Statement of Financial Position (SFP) - Chapter 1

STATEMENT OF
FINANCIAL POSITON
Assets, Liabilities, and Equity
6/13/2017Fundamentals of Accountancy, Business, and Management 2 Edmer M. Constantino
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ASSETS
Cash, Receivables, Inventory, Prepaid Expenses, Property Plant and Equipment,
Intangible Assets
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Assets are resources with future benefits that are
within the control of the company. Resources are
classified into asset accounts based on its future use
to the company. There are many kinds of assets. This
book will focus on the following assets:
1.Cash
2.Receivables
3.Inventory
4.Prepaid Expenses
5.Property, Plant and Equipment
6.Intangible Assets

CASH
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Fundamentals of Accountancy, Business, and Management 2 Edmer M. Constantino 6/13/2017
Statement of Financial Position

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• The most well-known asset class first – Cash. 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 the
bank which can be kept in a savings or checking account.
Generally, time deposit is not categorized as cash, this will be
further explained in detail below.
• Cash refers only to funds readily available to be spent for the
company’s operations. It is used for buying assets, paying
supplies, utilities, employee salaries and others. It is also used
for settlement of obligations. On the other hand, cash are
sourced from contribution of owners, proceeds from
borrowings, sales of assets or collections from customers.

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San Juan Enterprise is manage by Beefy San Juan. Beefy asked you to determine the
balance of her cash account as of December 31, 2017. You determined the following:
1. She kept some cash in the store as change fund (sukli). The cash count revealed the
following: 100, 100, 50, 20, 20, 10, 5, .25, 1, 1, 1, 1, 5, 5, 5, 10, 10, 5, 200, 200, 500,
500, 100, 1000, 10, 1, 5, 50, 20, 50, 10, 1000, 50, 20, 20, 10, 50, 5, 1, 1, 1, 50, 20, .50,
50, .50, .25, 50, .25.
2. Two of her regular customers gave B. San Juan the following checks in payment of
debts:
a. P 2,345 check dated December 31, 2017
b. P 2, 421 check dated January 3, 2018
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, 2017 according to the passbook is
P 32,420.
b . A time deposit certificate for P 150,000 for 60 days.
Report to Beefy San Juan the balance of the cash and cash equivalents account of San
Juan Enterprise.

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Denomination Number of Bills Peso Amount
Total Cash on Hand
Cash in bank
Total Cash
Cash Equivalents
Total Cash and Cash Equivalents

RECEIVABLES
9

• Receivables is a general term that refers to the
company’s right to collect or claim payment. The right to
collect comes from unpaid sales or lending activities.
• Generally, the company collects cash from its receivables.
There are also receivables that may be settled in other
assets or services. For example, receivable from suppliers
may be settled in merchandise.
• A sales agreement may require a customer to pay the
seller immediately upon delivery of goods. This is called
cash on delivery (COD).
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• In contrast to COD, a customer may instead promise to
pay the seller at some future time after delivery. This a
credit sales agreement and it gives rise to Account
Receivable. Normally referred to as AR, this account
means receivable from customers.
• Note Receivable is another kind of receivables. It is
evidenced by promissory notes (PN). PN is a legal
document that says that borrower promises to pay, on
scheduled payment dates, a specific sum called that
principal and interest based on principal and stated
interest rate.
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MARIA REYES
Balance
P124.00
September 5
2 bottles of cola (P 12 each)
September 15
1 bar of laundry soap (P 50)
October 3
1 sachet of fabric softener (P 50)
October 8
1 small can of sardines (P 25)
October 15
Payment: P 200.00
October 25
2 bag of chips (P 30 each)
October 30
Payment: P 100.00
November 16
1 sachet of laundry soap (P 50)
November 30
Payment: P 100.00
December 1
5 sachets of shampoo (P 15)
December 15
Payment: P100.00
December 22
1 small cans of sardines (P 25)
December 27
2 kilo of rice (P 44)
December 28
1 small bar of bath soap (P 20)
December 30
Payment: P 100.00
Juana asked you to compute how much Maria Reyes owed the store. Juana sells to Maria on
credit. Maria pays every 15th and 30th of the month. Maria’s listings are reproduced below:
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INVENTORY
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• The inventory account reports the cost of
unsold merchandise. The inventory account
of a trading business contains merchandise
held for resale. A manufacturing company
will have more complex inventories
composed of raw materials, unfinished
inventories in the middle of the
manufacturing process (may also be called
work in process), and unsold finished goods.
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• Consignment is an important issue in inventory
accounting. The owner places his goods “on-
consignment” in the premises of the store owner. The
store in 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 the proceeds form the sale of the
consigned items. The store owner’s income from this
transaction maybe in the form of commissions from the
sale and/or rent from the store space used to display
the consigned goods.
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• 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.
• Only merchandise held for sale are reported as
inventory. Those items that are to be used in the day to
day activities of the company are Supplies and not
Inventory.
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Before Juana opened the store on January 1, 2017, she asked
you to help her count the merchandise inside the store. The result
of the count are given below:
Note:
• The chocolate bars were on consignment from Tsokolate-Eh.
• Of the 5 notebooks inside the store, one is used for listings of customer credit.
Report to Juana Dela Cruz the balance of the merchandise inventory account of Friendly
Convenience Store.
Merchandise Cost
2 bags of candy P 30 per bag
10 sachets of coffee P 6 per sachet
10 sachets of laundry powder P 15 per sachet
1 sack of rice (50 kilos) P 1,800 per sack
10 cans of sardines P 15 per can
10 chocolate bars P 20 per bar
5 notebooks P 25 per notebook
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PREPAID EXPENSES
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• Prepaid Expenses refer to future expenses that the
company had paid for in advance. It is placed in this
account until the services or items are used and become
expenses. Expenses are recorded only when purchased
goods and services are used.
Let us look at mobile phone services. When prepaid subscribers purchase “loads” 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 are used. Accrual
accounting dictates that expense is recognized only when phone services are used,
regardless of whether they are prepaid or post-paid subscribers.
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• Another kind of prepaid expenses is insurance. The
insured will pay premium at the beginning of the
contract period and the insurer (insurance company) will
reimburse the insured party for losses if the insured
event occur.
For example: An annual fire insurance contract requires the insured party to pay premium at
the beginning of the contract year. During the contract period, if fire occurs at the insured
premises, then the insurance company will pay the insured for the amount damages he
suffered resulting from the fire. However, the insurance company has no obligation to return
the premiums paid by the insured party if there is no fire during the contract period.
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It is because the premium payments are
significantly lower than the amount of the
estimated damages that the company will burden if
the insured event indeed occurs. A company buys
insurance contract to be prepared in case
something happens, even if they hope that thing
never happens.
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•Why companies buy insurance
contracts?

• Insurance contracts are time based. The buyers of the
contract is insured only within the contract period. This
means that the advanced payment of the insured is at
first a Prepaid Expense. It is transferred to expense
evenly over the contract period. Also, at the end of the
contract period, the entire advance payment should
have been fully transferred to expense such that the
balance of the Prepaid Insurance is zero.
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Friendly Convenience Store:
Juana paid premium P 2,500 for
one-year fire insurance in the name
of the store on October 1, 2016.
How much should prepaid insurance
be on December 31, 2016?

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ANSWER:
Insurance premium is paid in advance. In the case of
the Friendly Convenience Store, the P 2,500 premium
payments was for insurance from October 1, 2016 to
September 30, 2017. As of December 31, 2016, 3 months
had already passed and considered expense. Therefore,
only 9 months is Prepaid Expenses.
We compute the Prepaid Insurance Expense as P
2,500 x 9/12 = P 1,875

PROPERTY, PLANT
AND EQUIPMENT
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• Property, Plant, and Equipment or PPE for short, are long-
term assets that are used in the operations of the
company. These are classified as long-term asset (or non-
current asset) because these assets will be used in the
business for more than one year.
• Examples of such assets classified as PPE are land,
building, warehouse, automobiles, delivery vehicles,
computer equipment and manufacturing equipment. Only
those assets owned and controlled by the company will
be reported as PPE. Rented facilities and equipment are
excluded from PPE.
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• Recall that assets are resources with future benefits for
the company. For PPE, such benefits are to be used for
more than one year.
• The cost of purchasing PPE is not immediately reported
as expense, rather, it is recognized as assets.
• As the asset is used, a portion of the cost is transferred
to expense. The process of recognizing the asset is
called capitalization while depreciation refers to
transferring of cost of asset to expense.
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• Depreciation is linked to usage. It seems necessary to
estimate the pattern of usage in order to compute for
depreciation.
• To simplify, it is an acceptable assumption in accounting
that the asset will be used evenly over its life.
• This assumption enables accountants to simply divide
the cost of the asset over its useful life. This is the
straight-line method of depreciation. The depreciation
will increase the expense account and decrease the
asset account.
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• Its normal accounting practice not to directly decrease the
PPE account. Rather, a contra-assets account called
accumulated depreciation is used to catch the
depreciation and decrease the asset value to be reported
in the SFP.
• The cost of the PPE, net of the balance of accumulated
depreciation as of the SFP date is called Net Book Value
of the PPE.
• Not all PPEs are subject to depreciation. Land is not
depreciated because this asset does not have a useful life.
More so, the value of Land increase with the passage of
time.
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Friendly Convenience Store: Property, Plant, and
On January 1, 2017, Juana purchased an electronic cash
register to be used in the Friendly Convenience Store. The cash
register was purchased at a cost of
P 15,000. Juana depreciates the cash register over five years.
Determine the following:
1. Equipment
2. Annual depreciation
3. Accumulated depreciation as of December 31, 2016
4. Net book value of Equipment as of December 31, 2016

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ANSWER
Cost of electronic cash register P 15,000
Estimated useful life (in years) 5
Annual depreciation (P 15,000 / 5 years) P 3,000
Number of years depreciated (2015 – 2016) 2
Accumulated depreciation (P 3,000 x 2) P 6,000
Net book value (P 15,000 – P 6,000) P 9,000
(1)
(2)
(3)
(4)

INTANGIBLE ASSETS
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• Intangible Assets are long-term assets similar to PPE.
These assets will be used in the business for more than
one year. 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 not tangible properties. These assets that you
cannot see or touch. There may be a piece of paper as
evidence of the asset but the actual asset is “intangible”.
33

• 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, whether a
product or a process, for the sole right to make, use, and
sell that invention for a specified period of time.
• Brand name refers to word or words used to identify a
specific product and its manufacturer.
• Trademark is the symbol that represents the brand.
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LIABILITIES
Payables: Accrued Expenses, Unearned Income, Long-Term Liabilities
35

• LIABILITIES – these are obligations that the company is
required to pay. Payment for liabilities may be in cash,
goods, or services.
• Entities to whom the company is indebted are called
creditors.
• There are many different kinds of liabilities.
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PAYABLES
37

• The opposite of right to collect is the obligations to pay.
Receivables are right to collect payments t is from
debtors while payables are obligations to make
payments to creditors.
• There are generally two kinds of payables – Accounts
Payable (AP) and Notes Payable (NP).
• AP normally refers to obligation to the suppliers of
inventories. It is evidenced by the supplier’s sales
invoices and delivery receipts.
38

• Most suppliers give credit terms of 30 to 90 days. A 30
day credit term means that the company should pay for
the purchases 30 days from the date of delivery.
• Some suppliers give discounts for early payments. The
credit term 2/10, n/30 (reads: two ten net thirty) means
payment of full amount is due in 30 days but a 2%
discount may be taken if paid within ten days (after
delivery). This kind of credit term encourages debtors to
pay earlier than their due dates.
39

• NP refers to an obligation evidenced by a promissory
note. Recall from our discussion of Notes Receivable
(NR). Promissory Note (PN) is a document that expresses
the borrower’s promise to pay. The issuer of the
promissory note reports this as NP in his accounting
books. On the other hand, the holder of the promissory
note has the right to collect and reports NR in his
accounting books
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41
Friendly Convenience Store:
ACCOUNTS PAYABLE
On November 15, 2016, Juana Dela Cruz
purchased five sacks of rice at P 1,800 per sack.
The credit term is 2/10, n/30. Determine how
much Juana should pay given the following
payment dates:
1.November 25, 2016
2.December 15, 2016

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1. If Juana will pay anytime from November 15, 2016 to
November 25, 2016, payment due is:
Full cost of one sack of rice P 1,800
Number of sacks purchased 5
Total cost of purchase 9,000
Discount in % 2%
Discount in Peso 180
Discounted cost to be paid P 8,820
2. If Juana will pay after November 25, 2017, she is liable for the
full cost of P 9,000. She will forego the saving of P 180.

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PROMISSORY NOTE
November 1, 2016
1. Promise to Pay. For value receive, Friendly Convenience Store, represented by
Juan Dela Cruz, the manager, (Borrower) promises to pay United Bank (Lender) P
25,000 (Twenty-five thousand pesos) and interest at the yearly rate of 6% on the
unpaid balance as specified below.
2. Installments. Borrower will pay five payments of P 5,000 each at monthly intervals
on the 30th day of the month. First payment is due on November 30,2016.
3. Application of Payments. Payments will be applied first to interest and then to
principals.
4. Prepayment. Borrower may prepay all or any part of the principal without
penalty.
5. Loan Acceleration. If borrower is more than five days late in making any payment,
Lender may declare that the entire balance of unpaid principal id due
immediately, together with the interest that has accrued.

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PROMISSORY NOTE
December 1, 2016
1. Promise to Pay. For value receive, Marcos Trading Enterprise, represented by
Susan Magpantay, the manager, (Borrower) promises to pay Moments
Cooperatives (Lender) P 125,000 (One Hundred Twenty-five thousand pesos) and
interest at the yearly rate of 8% on the unpaid balance as specified below.
2. Installments. Borrower will pay five payments of P 25,000 each at monthly
intervals on the 30th day of the month. First payment is due on December 30,
2016.
3. Application of Payments. Payments will be applied first to interest and then to
principals.
4. Prepayment. Borrower may prepay all or any part of the principal without
penalty.
5. Loan Acceleration. If borrower is more than five days late in making any payment,
Lender may declare that the entire balance of unpaid principal id due
immediately, together with the interest that has accrued.

ACCRUED EXPENSES
45

• Let us recall our earlier discussion about prepaid mobile
phone loads and post-paid plan. Mobile phone loads
are advance payments for future usage of mobile
phones services. On the other hand, post-paid services
subscribers are billed for their usage of the service. The
billing statement also stated when payment is due. Post-
paid service plans are accounted for as Accrued Expense
until payment is made to the phone company.
46

• Accrued Expenses refers to the unpaid expenses of the
company as of the cut-off date of the statement of
financial position. There are many kinds of accrued
expenses such as Salaries Payable, Utilities Payable, Rent
Payable, and Interest Payable. Take the case of the
following payroll schedule. Employees are paid every
15th and 30th day of the month.
47

• Salary paid on the 15th is for work rendered by the
employees for the 29th day of the current month to 13th
day of the following month while that paid on the 30th is
for work rendered for 14th to 28th day of the same
month. As of December 31 (calendar year SFP), the
company would have owed the employees for three
days of work, December 29 – 31. According to the
payroll schedule, these days will be paid as part of their
January 15 payroll. Therefore, Salaries Payable should
reflect three days of unpaid salaries.
48

49
FRIENDLY CONVENCIENCE STORE:
Accrued Expense
Juana hired Elena Reyes as storekeeper with
salary of P 400.00 per day. Elena is paid every
Saturday for work rendered during the week.
Sunday is her day-off. December 31, 2016 falls
on a Thursday. Determine the balance of
Salaries Payable to be reported on the Store’s
SFP as of December 31, 2016.

50
ANSWER:
Daily salary rate P 400.00
Number of unpaid days (Monday
to Thursday)
4
Salaries payable,
December 31, 2016
1,600.00

UNEARNED INCOME
51

• Customer deposits or down payments are
customer payments received before the
delivery of goods or services. These will not
count as sales until deliveries are made.
These payments are initially recorded as
Unearned Income – a liability payable in
goods or services.
52

• Take the case of a tailor of custom-made suits.
He requires his customer to pay a down
payment upon ordering. The tailor does this
because (1) the money received from the
customer will be spent on materials for the suits;
and (2) the significant payment made by the
customer will ensure that he will return to claim
his order and pay the full price.
53

Can the tailor record revenue
based on the amount of down
payment received from the
customers?
54

• The answer is NO. He can only record revenue
when the suits are delivered to and accepted
by the customer. While these activities are not
yet done, the cash received from the customer
is reported as unearned income. Upon delivery
and acceptance, the unearned income is
transferred to revenue.
55

• Unearned income is a liability. However, unlike
regular liability, the settlement of Unearned
income is not through direct cash payments to the
customer. Rather, it is settled 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. In
the case of the tailor, it is job based. However,
some contracts are time based. An example of this
is advance rent.
56

57 FRIENDLY CONVENIENCE STORE: Unearned Income
Pedro Benitez, a neighbor of Juana, operates a coffee
vending machine business. On October 1, 2016, he
entered in a contract with Juana to rent a small space
on the counter top of the Store where he can put his
coffee vending machine. The rent is P 500.00 per
month. Pedro paid six months advance rent on
October 1, 2016. How much should be reflected as
Unearned Rent Income on the Store’s SFP as of
December 31, 2016.

58
ANSWER
Monthly Rental Rate P 500.00
Remaining unused months
(January to March)
3
Unearned Rent Income,
December 31, 2016
P 1,500.00

LONG-TERM
LIABILITIES
59

• Long-term liabilities refer to obligations with due
dates that fall more than one year from the date
of the SFP. Bank loan is a common example. It is
documented by a promissory note. The company
pays interest periodically. The repayment of the
principal is based on the contractual agreement. It
can all be paid at maturity or in installment over
the term of the loan. Long-term liability is part of
the financing activities of the company.
60

61
FRIENDLY CONVENIENCE STORE: Long-Term Liability
In order to construct the store, Juana borrowed P 50,000.00 from
Universal Bank and P 25,000.00 from United Bank. Terms of the loans are
as follows:
Universal Bank: The bank requires Juana to pay interest of 7% payable
monthly. The principal is payable on October 1, 2018.
United Bank: The bank requires Juana to pay five monthly installments of
P 5,000.00 plus interest on the unpaid balance. The loan was taken on
November 1, 2016 and first monthly installment is due on November 31,
2016.
Which of the two loans should be reported as Long-Term Liability on the
Store’s calendar year 2016 SFP?

62
Marcos Trading Enterprise: PREPAYMENTS
Marcos Trading Enterprise accumulates
Building Insurance Premium amounting for
P 5,000.00 for one-year in the name of the
store on August 1, 2016. How much should
the trading enterprise have already
accumulated on November 30, 2016?

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Cost of Automobile P
Estimated useful life (in years)
Annual depreciation ( )
Number of years depreciated ( )
Accumulated depreciation ( )
Net book value ( )
TOTAL P
Marcos Trading Enterprise: Property, Plant and Equipment
On February 1, 2013, the Enterprise purchased an
automobile to be used in trading Enterprise. The automobile
was purchased at a cost of P 750,000.00. Marcos depreciates
the automobile over 10 years. Determine the following:

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