Financial Statements

Statement of Financial
Position
(Balance Sheet)

K to 12 BASIC EDUCATION CURRICULUM SENIOR HIGH SCHOOL

ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
WRITTEN WORKS 25%
QUIZZES 10%
HOMEWORK 7%
SEATWORK 8%

PERFORMANCE 45%
ACTIVITY 20%
RECITATION 10%
PROJECT 15%

TERM EXAMS 30%

TOTAL 100%
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 end product
of the accounting process.
 Users of Accounting Information

External Accounting Internal

Users Information Users
• Creditors
• Investors • Owners
• Government and Tax • Managers
Authorities • Employees and
• Regulatory Agencies
• 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 of

and Loss 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 FINANCIAL DESCRIPTION
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 Statements information required by the standards but 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 Accumulated
Allowance for Doubtful Accounts) Depreciation)
Inventory Equipment (Including Accumulated
Prepaid Assets Depreciation)

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 trade
Salaries Payable payable that matures beyond 1
Utilities Payable year from the end of reporting
Unearned Income 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.

C:\Users\acer\Documents\001 Ronald v2\03 LAMS\2019-2020 Sem 01\01 SFP illustration.xlsx

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

Report to Albert Rein the balance of the cash and cash equivalents of ABM Store as of
December 31, 20X1.
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.
(http://accountingexplained.com/financial/inventories/perpetual-vs-periodic-system)
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.
(http://accountingexplained.com/financial/current-assets/prepaid-expense)
 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.
(http://accountingexplained.com/financial/current-assets/prepaid-expense)
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