Statement of Financial Position or Balance Sheet PDF

STATEMENT OF FINANCIAL POSITION OR THE BALANCE SHEET  The statement of financial position, also known as the balance sheet, is a crucial financial document that provides a snapshot of a company's financial health at a specific point in time. It outlines the company's assets, liabiliti...

STATEMENT OF FINANCIAL POSITION OR THE BALANCE SHEET  The statement of financial position, also known as the balance sheet, is a crucial financial document that provides a snapshot of a company's financial health at a specific point in time. It outlines the company's assets, liabilities, and equity, offering insights into its resources, obligations, and ownership structure. This information is vital for investors, creditors, and management to assess the company's financial standing and make informed decisions. The balance sheet is structured in a way that highlights the fundamental accounting equation: Assets = Liabilities + Equity. Assets represent the company's resources, including cash, accounts receivable, inventory, and fixed assets like property, plant, and equipment. Liabilities represent the company's obligations to external parties, such as accounts payable, loans, and taxes payable. Equity represents the owners' stake in the company, reflecting their initial investment, retained earnings, and any changes in ownership structure.  The balance sheet is typically presented in either an account format or a report format. The account format divides the statement into two columns, with assets listed on the left side and liabilities and equity on the right side. The report format uses a single column, listing assets first, followed by liabilities and equity. Both formats categorize assets and liabilities into current and long-term components, reflecting their expected conversion to cash or settlement within a year. Current assets are those that are expected to be converted into cash within a year, such as cash, accounts receivable, and inventory. Non-current assets, also known as long-term assets, represent investments with a longer lifespan, such as property, plant, and equipment. Current liabilities are obligations due within a year, such as accounts  The balance sheet is a powerful tool for analyzing a company's financial position. By examining the relationship between assets, liabilities, and equity, analysts can assess the company's liquidity, solvency, and profitability. Liquidity refers to the company's ability to meet its short-term obligations. Solvency refers to the company's ability to meet its long-term obligations. Profitability reflects the company's ability to generate profits from its operations. The balance sheet is an essential component of a company's financial reporting, providing a comprehensive view of its financial health and serving as a foundation for further analysis and decision-making. By understanding the elements of the balance sheet and their relationships, individuals can gain valuable insights into a company's financial performance and potential risks. B. Analysis 1. Have you ever tried having a business? Did it run well? Where you able to gain profit or loss? 2. Well known entrepreneurs are making money in their business. How important is accounting to them? 3. Can you now define the importance of the statement of financial position or balance sheet in the accounting system? Activity 1: Opinions of Accountants. In the given pictures, analyze the opinions given by the caricatures. 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. It shows the financial condition of the business entity at any given time. It conveys information about the business’s liquidity, solvency, financial structures, and financial flexibility.  COMPONENTS OF THE STATEMENT OF FINANCIAL POSITION 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. Components of the Statement of Financial Position (SFP) Assets these are the resources that are within the control of the company and have future benefits. 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, traveller’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: 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.  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 the PPE. b. LONG-TERM INVESTMENTS are intangible assets similar to PPE. The allocation of the cost of intangible assets to the year it was used is called amortization. It is computed similar to 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 are may be a piece of paper as evidence of the asset but the actual asset is “intangible”. Some example 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 of time. 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 includes, 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: accumulated depreciation of building accumulated depreciation of equipment, etc. a. Describe Me! Let the students describe themselves using the different accounting terms. 1. Asset 6. Doubtful Accounts 2. Liability 7. Accounts Payable 3. Capital 8. Debit 4. Bad Debts 9. Inventory 5. Receivables 10. Depreciated Value b. Let’s Define! 1. Define the importance of the Statement of Financial Position in the accounting system or in the life of every Business entity? 2. What are the different elements of the SFP? Elements of the Statement of Financial Position (SFP) b. Liabilities are obligations that the company is require to pay. c. Equity is the residual interest of the owner of the company/business. Elements of the Statement of Financial Position (SFP) b. Liabilities are obligations that the company is require to pay. In other words, they represent claims against the assets of the business. Liabilities have normal credit balance. There 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/revenue, bank account overdrafts, current portion of long term debts, dividends payable, and current lease payable. 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 Elements of the Statement of Financial Position (SFP) c. Equity is the residual interest of the owner of the company/business. It 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. The Statement of Financial Position or Balance Sheet 1. Liquidity – pertains to the capacity of the company to pay for its currently maturing obligation. For simple understanding, the company has enough current assets to settle for its current liabilities. 2. Solvency – pertains to the ability of the company to pay for its’ long-term obligations. Long-term obligations are those that will mature more than 12 months from the reporting period. The Statement of Financial Position or Balance Sheet 3. Financial Structure - shows the composition of the claims over the assets of the company. It provides insights whether the assets of the company re financed more from creditors of the company’s equity. 4. Flexibility – the SFP shows the insights as to the capacity of the company to adapt to various circumstances. This could be in the form of its capability to grab possible opportunities or to adjust in possible unfavorable situations. II. CLASSIFICATIONS IN PREPARING SFP 1. ACCOUNT FORM II. CLASSIFICATIONS IN PREPARING SFP 2. REPORT FORM Bottom Line Through its total assets, liabilities, and equity, the Statement of Financial Position reveals details about the company's liquidity, solvency, financial structure, and flexibility. Current assets and current liabilities are distinguished from non-current assets in a statement of financial position that has been appropriately categorized. The accounting form, in which the company's total assets are displayed on the left and its liabilities and capital are displayed on the right, or the report form, in which the company's total assets, liabilities, and capital are all listed vertically, can be Activity 1: “Count Me In”. Activity 2: “Count Me In”. Direction: Using the data from activity 1, fill out the amounts in the given accounts. Current Assets: ___________________________ Non-current Assets: ___________________________ Current Liabilities: __________________________ Non-current Liabilities: ___________________________ Owner’s Equity: ___________________________ Activity 3: “Alphabet of Numbers. Direction: Arrange the accounts using the Report Form Activity 4: Finding Money: Direction: Using the information in Activity 3 – Alphabet of Numbers, 1. With the same information above, the owner’s Capital has a beginning balance of Php 700,245. The owner gave Php 50,000 additional contribution during the year. Based on Statement on Comprehensive Income, net income for the year was Php 150,545. How much money did the owner withdrew from the business? Show solution. Activity 5: Check your Understanding: Directions: Choose your answer from the given choices. Use separate sheet of paper. 1. 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 2. What basic financial statement is also called a Balance Sheet? A. Statement of Financial Position B. Statement of Comprehensive Income C. Statement of Cash Flows D. Statement of Changes in Owner’s Equity 3. What element of SPF is the resources of the company? A. Assets B. Liabilities C. Equity D. None of the above 4. Which of the following IS NOT an element of SFP? A. Asset B. Real Accounts C. Liability D. Equity 5. What is the residual interest of the owner of the business? A. Asset B. Real Accounts C. Liability D. Equity Summary:  The balance sheet, also known as the statement of financial position, is a financial document that provides a snapshot of a company's financial health at a specific point in time.  It outlines the company's assets, liabilities, and equity, which are essential for investors, creditors, and management to assess the company's financial standing.  The balance sheet is structured based on the accounting equation: Assets = Liabilities + Equity, and it is presented in either an account format or a report format.