LESSON 1: STATEMENT OF THE FINANCIAL POSITION (SFP) / THE

BALANCE SHEET
INTRODUCTION -these accounts are permanent in a sense that
their balances remain intact from one
- The three major elements of accounting
accounting period to another. (Haddock,
are: Assets, Liabilities, and Capital. These
Price, & Farina, 2012)
terms are used widely in accounting so it is
necessary that we take a close look at each Examples of permanent account include
element. But before we go into them, we
> Cash, Accounts Receivable, Accounts
need to understand what an "account" is
Payable, Loans Payable, Capital
first.
-Basically, assets, liabilities and equity
WHAT IS AN “ACCOUNT”?
accounts are permanent accounts. They are
- In accounting, an account is a descriptive called permanent accounts because the
storage unit used to collect and store accounts are retained permanently in the
information of similar nature. For example, SFP until their balances become zero. This
"Cash". Cash is an account that stores all is in contrast with temporary accounts which
transactions that involve cash receipts and are found in the Statement of
cash payments. All cash receipts are Comprehensive Income (SCI). Temporary
recorded as increases in cash and all accounts unlike permanent accounts will
payments are recorded as deductions in the have zero balances at the end of the
same account. accounting period.
WHAT IS AN “ACCOUNT TITLE”? THE ACCOUNTING EQUATION
-An account title is the unique and specific -the most basic tool of accounting is the
name assigned to an account in an accounting equation, it presents the
accounting system. The title conveys the resources controlled by the enterprise, the
purpose of the account. Without an account present obligations of the enterprise and the
title, the possibility of making an incorrect residual interests in the assets.
entry into the wrong account would be much
higher.
WHAT IS A “CHART OF ACCOUNT?”
-The chart of accounts is a listing of all
accounts used in the general ledger of an -it states that assets MUST ALWAYS
organization. It is usually sorted in order by EQUAL liabilities and owner’s equity.
account number, to ease the task of locating
specific accounts. The accounts are usually -Note that the assets are on the left side of
numeric, but can also be alphabetic or the equation opposite the liabilities and
alphanumeric. owner’s equity. This explains why increases
and decreases in assets are recorded in the
STATEMENT OF FINANCIAL POSITION opposite manner. (mirror image) as the
liabilities and owner’s equity are recorded.
-Also known as the balance sheet. This
The equation also explains why liabilities
statement includes the amounts of the
and owner’s equity follow the same rules of
company’s total assets, liabilities, and
debit and credit.
owner’s equity which in totality provides the
condition of the company on a specific date. DEBITS AND CREDITS – THE DOUBLE
(Haddock, Price, & Farina, 2012) ENTRY SYSTEM
-A balance sheet is a statement of the -Accounting is based on a double-entry
financial position of a business that lists the system which means that the dual effect of a
assets, liabilities, and owners' equity at a business transaction is recorded.
particular point in time. In other words, the
balance sheet illustrates a business's net -A debit side entry MUST HAVE a
worth. corresponding credit side entry. For every
transaction, there must be one or more
PERMANENT ACCOUNTS accounts debited and one or more accounts
credited. Each transaction affect at least 2

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accounts. The total debits for a transaction
MUST ALWAYS EQUAL the total credits.
TYPICAL ACCOUNT TITLE USED
-An account is debited when the amount is
ASSETS DEFINED:- Assets should be
entered on the LEFT side of the account.
classified only into two: current assets and
The abbreviation for debit is Dr (from the
non-current assets. Per revised Philippine
Latin word debitum which means a debtor or
Accounting Standards (PAS) No. 1, an
borrower) Debit is the value received in a
entity shall classify assets as current when
business. The word “charge” in accounting
would also mean debit. a. it expects to realize the asset, or intends to
sell or consume it, in its normal operating
-While an account is credited when the
cycle.
amount entered on the RIGHT side of the
account. The abbreviation for credit is Cr b. It holds the asset primarily for the purpose
(from the Latin word creditum which means of trading.
a creditor or lender) Credit is the value
parted with or value given in a transaction. c. It expect to realize the asset within 12
In every value received, there must be a months after the reporting period.
corresponding value parted with. - Assets are properties owned and controlled
THE RULES OF DEBIT AND CREDIT by a business. Current assets are short-term
in nature, such as cash and inventories. Non-
Rule No. 1 Assets Debit to increase the current assets are long-term; for example,
amount of asset. Credit to decrease its land, building, and equipment.
amount.
- It also refer to resources owned and
Rule No. 2 Liabilities Credit to increase the controlled by the entity as a result of past
amount of liability. Debit to decrease its transactions and events, from which future
amount. economic benefits are expected to flow to
the entity. In simple terms, assets are
Rule No. 3 Owner’s Equity Credit to
properties or rights owned by the business.
increase the capital account, Debit to
decrease its amount. CURRENT ASSETS
Rule No. 4 Revenue/Income Credit to - Assets that can be realized (collected, sold,
increase the revenue account. Debit to used up) one year after year-end date.
decrease its amount. Examples include Cash, Accounts
Receivable, Merchandise Inventory, Prepaid
Rules No. 5 Expenses Debit to increase
Expense (expenses that were paid in
expense accounts. Credit to decrease its
advance), etc. Current Assets are arranged
amount.
based on which asset can be realized first
Note: For Withdrawals/Drawings Debit to (liquidity). Current assets is also called short
increase drawings account. term assets.
NORMAL BALANCE OF AN ACCOUNT WHAT IS LIQUIDITY?
- The normal balance of any account refers - Liquidity refers to the efficiency or ease
to the side of the account- debit or credit- with which an asset or security can be
where increases are recorded. ADE- Assets, converted into ready cash without affecting
Drawings, & Expense accounts normally its market price. The most liquid asset of all
DEBIT balances, while LCR- Liabilities, is cash itself.
Owner’s Equity/Capital and
NONCURRENT ASSETS
Revenue/Income accounts normally have
credit balances. This result occurs because - Assets that cannot be realized (collected,
increases in an account are usually greater sold, used up) one year after year end date.
than or equal to decreases. Examples include Property, Plant and
Equipment (equipment, furniture, building,
land), long-term investments, intangible
assets etc. Noncurrent assets is also known
as long-term or fixed assets.
WHAT IS THE OPPOSITE OF LIQUID?

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Illiquid refers to the state of a stock, bond, or company's normal operating cycle is longer
other assets that cannot easily and readily be than 12 months, a liability is considered
sold or exchanged for cash without a current if it is due within the operating cycle.
substantial loss in value. Illiquidity is the
Current liabilities include:
opposite of liquidity.
Trade and other payables – such as Accounts
CONTRA ASSETS DEFINED:
Payable, Notes Payable, Interest Payable,
- are those accounts that are presented under Rent Payable, Accrued Expenses, etc.
the assets portion of the SFP but are
Current provisions – estimated short-term
reductions to the company’s assets. They
liabilities that are probable and can be
usually carry an opposite balance than the
measured reliably
other accounts in their account type. Also
each contra is always linked to a regular Short-term borrowings – financing
account. arrangements, credit arrangements or loans
that are short-term in nature
ALLOWANCE FOR BAD DEBTS
Current-portion of a long-term liability – the
- Allowance for Bad Debts is a contra asset
portion of a long-term borrowing that is
to Accounts Receivable. This represents the
currently due.
estimated amount that the company may not
be able to collect from delinquent customers. Example: For long-term loans that are to be
paid in annual instalments, the portion to be
ACCUMULATED DEPRECIATION
paid next year is considered current liability;
- Accumulated Depreciation is a contra asset the rest, non-current.
to the company’s Property, Plant and
Current tax liabilities – taxes for the period
Equipment. This account represents the total
and are currently payable
amount of depreciation booked against the
fixed assets of the company. CONTRA LIABILITIES DEFINED:
LIABILITIES DEFINED: - A contra liability account is paired with
another liability account, and is used to
- Liabilities are economic obligations or
reduce the balance in that account. In
payables of the business. Company assets
practice, contra liability accounts are rarely
come from 2 major sources
used. Contra accounts are more commonly
1. Borrowings from lenders or creditors, paired with asset accounts, such as accounts
(Liabilities) receivable or inventory, to reduce the
carrying values of those assets.
2. Contributions by the owners. (Capital)
CAPITAL OR OWNER’S EQUITY
- Liabilities represent claims by other parties
DEFINED:
aside from the owners against the assets of a
company. Like assets, liabilities may be - Also known as net assets or equity, capital
classified as either current or noncurrent. refers to what is left to the owners after all
liabilities are settled. C=A-L
CURRENT LIABILITIES
Capital is affected by the following:
- Liabilities that fall due (paid, recognized as
revenue) within one year after year-end date. ✓ Initial and additional contributions of
owner/s (investments),
Examples include Notes Payable, Accounts
Payable, Accrued Expenses (example: ✓ Withdrawals made by owner/s (dividends
Utilities Payable), Unearned Income for corporations),
(income received but not yet earned by the
✓ Income, and
company), etc.
✓ Expenses
-Current liabilities is also known as short
term liabilities Owner contributions and income increase
- A liability is considered current if it is due capital. Withdrawals and expenses decrease
within 12 months after the end of the it.
balance sheet date. In other words, they are
expected to be paid in the next year. If the

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The terms used to refer to a company's • When there is an operation (addition,
capital portion varies according to the form subtraction), execute the single rule.
of ownership.
• Total assets is double ruled and total
✓ in a sole proprietorship business, the liabilities and equity must be double ruled
capital is called Owner's Equity or Owner's because they represent the end of a part of
Capital; the financial statement.
✓ in partnerships, it is called Partners' PARTS OF THE SFP
Equity or Partners' Capital; and
a. Heading
✓ in corporations, Stockholders' Equity.
i. Name of the Company (Who)
SFP PRESENTATION
ii. Name of the Statement (What)
The statement of financial position can be
iii. Date of preparation (When)
presented in either of the following form.
(emphasize–“as of”)
Report Form – A form of the SFP that
b. Asset Section
shows asset accounts first and then liabilities
and owner’s equity accounts after. i. Current
(Haddock, Price, & Farina, 2012)
ii. Noncurrent
It is presented by listing the three different
c. Liabilities & Owner’s Equity Section
sections one on top of the other. It is called
the report form because there are no i. Current Liabilities
individual sides. Each category is simply
listed in order. ii. Noncurrent Liabilities

Account Form – A form of the SFP that iii. Owner’s Capital

shows assets on the left side and liabilities
and owner’s equity on the right side just like
the debit and credit balances of an account. SAMPLE OF A REPORT FORM:
(Haddock, Price, & Farina, 2012)
It is more commonly used because it better
illustrates the standard accounting equation.
A total of these two components is placed at
the bottom. The totals from both columns
should be equal. This method illustrates that
assets are equal to the total of all liabilities
and equities.
Take note:
• That the two are only formats and will
yield the same amount of total assets,
liabilities and equity.
• That assets should always be equal to
liabilities and equity.
• That amounts in the SFP are permanent
meaning that the amounts are cumulative
from the beginning of the life of the
company. (use of the word (“As of”).
Therefore, the balance sheet heading will
specify a “point in time”.
Take note on Rules on Single Rule and
Double Rule:

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DIFFERENCE OF THE STATEMENT separates assets from liabilities and
OF A FINANCIAL POSITION OF A equities.
SERVICE COMPANY AND A
iii. Separation of the current and
MERCHANDISING COMPANY
noncurrent – current liabilities are
The main difference of the Statements of the upcoming liabilities and the
two types of business lies on the inventory company should be prepared to pay
account. them. Companies should prepare as
early as today for payment of
➢ A service company has supplies inventory
noncurrent liabilities as these usually
classified under the current assets of the
have large balances. Current assets
company.
shows the company’s ability to
➢ While a merchandising company also has sustain its current operations while
supplies inventory classified under the noncurrent assets shows the
current assets of the company, the business company’s ability to sustain long-
has another inventory account under its term operations.
current assets which is the Merchandise
BASIC ACCOUNTING TERMS
Inventory, Ending.
STATEMENT OF FINANCIAL POSITION
TOPIC ENRICHMENTS
– Also known as the balance sheet. This
How a company can have a lot of assets but statement includes the amounts of the
still have very low equity? company’s total assets, liabilities, and
owner’s equity which in totality provides the
When the company has a lot of assets condition of the company on a specific date.
(example: cash, accounts receivable, prepaid (Haddock, Price, & Farina, 2012)
expenses), owners may sometimes think that
the company is doing well. There are PERMANENT ACCOUNTS – As the name
instances that owners forget that they might suggests, these accounts are permanent in a
also have a lot of liabilities which may result sense that their balances remain intact from
to their equities having a very small balance. one accounting period to another. (Haddock,
Price, & Farina, 2012) Examples of
With the preparation of the SFP, the owner permanent account include Cash, Accounts
can easily see the assets, liabilities and Receivable, Accounts Payable, Loans
equity balances of his/her company which Payable and Capital among others.
will show exactly the financial position of Basically, assets, liabilities and equity
the company as of a given point in time. accounts are permanent accounts. They are
a. Without the SFP, the company will never called permanent accounts because the
know if the company truly owns anything accounts are retained permanently in the
because in case of bankruptcy, liabilities are SFP until their balances become zero. This
paid first. is in contrast with temporary accounts which
are found in the Statement of
- Small businesses don’t usually account for Comprehensive Income (SCI). Temporary
their assets and liabilities as long as the accounts unlike permanent accounts will
owners see that cash is coming in. They have zero balances at the end of the
sometimes forget that when liabilities accounting period.
become due, if they don’t have enough
current assets to be able to pay those CONTRA ASSETS – Contra assets are
liabilities, then they can get in trouble with those accounts that are presented under the
their debts. assets portion of the SFP but are reductions
to the company’s assets. These include
b. The importance of the SFP format: Allowance for Doubtful Accounts and
i. Report form vs Account form – Accumulated Depreciation.
these are just formats. Usually Allowance for Doubtful Accounts is a contra
depends on the reader for preference. asset to Accounts Receivable. This
ii. Report form is the normal format represents the estimated amount that the
for those not familiar with company may not be able to collect from
accounting. Account form easily delinquent customers.
shows that the SFP is balanced and

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Accumulated Depreciation is a contra-asset
to the company’s Property, Plant and
Equipment. This account represents the total
amount of depreciation booked against the
fixed assets of the company.
Report Form – A form of the SFP that
shows asset accounts first and then liabilities
and owner’s equity accounts after.
(Haddock, Price, & Farina, 2012)The
balance sheet shown earlier is in report
form.
Account Form – A form of the SFP that
shows assets on the left side and liabilities
and owner’s equity on the right side just like
the debit and credit balances of an account.
(Haddock, Price, & Farina, 2012)
a. the two are only formats and will yield
the same amount of total assets, liabilities
and equity
b. assets should always be equal to liabilities
and equity
Current Assets – Assets that can be realized
(collected, sold, used up) one year after
year-end date. Examples include Cash,
Accounts Receivable, Merchandise
Inventory, Prepaid Expense, etc.
Current Liabilities – Liabilities that fall due
(paid, recognized as revenue) within one
year after yearend date. Examples include
Notes Payable, Accounts Payable, Accrued
Expenses (example: Utilities Payable),
Unearned Income, etc.
Current Assets are arranged based on which
asset can be realized first (liquidity). Current
assets and current liabilities are also called
short term assets and shot term liabilities.
Noncurrent Assets – Assets that cannot be
realized (collected, sold, used up) one year
after year-end date. Examples include
Property, Plant and Equipment (equipment,
furniture, building, land), Long Term
investments, Intangible Assets etc.
Noncurrent Liabilities – Liabilities that do
not fall due (paid, recognized as revenue)
within one year after year-end date.
Examples include Loans Payable, Mortgage
Payable, etc.
Noncurrent assets and noncurrent liabilities
are also called long term assets and long
term liabilities.