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 9

3. Why do you think the current and non current elements of SFP needs to be re-
ported separately? __________________________________________________
__________________________________________________________________
__________________________________________________________________

TRANSFER

Activity 4: Do It Yourself !
How much have you learned in this lesson? Let’s find out by preparing
your own statement of financial position!

PROBLEM 1: Below shows the statement of financial position of McDolibee

Company for the year 2019:

McDolibee Company
Statement of Financial Position
December 31, 2019

Assets
Current Assets

Cash 1,200,000.00
Accounts Receivable 500,000.00
Less: Allowance for Bad Debts (120,000.00) 380,000.00
Inventory 500,000.00
Prepaid Expense 50,000.00
Total Current Assets 2,130,000.00

Non-current Assets
Property, Plant and Equipment 1,500,000.00
Less: Accumulated Depreciation (200,000.00) 1,300,000.00
Total Non-current Assets 1,300,000.00

Total Assets 3,430,000.00

Liabilities & Equity

Current Liabilities
Accounts Payable 400,000.00
Total Current Liabilities 400,000.00

Non-current Liabilities
Loans Payable 1,800,000.00
Total Non-current Liabilities 2,200,000.00

Owner's Equity
ABM, Capital 1,230,000.00

Total Liabilities and Equity 3,430,000.00

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 10

Transactions during 2020 that affects the balance sheet included the following:
1. Purchased new equipment using cash amounting to Php 200,000.00
2. Customers paid Php 120,000.00 as payment for their account.
3. Paid debts of Php 250,000.00 to suppliers.
4. Borrowed additional Php 50,000.00 of loan.
5. Purchased inventories of Php 90,000.00 on account.
6. Half of the total inventories (including newly purchased) are sold on cash.
Assume that all other accounts not affected by these transactions are all the
same.
Instructions: Prepare the journal entries of these transactions, as well as their T
-accounts to know the updated balances of each affected accounts. Make an up-
dated statement of financial position for the year 2020 in a.) account form ; and
b.) report form.
1. Recording of transactions
Transaction 1 Transaction 2
Account Debit Credit Account Debit Credit

Transaction 3 Transaction 4
Account Debit Credit Account Debit Credit

Transaction 5 Transaction 6
Account Debit Credit Account Debit Credit

2. Updating T– Accounts

Debits Credits Debits Credits Debits Credits

Balance: Balance: Balance:

Debits Credits Debits Credits Debits Credits

Balance: Balance: Balance:

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 11

3. Preparing the financial statement ( Do not forget the title, company name and
the date)
Account Form

Report Form

VICTORIOUS CHRISTIAN MONTESSORI COLLEGE ALFONSO, INC.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 1 12

REFERENCES

Contents:

 https://www.investopedia.com/ask/answers/030215/what-difference-
between-current-assets-and-noncurrent-assets.asp#:~:text=Key%
20Takeaways,to%20cash%20within%20a%20year.&text=Current%20assets%
20include%20items%20such,such%20as%20long%2Dterm%20debt

 https://www.investopedia.com/terms/a/
allowancefordoubtfulaccounts.asp#:~:text=The%20allowance%20for%
20doubtful%20accounts%20is%20a%20contra%2Dasset%20account,offset%
20to%20bad%20debt%20expense.

 https://smallbusiness.chron.com/difference-between-report-form-account-
form-balance-sheets-54993.html#:~:text=Statements%20of%20financial%
20position%20forms%20provide%20a%20snapshot%20of%20the,cash%
20flows%20of%20a%20business.&text=Each%20of%20the%20documents%
20relies,Income%20statement.

 https://accounting-simplified.com/financial/statements/statement-of-financial
-position.html

 Dr. Marivic Valenzuela-Manalo, Learning to Succeed in Business with Ac-

counting, Vol.2. Phoenix Publishing House, 2016

Picture(s):

 https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.kindpng.com%
2Fimgv%2FioThiwx_justice-weighing-scale-law-clip-art-weighing-scale%
2F&psig=AOvVaw3v07Ey9wMehgrQlhqYqGvp&ust=1597911607745000&sourc
e=images&cd=vfe&ved=0CAIQjRxqFwoTCMDNvuTqpusCFQAAAAAdAAAAABA
D
 https://www.google.com/url?sa=i&url=https%3A%2F2Fwww.pinclipart.com%
2Fpindetail%2FxJJix_big-image-clip-art-plastic-bag-png-download%
2F&psig=AOvVaw2lShKstAuuNh2IHVaKnXMx&ust=1597911651204000&sourc
e=images&cd=vfe&ved=0CAIQjRxqFwoTCJD-6PzqpusCFQAAAAAdAAAAABAE

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