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Fundamentals of Accountancy,
Business and Management 2
Module 1:
Statement of Financial Position

LU_Fundamentals of Accountancy, Business and Management 2_Module1

Introductory Message

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LU_Fundamentals of Accountancy, Business and Management 2_Module1

Target

A Projection of a Financial Position

We begin our study of financial statements with Statement of Financial
Position. Statement of Financial Position (SFP) also known as balance
sheet shows the financial condition of the business entity at any given
time.
This financial statement conveys information about the business
entity’s
liquidity, solvency, stability, capital structure, and financial flexibility.

The accounting elements of the financial position are Assets, Liabilities

and
Equity. (See Figure 1)

Assets Liabilities Equity

= +

Figure 1: The Accounting

Equation
The assets are on the left side of the equation while liabilities and
equity are on the right side of the equation. The total assets should
always be equal to the total liabilities and total equity.
This module will provide you with information and activities that will
help you understand the Statement of Financial Position.
After going through this module, you are expected to:

1. Identify the elements of the Statement of Financial Position (SFP)

2.

3. and describe each item (ABM_FABM12 – Ia-b-1):

LU_Fundamentals of Accountancy, Business and Management 2_Module1

4. Prepare an SFP using the report form and the account form with the
Before going on, check how much you know about this topic. Answer
the pre-test on the next page in a separate sheet of paper.

proper classification of items as current and noncurrent. (ABM_FABM12

– Ia-Jumpsta

Activity 1: Read me! Understand me!

Directions: Read the three elements of Statement of Financial Position.
Understand what you are reading.
The Statement of Financial Position or Balance Sheet reports the
resources available for the company to use, obligations that the company
is required to settle
and the equity that belongs to the owner/s of the company.
Permanent/Real Accounts are Assets, Liabilities and Owner’s Equity.
Real/Permanent accounts are reported in SFP. They are not closed at the
end of accounting period.
Elements of the Statement of Financial Position (SFP)

a. Assets these are the resources that are within the control of the
company and have future benefits.

b. Liabilities are obligations that the company is required to pay.

c. Equity is the residual interest of the owner of the company/business.

Directions: Choose your answer from the given choices. Use separate
paper.
Q1. What element of the SFP are debts and obligations of the company
to another entity?
A. Assets B. Liabilities C. Equity D. None of the
above Q2. What basic financial statement is also called a
Balance Sheet?
A. Statement of Cash Flows
B. Statement of Financial Position
C. Statement of Comprehensive Income
D. Statement of Changes in Owner’s Equity
Q3. What element of SPF is the net assets of the company?
A. Assets B. Liabilities C. Equity D. None of the
above Q4. Which of the following IS NOT an element of SFP?
A. Asset B. Real Accounts C. Liability D.
Equity Q5. What is the residual interest of the owner of the
business?

LU_Fundamentals of Accountancy, Business and Management 2_Module1

 A. Asset B. Real Accounts C. Liability D. Equity

Discover

I. THE ELEMENTS OF THE STATEMENT OF FINANCIAL POSITION

1. Assets are the resources with future benefits that are within the control
of the company. Resources are classified into accounts based on its
future use to the company. Assets are recorded in the books of accounts
with a normal debit balance. There are the classification of assets;
current and noncurrent assets.

Current assets are assets that can be realized (collected, sold,

used up) one year after year-end date. Examples include Cash,
Receivable, Merchandise Inventory and Prepaid Expenses.

a. CASH is any item on hand with monetary value that a bank will accept
for deposit and all small amounts currently on deposit with the bank in the
name of business. This includes coins and currencies, personal checks,
money orders, traveler’s checks made payable to the business and bank
drafts. Also included are any funds that are currently on deposit at a bank
and readily available as checking and savings account

b. RECEIVABLES refers to the company’s right to collect or claim

payment. Accounts Receivables are amounts due from customers arising
from credit sales or credit services. Notes Receivable is another kind of
receivable. It is evidenced by promissory notes. Promissory notes is a
legal document that says the borrower promises to pay on scheduled
payments dates, a specific sum called the principal and interest based on
principal and stated interest to sign a promissory note. The company may
also lend to its employees or other companies is the company has excess
cash.

c. INVENTORIES are assets held for sale in the normal operation of the
business, in the process of production for sale, or in the form of materials or
supplies to be consumed in the production process or in the rendering of
services. Examples are merchandise inventory, work-in-process inventory,
and raw materials inventory.

d. PREPAID EXPENSES are expenses paid in advance. It is placed in

this account until the services or items are used and become expenses.
Recall the concept of accrual discussed in FABM 1, expenses are
recorded only when purchased goods and services are used.

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For example, prepaid subscribers in buying load or cards, they essentially
pay the phone companies prior to using their services. On the other hand,
post paid subscribers pay only after they are billed for the services used.

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 Discover

Accrual accounting states that expense is recognized only when phone

services are used, regardless of whether they are prepaid or post-paid
subscribers – it is Prepaid Expense. When the load is consumed, the cost
of the card is transferred out to Prepaid Expense and into
Communication/Telephone Expense. Another kind of prepaid expense is
Insurance. The insured will pay premium at the beginning of contract period
and the insurer (insurance company) will reimburse the insured party for
losses if the insured event occur.

Noncurrent assets are assets that cannot be realized (collected,

sold, used up) one year after the year-end date. Examples include Property,
Plant and Equipment (equipment, furniture, building, land) and Long-
term investments.

a. PROPERTY, PLANT AND EQUIPMENT or PPE for short, are long-

lived assets which have been acquired for use in operations. Only those
assets owned and controlled by the company will be recorded as PPE.
Rented facilities and equipment are excluded from PPE.

b. LONG-TERM INVESTMENTS are intangible assets like PPE. The

allocation of the cost of intangible assets to the year it was used is called
amortization. It is computed like depreciation such that the cost of the
asset is amortized evenly over its useful life. The main difference between
the two assets is that intangible assets have no tangible properties.
These are assets that you cannot touch or see. There may be a piece of
paper as evidence of the asset, but the actual asset is “intangible”. 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 for a specified period. In recent years, the patent infringement
cases between Samsung and Apple filled the business news. Brand-
name refers to word or words used to identify a specific product and its
manufacturers. Famous brands include Jollibee, McDonalds, Apple,
Coca-Cola, Samsung, and Nike. Trademark is the symbol that represents
the brand. For example, red happy bee for Jollibee, tall clown in stripes
for McDonalds, a checkmark for Nike.

LU_Fundamentals of Accountancy, Business and Management 2_Module1

 Another kind of prepaid expense is Insurance. The insured will pay
premium at the beginning of contract period and the insurer (insurance
company) will reimburse the insured party for losses if the insured event
occur.

Noncurrent assets are assets that cannot be realized (collected,

sold, used up) one year after the year-end date. Examples include Property,
Plant and Equipment (equipment, furniture, building, land) and Long-
term investments.

c. PROPERTY, PLANT AND EQUIPMENT or PPE for short, are long-

lived assets which have been acquired for use in operations. Only those
assets owned and controlled by the company will be recorded as PPE.
Rented facilities and equipment are excluded from PPE.

d. LONG-TERM INVESTMENTS are intangible assets like PPE. The

allocation of the cost of intangible assets to the year it was used is called
amortization. It is computed like depreciation such that the cost of the
asset is amortized evenly over its useful life. The main difference between
the two assets is that intangible assets have no tangible properties.
These are assets that you cannot touch or see. There may be a piece of
paper as evidence of the asset, but the actual asset is “intangible”. 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 for a specified period. In recent years, the patent infringement
cases between Samsung and Apple filled the business news. Brand-
name refers to word or words used to identify a specific product and its
manufacturers. Famous brands include Jollibee, McDonalds, Apple,
Coca-Cola, Samsung, and Nike. Trademark is the symbol that represents
the brand. For example, red happy bee for Jollibee, tall clown in stripes
for McDonalds, a checkmark for Nike.

Contra Valuation Accounts:

 Allowance for doubtful accounts – refers to an amount estimated

uncollectible on receivable in compliance with the principle of
conservatism. It is credited to serve as a contra account for the related
receivable. Other terms used to describe this account are “allowance
for uncollectible account” and “allowance for bad debts”.
 Accumulated Depreciation – the aggregate periodic costs of using
a depreciable plant asset. In accordance with the systematic cost
allocation principle, the acquisition cost or depreciable plant asset
should be allocated as expense over its useful life. Examples are
accumulated depreciation of building, accumulated depreciation of
equipment, etc.

2. Liabilities these are present obligations to pay cash or cash

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equivalents by an entity. In other words, they represent claims against the
assets of the business. Liabilities have normal credit balance. These are
the classification of liabilities, current and noncurrent liabilities.

Current Liabilities are liabilities that fall due (paid, recognized as revenue)
with one year after year-end date. Examples include Accounts payable,
Notes payable, Accrued Expenses, Unearned Income.

a. ACCOUNTS PAYABLE an obligation or debt to creditors for money

borrowed or merchandise and other assets bought on credit.

b. NOTES PAYABLE a promissory note issued by the business to its

creditors for money borrowed or merchandise and other assets bought on
credit.

c. ACCRUED EXPENSES are expenses that are incurred but not yet
paid. Examples are salaries payable, taxes payable)

d. UNEARNED INCOME is cash collected in advance; the liability is the

services to be performed or goods to be delivered in the future.

NON-CURRENT LIABILITIES are liabilities that do not fall due

(paid, recognize as revenue) within one year after year-end date.

a. LOANS PAYABLE

b. MORTGAGE PAYABLE

3. Equity is the residual amount after deducting liabilities from assets. It

comprises the capital contribution of the owner and withdrawals by the
owner. It is increased by capital contribution of the owner and net income
of the business and decreased by the owner’s withdrawals and net losses
of the business.

Owner’s Equity is described as owner’s capital (sole proprietorship),

partner’s capital (partnership) and shareholders’ equity (corporation). These
accounts have normal credit balances.

 Drawing is a temporary account used initially the amount taken by

the owner from the business. This is closed to the capital account of
the owner at the end of accounting period.

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 Current Liabilities are liabilities that fall due (paid, recognized as
revenue) with one year after year-end date. Examples include Accounts
payable, Notes payable, Accrued Expenses, Unearned Income.

a. ACCOUNTS PAYABLE an obligation or debt to creditors for money

borrowed or merchandise and other assets bought on credit.

b. NOTES PAYABLE a promissory note issued by the business to its

creditors for money borrowed or merchandise and other assets bought on
credit.

c. ACCRUED EXPENSES are expenses that are incurred but not yet
paid. Examples are salaries payable, taxes payable)

d. UNEARNED INCOME is cash collected in advance; the liability is the

services to be performed or goods to be delivered in the future.

NON-CURRENT LIABILITIES are liabilities that do not fall due

(paid, recognize as revenue) within one year after year-end date.

c. LOANS PAYABLE

d. MORTGAGE PAYABLE

4. Equity is the residual amount after deducting liabilities from assets. It

comprises the capital contribution of the owner and withdrawals by the
owner. It is increased by capital contribution of the owner and net income
of the business and decreased by the owner’s withdrawals and net losses
of the business.

Owner’s Equity is described as owner’s capital (sole proprietorship),

partner’s capital (partnership) and shareholders’ equity (corporation). These
accounts have normal credit balances.

 Drawing is a temporary account used initially the amount taken by

the owner from the business. This is closed to the capital account of
the owner at the end of accounting period.

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II. CLASSIFICATIONS IN PREPARING SFP

1. ACCOUNT FORM

2. REPORT FORM
The Statement of Financial
Position, SFP (Balance Sheet)
shows the financial condition of the
business at any given time. It also
starts with the heading
compromised the following:

 Name of the business

(who?)
 Name of the statement
(what?)
 Date of the statement
(when?)

Observe that the date of the

business starts with the words “as
of”. This means the SFP can be
prepared anytime even if the
operation of the business has not
yet started yet. As long as the
business has assets contributed by
owners or creditors, the SFP can be
prepared.

The SFP presented on the left side

is an example of a report form. The
SFP can also be presented in its
account form as shown above.

LU_Fundamentals of Accountancy, Business and Management 2_Module1

 Explore

Enrichment Activity 1: HERE WE GO A-COUNTING!

Directions: The following items are taken from the records of XYZ
Company. Classify whether they belong to the Assets, Liabilities, Owner’s
Equity of the business. Use separate sheet for your answers.
Items: Amount: Items: Amount:
1. Merchandise Inventory P 50,000 13.
Owner’s Equity ?
2. Accounts Receivable 30,000 14. Furniture and Fixtures 6,000
3. Worthless Receivable 500 15. Accum. Dep’n – Store
Bldg.5,000
4. Prepaid Rent 8,000 16. Sales (80% cash) 200,000
5. Obsolete Merchandise 1,000 17. Accum. Dep’n – F and F600
6. Rent Expense 4,000 18. Depreciation Expense 3,300
7. Notes Receivable 10,000 19. Cash 25,000
8. Accrued Interest Receivable 200 20.
Accounts Payable 20,100
9. Unused Supplies 1,200 21. Notes Payable 60,000
10. Used Supplies 800 22. Interest Income 200
11. Land 100,000 23. Mortgage Payable 1,200
12. Store Building 50,000 24. Owner’s drawings 5,000

Assessment 1: COUNT ME IN!

Directions: Use separate sheet for your answers. With the same information
above (Enrichment 1), fill the amounts of the following SFP elements:
Current Assets:
Noncurrent Assets:
Current Liabilities:
Noncurrent Liabilities:
Owner’s Equity:

LU_Fundamentals of Accountancy, Business and Management 2_Module1

 Deepen

Comprehensive Problem: Walang Oras Store

On February 1, 20x1, Walang Oras opened a store that sells
schools supplies. Her main customers are the students and teachers of
Malayang Guro School that is located in front of her store. Walang Oras
wanted to know the financial position of the store. Walang Oras knew you
were studying accounting, so she asked for your help.
The following information were made available for you:
1. Walang Oras invested Php 42,535 in the business.
2. As of December 31, 20x1, cash on hand from sales and
collections is amounted to Php 22,000.
3. Walang oras showed you a delivery receipt for Php 875. The receipt
dated December 29, 200x showed that various school supplies were
delivered to Juan Luna who is a SHS Teacher at Malayang Guro
School. Juan Luna will pay Walang Oras on January 5, 20x2.

4. Walang Oras is renting the space for her store. It costs her Php 4,500
for the monthly rent. As of December 31, 20x1, Walang Oras store
has a remaining one month advance rent.

5. Walang Oras purchased furniture and fixtures amounting to Php

55,000 with an estimated useful life of 5 years. Walang Oras started
using the furniture and fixtures on December 1, 20x1.
6. Walang oras has an eding inventory of Php 25,275.
7. A LUELCO bill for electricity consumption from December 1-31, 20x1
for Php 5,600 payable on January 10, 20x2.

8. A December 20x1 PLDT telephone bill amounting to Php 1,200 is

payable on January 12, 20x2.
9. Walang Oras hired Gabriela Silang as helper with a wage of Php
450/day. Gabriela’s wages were paid on December 28, 20x1 for work
rendered until December 29, 20x1. Gabriela’s pay for December 30
and 31 will be included in her January wage.

10. Mrs. Ling Briones ordered some various materials to Walang Oras.
These materials are hi-tech pens, dividers and logbooks amounting to
Php 5,143. These materials are pre-ordered and will delivered on
January 20, 20x2. Walang Oras showed you an official receipt stating
that Mrs. Briones paid half of its price as down payment.

Fundamentals of Accountancy, Business and Management 2_Module1

 11. On December 30, 20x1, Walang Oras borrowed Php 87,500 to Land
Bank of the Philippines payable within 3 years. Interest is payable
monthly.

12. Walang oras open a checking account depositing Php 50,000, On

August 1, 20x1, Walang oras deposited Php 15,000 on the business
checking account. Walang oras also withdrew Php 20,000 for
personal use.

Requirements: Use separate sheet for the comprehensive problem.

1. Prepare a Pro-forma SFP (Account form) of Walang Oras Store
as of December 31, 20x1.
2. Determined the Net Income for the month-ended December 31, 20x

Gauge

ANSWER ME, PLEASE?

Directions: Carefully read each item. Use a separate sheet for your
answers. Write only the letter of the best answer for each test item.

1. Which of the following is not recorded in the SFP?

A. Assets B. Equity C. Liabilities D. Revenues

2. Which of the following assets is NOT a current asset?

A. Cash B. Equipment C. Inventories D.
Receivables

3. What are the resources or things value owned by an enterprise?

A. Assets B. Equity C. Expenses D. Liabilities

4. What do you call the transferring of cost of asset to expense?

A. Allowance for Bad debts B. Accounts Payable
C. Accumulated D. Accrued Interest Payable
Depreciation

5. What is a Current Assets?

A. It is cash or cash equivalent which is not restricted for current use.
B. It is expected not to be realized or is held for sale or consumption
in the normal course of the business operating cycle.
C. It is held primarily for trading purposes or for the long term, and
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 it is expected to be realized more than twelve months of the SFP
date.
D. It is expected to be settled in the normal course of the
business operating cycle.

6. What is a contra-validation account that refers to the amount

estimated uncollectible?
A. Accounts Payable B. Accrued Interest Payable
C. Allowance for Bad D. Accumulated Depreciation
Debts

7. Which of the following is an example of noncurrent liability?

A. Accrued Expenses
C. Loans Payable
B. Deferred Income
D. Short-term Liabilities

8. Which of the following is not recorded in the SFP?

A. Assets B. Equity C. Liabilities D. Revenues

9. Which of the following assets is NOT a current asset?

A. Cash B. Equipment C. Inventories D.
Receivables

10. What are the resources or things value owned by an enterprise?

A. Assets B. Equity C. Expenses D. Liabilities

[Link] do you call the transferring of cost of asset to expense?

A. Allowance for Bad debts B. Accounts Payable
[Link] D. Accrued Interest Payable
Depreciation

12. What is a Current Assets?

A. It is cash or cash equivalent which is not restricted for current use.
B. It is expected not to be realized or is held for sale or consumption in
the normal course of the business operating cycle.
C. It is held primarily for trading purposes or for the long term, and it is
expected to be realized more than twelve months of the SFP date.
D. It is expected to be settled in the normal course of the business
operating cycle.

[Link] is a contra-validation account that refers to the amount

estimated uncollectible?
A. Accounts Payable B. Accrued Interest Payable
C. Allowance for Bad Debts D. Accumulated Depreciation

14. Which of the following is an example of noncurrent liability?

A. Accrued Expenses B. Deferred Income
C. Loans Payable D. Short-term Liabilities
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Fundamentals of Accountancy, Business and Management 2_Module1

 8. Which of the following is not recorded in the SFP?
A. Assets B. Equity C. Liabilities D. Revenues

9. Which of the following assets is NOT a current asset?

A. Cash B. Equipment C. Inventories D.
Receivables

10. What are the resources or things value owned by an enterprise?

A. Assets B. Equity C. Expenses D. Liabilities

11. What do you call the transferring of cost of asset to expense?

A. Allowance for Bad debts B. Accounts Payable
C. Accumulated D. Accrued Interest Payable
Depreciation

12. What is a Current Assets?

A. It is cash or cash equivalent which is not restricted for current use.
B. It is expected not to be realized or is held for sale or consumption
in the normal course of the business operating cycle.
C. It is held primarily for trading purposes or for the long term, and
it is expected to be realized more than twelve months of the SFP
date.
D. It is expected to be settled in the normal course of the
business operating cycle.

[Link] is a contra-validation account that refers to the amount

estimated uncollectible?
A. Accounts Payable B. Accrued Interest Payable
C. Allowance for Bad D. Accumulated Depreciation
Debts

14. Which of the following is an example of noncurrent liability?

A. Accrued B. Deferred Income
Expenses D. Short-term Liabilities
C. Loans Payable

15. What accounts are reported in the SFP?

A. Assets B. Equity C. Liability D. Revenue

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 [Link] are these various materials which remain unused at the end of
the accounting period?
A. Accounts Receivable B. Accounts Payable
C. Prepaid Supplies D. Withdrawal Account

17. What pro forma of the SFP that presents its elements in horizontal
order following the accounting equation?
A. Account Form B. Direct Method
C. Indirect D. Report Form
Method

18. A promissory note issued by the business to its creditors for money
borrowed or merchandise and other assets bought on credit. What
example of current liability it is?
A. Accounts B. Accrued Interest Payable
Payable D. Premium Payable
C. Notes Payable

19. Which of the following compromises the portion payable beyond one year
of a long-term liability?
A. Assets B. Current Liability
C. D. Noncurrent Liability
Equity

20. What plant asset is NOT subject to depreciation?

A. Building B. Equipment
C. Land D. Land Improvements

21. Which of the following is NOT reported in the SFP?

A. Accrued Interest B. Accumulated Depreciation
C. Bad Debt D. Owner’s Drawings
Expense

22. Which of the following is NOT a current asset?

A. Accounts Receivable
B. Cash
C. Equipment
D. Inventories

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.