Statement of Financial Position

STATEMENT OF
FINANCIAL POSITON
Assets, Liabilities, and Equity
6/13/2017
Fundamentals of Accountancy, Business, and Management 2 Edmer M. Constantino
2

ASSETS
Cash, Receivables, Inventory, Prepaid Expenses, Property Plant and
Equipment, Intangible Assets
6/13/2017
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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
5
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).
10

• 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.
11

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:
12

INVENTORY
13

• 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.
14

• 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.
15

• 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.
16

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
17

PREPAID EXPENSES
18

• 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.
19

• 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.
20

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.
21
•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.
22

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Friendly Convenience Store:
Prepayments
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
25

• 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.
26

• 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.
27

• 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.
28

• 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.
29

30
Friendly Convenience Store: Property, Plant, and
Equipment
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
32

• 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.
34

LIABILITIES
Payables: Accrued Expenses, Unearned Income, Long-Term Liabilities
6/13/2017
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• 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.
36

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
40

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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

6/13/2017
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.

6/13/2017
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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

6/13/2017
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.

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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

6/13/2017
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?

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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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63
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:

6/13/2017
64

Statement of Financial Position

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