Principle of Accounting Chapter 2 Statement of Financial Position Foreign Trade University
Statement of Financial Position(Balance Sheet) An accounting report that summarizes the financial status of a business at a particular point in time. Three main sections of a statement of financial position: Assets Liabilities Owner’s equity
Statement of Financial Position The accounting equation is the basis of the statement of financial position. Assets = Liabilities + Owner’s equity T-form statement of financial position Narrative form statement of financial position
T-form statement of financial positionCity Traders: Statement of financial position as at 30 June 2005Assets LiabilitiesCash at bank 3 000 Creditors 5 000Debtors 5 000 Loan 10 000Stock 20 000 15 000Office equipment 4 000 Owner’s equityVehicle 18 000 Capital – K. Wilson 35 000 Total equities &Total assets $50 000 liabilities $50 000
Statement of Financial PositionCity Traders: Statement of financial position as at 30 June 2005 Narrativeform Assets Cash at bank 3,000 Debtors 5,000 Stock 20,000 Office equipment 4,000 Vehicles 18,000 Total assets $50,000 Liabilities Creditors 5,000 Loan (due 30/6/07) 10,000 15,000 Owner’s equity Capital – K. Wilson 35,000 Total equities $50,000
Statement of Financial PositionCity Traders: Statement of financial position as at 30 June 2005 Narrativeform Owner’s equity Capital – K. Wilson $35,000 Is represented by Assets Cash at bank 3,000 Debtors 5,000 Stock 20,000 Office equipment 4,000 Vehicles 18,000 Total assets 50,000 Less Liabilities Creditors 5,000 Loan (due 30/6/07) 10,000 15,000 Net assets $35,000
Classification in the Statement ofFinancial Position A classified statement of financial position separate both assets and liabilities into those that are current and those that are non-current. The assets are usually classified according to their liquidity, which is how quickly they are expected to be turned into cash or used up. Liabilities are classified on the basis of the urgency of repayment.
Classification in the Statement ofFinancial Position (Cont’d) Current assets: Assets that are expected to be realised in cash or used up within the next 12 months. Current assets include cash on hand, cash at bank, short-term investments, inventory, debtors. Non-current assets: Assets that are acquired with the intention of controlling them for a period of time greater than 12 months. Non-current assets include property, equipment, machinery, furniture, vehicles, long-term investments.
Classification in the Statement ofFinancial Position (Cont’d) Current liabilities: obligations that will be satisfied within the next 12 months. Current liabilities include bank overdrafts, short-term loans, creditors. Non-current liabilities: obligations that are deferred over a period greater than 12 months. Non-current liabilities: include long-term loans.
Classified statement of financial position (T-form)City Traders: Statement of financial position as at 30 June 2005Current assets Current liabilitiesCash at bank 3,000 Creditors 5,000Debtors 5,000 Loan 5,000 10,000Stock 20,000 28,000 Non-current liabilities Loan (due 30/6/07) 5,000Non-current assetsOffice equipment 4,000 Owner’s equityVehicles 18,000 22,000 Capital – K.Wilson 35,000Total assets 50,000 Total liabilities & equity 50,000
Classified statement of financial position – Narrative formCity Traders: Statement of financial position as at 30 June 2005Current assetsCash at bank 3,000Debtors 5,000Stock 20,000 28,000Non-current assetsOffice equipment 4,000Vehicles 18,000 22,000Total assets $50,000Current liabilitiesCreditors 5,000Loan 5,000 10,000Non-current liabilitiesLoan (due 30/6/07) 5,000Owner’s equityCapital – K.Wilson 35,000 $50,000
Classified statement of financial position – Narrative formCity Traders: Statement of financial position as at 30 June 2005Owner’s equityCapital – K. Wilson 35,000Is represented byCurrent assetsCash at bank 3,000Debtors 5,000Stock 20,000 28,000Less Current liabilitiesCreditors 5,000Loan 5,000 10,000Working capital 18,000Non-current assetsOffice equipment 4,000Vehicles 18,000 22,000 40,000Less Non-current liabilitiesLoan (due 30/6/07) 5,000Net assets $35,000
Classification of loans The classification of loans depends on the term of loans and the type of loan. Term of loans: Short-term loan: current liability Long-term loan: non-current liability Type of loans: Interest only loan: non-current liability as it does not involve an obligation due within 12 months. Installment loan: two components. Current liability component: installment to be paid within 12 months. Non-current liability component: instalments outstanding for more than 12 months.
Classification of loans (Cont’d) Interest-only loan: the principal of the loan is repaid until the loan period expires. Advantage: borrower has time to repay the principal. Disadvantage: borrower needs to be well-planned to repay the whole principal. Installment loan: repayments are made throughout the life of the loan. These installments are usually sated as a dollar amount per month or per quarter. Advantage: avoid having to make one lump sum payment. Disadvantage: borrower is under pressure to make periodic repayments.
Effect of financial transactions on theStatement of Financial PositionNet profit = Revenues - ExpensesIncrease in net profit -> Increase in owner’s equityDecrease in net profit ->Decrease in owner’s equity
ExampleTransaction Assets Liabilities Owner’s equityOwner deposited $30,000 +30,000 +30,000Took out a loan of $20,000 +20,000 +20,000Bought shop fittings for +10,000$10,000 - 10,000Purchased stock on credit for +15,000 +15,000$15,000Sold goods for $2,000 (cost of +2,000 +800goods sold $1,200) -1,200Paid weekly wages $500 -500 -500Final result 65,300 35,000 30,300
Quiz Pete prepared the following balance sheet for Island Enterprise as at 31 December 2005. He asked you to review it for accuracy. Island Enterprises Balance Sheet For the year ended December 31, 2005Assets $ Liabilities and $ capitalTrade creditor 29,600 Trade debtor 23,200Cash 14,750 Capital 213,850Drawings 16,000 Stock control 12,200Building and equipment 177,300