Here are the issues I see with Pete's balance sheet: 1. Drawings should be shown as a reduction to capital, not as an asset. 2. The title should specify it is a balance sheet "as at" December 31, 2005 rather than "for the year ended". 3. The accounting equation is not balanced. Assets should equal the sum of liabilities and capital. Please let me know if you would like me to review the corrected balance sheet.

1. Principle of Accounting
Chapter 2
Statement of Financial Position
Foreign Trade University

2. 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

3. 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

4. T-form statement of financial position
City Traders: Statement of financial position as at 30 June 2005
Assets Liabilities
Cash at bank 3 000 Creditors 5 000
Debtors 5 000 Loan 10 000
Stock 20 000 15 000
Office equipment 4 000 Owner’s equity
Vehicle 18 000 Capital –
K. Wilson 35 000
Total equities &
Total assets $50 000 liabilities $50 000

5. Statement of Financial Position
City Traders: Statement of financial position as at 30 June 2005 Narrative
form
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

6. Statement of Financial Position
City Traders: Statement of financial position as at 30 June 2005 Narrative
form
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

7. Classification in the Statement of
Financial 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.

8. Classification in the Statement of
Financial 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.

9. Classification in the Statement of
Financial 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.

10. Classified statement of financial
position (T-form)
City Traders: Statement of financial position as at 30 June 2005
Current assets Current liabilities
Cash at bank 3,000 Creditors 5,000
Debtors 5,000 Loan 5,000 10,000
Stock 20,000 28,000 Non-current liabilities
Loan (due 30/6/07) 5,000
Non-current assets
Office equipment 4,000 Owner’s equity
Vehicles 18,000 22,000 Capital – K.Wilson 35,000
Total assets 50,000 Total liabilities & equity 50,000

11. Classified statement of financial position – Narrative form
City Traders: Statement of financial position as at 30 June 2005
Current assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000 28,000
Non-current assets
Office equipment 4,000
Vehicles 18,000 22,000
Total assets $50,000
Current liabilities
Creditors 5,000
Loan 5,000 10,000
Non-current liabilities
Loan (due 30/6/07) 5,000
Owner’s equity
Capital – K.Wilson 35,000
$50,000

12. Classified statement of financial position – Narrative form
City Traders: Statement of financial position as at 30 June 2005
Owner’s equity
Capital – K. Wilson 35,000
Is represented by
Current assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000 28,000
Less Current liabilities
Creditors 5,000
Loan 5,000 10,000
Working capital 18,000
Non-current assets
Office equipment 4,000
Vehicles 18,000 22,000
40,000
Less Non-current liabilities
Loan (due 30/6/07) 5,000
Net assets $35,000

13. 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.

14. 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.

15. Effect of financial transactions on the
Statement of Financial Position
Net profit = Revenues - Expenses
Increase in net profit -> Increase in owner’s
equity
Decrease in net profit ->Decrease in owner’s
equity

16. Example
Transaction Assets Liabilities Owner’s equity
Owner deposited $30,000 +30,000 +30,000
Took out a loan of $20,000 +20,000 +20,000
Bought shop fittings for +10,000
$10,000 - 10,000
Purchased stock on credit for +15,000 +15,000
$15,000
Sold goods for $2,000 (cost of +2,000 +800
goods sold $1,200) -1,200
Paid weekly wages $500 -500 -500
Final result 65,300 35,000 30,300

17. Practice questions
Exercise 2.2
Exercise 2.5

18. Homework
 Exercise 2.3
 Exercise 2.6

19. 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, 2005
Assets $ Liabilities and $
capital
Trade creditor 29,600 Trade debtor 23,200
Cash 14,750 Capital 213,850
Drawings 16,000 Stock control 12,200
Building and equipment 177,300