CHAPTER 1.

STATEMENT of
FINANCIAL POSITION
 Define the following.
a. Accounting Equation
REMEMBER
b. Assets
ME! c. Liabilities
d. Equity
e. Sole Proprietorship
Business
•Give specific account titles
•give examples of single/sole
proprietorship businesses and
merchandising businesses.
•to identify the normal balance of asset,
liabilities and equity.
•how these accounts are
increased/decreased.
The purpose of accounting is
to provide information that is
useful in making economic
decisions.

Financial statement - a
structured representation of an
entity’s financial position and
result of its operations.
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 – (result of operation)
the term “entity” refers to the “reporting
entity”. A reporting entity is the one whose
financial statements are being prepared, for
example a “business”. However, not only
businesses prepare financial statements:
other types of organizations, non-profit org,
government, private individual.

(SALN or statement of assets, Liabilities

and Net worth)
 Complete set of financial statements
Type of Financial Statement Brief description

1. Statement of Financial -also called the “balance sheet” or “ statement of condition”

Position - provides information on the entity’s assets, liabilities and equity

2. Statement of profit or loss and -provide information on income and expenses.

other comprehensive income

3. Statement of changes in -provides information on the movements in the component equity

equity during the period.

4. Statement of Cash flow. - Provides information on how cash and cash equivalents were
generated and used during the period.

5. Notes Provides narrative disclosure and other information required by the

standards but were not presented in the financial statements.

6 in some cases, an “additional” -this is discussed in higher accounting subjects.

statement of financial position
Information on result of operation is provided by the
other components of a complete set of financial
statement as follows:
• Information on financial performance is provided by the
statement of profit or loss and other comprehensive
income.

• Information on changes in financial position (e.g.,

changes in equity and changes in cash flows) is
provided by the statement of changes in equity and
statement of cash flows.

*the “notes” is used in conjunction with the other financial statement.

Elements of financial statements

1.Assets;
2.Liabilities;
3.Equity (also called Capital, net
assets or net worth)
4.Income; and
5.Expenses
Elements are directly related to
measurement of financial position in the
balance sheet are assets, liabilities and
equity.

Elements are directly directed to the

measurements of financial performance
in the statement of profit or loss and
other comprehensive income are income
and expense
Assets- resources you control that have
resulted from past events and can provide
you with future economic benefits.
a. Control –it is not necessary that you own it to
be considered asset as long as you control the
economic benefits it is considered your asset.
Control means you have the exclusive right to
enjoy it and prevent others from enjoying it.

b. Past events - the control over a resource have

resulted from a past event or transaction.
Therefore, resources for which control is yet
to be obtained in the future do not qualify as
assets in the present.
 c. Future economic benefits
• FUTURE” means the resource is expected to provide economic
benefits over more than one accounting period. If it provides
economic benefits only in one accounting period, it is not an
asset but an expense.

• “ECONOMIC BENEFITS” the potential of the resource to

provide you, directly or indirectly, with cash. The resources
can be:
• Sold or exchange for other assets;
• Used single or in combination with other assets to produce goods for
sale;
• Used to settle a liability; or
• Distributed to the owners.
LIABILITIES –are your present obligations that
have resulted from past events and can require
you to give up resources when settling them.
• Present obligation means that, right now,
you have a responsibility to pay someone
because of an obligating event that has
already transpired.

• Obligating event is an event that creates

• A legal obligation
• It arises from;
• A contract
• A law; or
• Other operation of law
• Constructive obligation – arise from
past business practices or
published policies that have
created a valid expectation on the
part of others that you will pay
them
EQUITY
• Simply assets minus liabilities. Other terms for equity
are “capital”, “net assets”, and “net
worth”.
Current and noncurrent assets
• 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
Examples of accounts and their
normal classification

CURRENT ASSETS NONCURRENT ASSETS

1.CASH 1.LAND
2.ACCOUNTS RECIEVABLE 2.BUILDING (including
(including accounts from accumulated
doubtful account) depreciation)
3.INVENTORY 3.EQUIPMENT (including
4.PREPAID ASSETS (prepaid accumulated
supplies, prepaid depreciation)
insurance)
 Identify current and noncurrent assets
Entries
CASH 10, 000
ACCOUNTS RECIEVABLE 20, 000
INVENTORY 65, 000
PREPAID SUPPLIES 5, 000
LAND 100, 000
BUILDING 400, 000
ACCUMULATED DEPRECIATION (120, 000)
 CURRENT AND NONCURRENT
LIABILITIES
Liabilities are classified as current when they are expected to be
settled within 12 months from the end of reporting period. All
other liabilities are classified as noncurrent.

CURRENT LIABILITIES NONCURRENT LIABILITIES

1.ACCOUNTS PAYABLE 1. LONG-TERM NOTE PAYABLE
2.SALARIES PAYABLE (nontrade note payable that
3.UTILITIES PAYABLE matures beyond 1 year from
4.UNEARNED INCOME the end of reporting period.)
 Identify current and noncurrent
liabilities
ENTRIES
Accounts Payable 30 000
Notes payable (nontrade) – 100 000 due within 1 500 000
year
Rent payable (due within 1 year) 10 000
Utilities payable 5 000
Interest payable 100 000
Salaries payable 400 000
Unearned income 120 000
Trade and nontrade 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
SEATWORK 6
A.Enumerate the elements of SFP.
B.identify the current assets and the non-
current assets.
1.Cash 6. Building
2.Accounts receivable 7. Accumulated
depreciation
3.Inventory 8. Prepaid rent
4.Prepaid supplies 9. Furnitures and

fixtures
Trade and nontrade 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
receivables.
Trade and nontrade 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 nontrade 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
receivables.
In a classified SFP:

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 month from the
end of reporting period
Normal operating cycle

Normal operating cycle of an entity is the time

between acquisition of assets for processing and
their realization in cash. -

“for a manufacturing entity, the normal operating cycles covers the

time of acquisition of raw materials for processing, production of
finished goods. Sale of finished goods on account and eventual
collection of receivables from the sale.
if the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be 12 months.

“accounts receivable” is usually assumed as trade

receivable unless there is evidence to the contrary
Accounts receivable = trade receivable

Accounts receivable is normally classified as current

assets.
“note receivable” – is treated as trade receivable only
if there is evidence that the note receivable was
received in exchange for the sale of goods or services in
the ordinary course of business. For non trade note
receivable, only the portion that is collectible within 12
months is presented as current asset, the remainder is
presented as noncurrent assets.
 example

ENTRY Current assets Noncurrent assets

CASH 50,000 Cash 50,000 Notes receivable 20,000

Accounts receivable 40,000 Accounts receivable 40,00

Notes receivable(nontrade)
– 30,000 due within 1 year 50,000 Notes receivable 30,000

Prepaid supplies 10,000 Prepaid supplies 10,000

Trade and nontrade payables

Trade payable are payables arising from the

sale of goods or services in the
ordinary course of business. These
include trade accounts payable and trade
notes payable. Payable arising from other
sources are classified as nontrade payable.
In a classified SFP:

a. Trade payable are presented as current liabilities if

they are payable within the normal operating cycle,
even if the normal operating cycle is longer than 12
months.

b. Nontrade payable are presented as current liability

only if they are payable within 12 month from the end
of reporting period
“accounts payable” is usually assumed as trade payable
unless there is evidence to the contrary
Accounts payable = trade payable

Accounts payable is normally classified as current

liability.
“note payable” – is treated as trade payable only if
there is evidence that the note payable was issued in
ENTRIES
exchange for the purchase of inventory. For nontrade
Accounts 30 000
note payable, only the portion that is collectible within
Notes payable (nontrade) – 100 000 due within 1 year 500 000
12 months is presented as
Rent payable (due within 1 year)
current liability, the 10 000
remainder is presented as noncurrent liability.
Utilities payable 5 000
Interest payable 100 000
Salaries payable 400 000
Unearned income 120 000
 General journal

Trial Balance

Financial Statement
SFP ----- SCI -----SHE -----SCF
Line items in the statement of
financial position
Accounts are presented in the financial statement
using “line items”. A line item is a caption used to
describe a group of accounts with similar nature.

Line items are used in order to promote comparability

ASSETS Notes Final amount

Cash and cash equivalents

Trade and other receivables

Inventory

Prepaid assets
TOTAL CURRENT ASSETS
Property, plant and equipment
TOTAL NONCURRENT ASSETS

LIABILITIES
Trade and other payables
Short term borrowings
Current portion of long-term borrowings
Income tax payable (current tax payable)
TOTAL CURRENT LIABILITIES

Long-term borrowings
TOTAL NON CURRENT LIABILITIES

EQUITY
 ASSETS
A. Cash and Cash Cash Pxx
Equivalents Cash Equivalents xx
A/R Pxx
Trade and Other
B. Allowance for bad Debts (xx)
Receivables Notes Receivable xx
Advance to suppliers xx

C. Inventory
 ASSETS
Prepaid Supplies Pxx
D. Prepaid Assets Prepaid Rent xx
Prepaid Insurance xx

Land Pxx
E. Property, Plant Building xx
and Equipment Acc. Depreciation Building
Equipment xx
(xx)

Acc. Depreciation Equipment (xx)

Cash include cash on hand and cash on bank
Cash Equivalents (higher accounting theories)
Allowance for bad debts
Notes receivable current portion is only included here. The non current is
presented separately
Advance to supplies – advance payment made to suppliers for purchases
of inventories that have not yet been delivered by the suppliers.
Inventories are item consists of goods held for sale
Prepaid assets is also referred as prepaid expense
Property, plant and Equipment (PPE) also known as fixed assets
 LIABILITIES
A/P Pxx
A. Trade and other payables
Interest Payable xx
Salaries Payable xx
Utilities Payable xx
Unearned Income xx

B. Short term Borrowings Loans with original term of 1 year or less

C. Current Portion of long–term Portion of long term loans
Borrowings
D. Long-term borrowings loans with original term of more than 1 year

E. Income tax payable Unpaid income taxis due to the national government
Notes Payable (nontrade) (current/noncurrent)
represents bank loans. Commonly exclude from trade
and other payables.

Interest payable, salaries payable and utilities payable

are referred to as “accrued liabilities” or in traditional
accounting as “accrued expenses”.
Account Form - Vertical

Report Form - Horizontal