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Unit 2
Measuring and Reporting Financial Position
Overview

Background As a means of telling interested people about business operations, accounting
performs important tasks of recording daily transactions, classifying recorded
data, summarizing recorded and classified data, and interpreting the
summarized facts. In all business enterprises, accounting information is
summarized in at least four basic financial reports.
One of these financial reports shows what the business is worth in terms of
the properties it owns (i.e., the assets), the debts it owes (i.e., the liabilities),
and the investment of its owner/s (i.e., the proprietorship). This report is
called the Statement of Financial Position and this statement informs the
users of the financial condition of the business at a given date, usually at the
end of an accounting period.

Purpose The purpose of Unit II Measuring and Reporting Financial Position is to
illustrate different forms of Statement of Financial Position and how to
prepare them. Students will also be introduced in analyzing business
transactions using the accounting equation.

In this unit This unit contains the following topics:

Topics
Forms of Statement of Financial Position
Parts of the Statement of Financial Position
Accounting Equation
Current Assets
Non-Current Assets (Plant, Property and Equipment)
Current Liabilities
Non-Current Liabilities (Long-Term Liabilities)
Owners Equity
Debit and Credit of Statement of Financial Position Items

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Forms of Statement of Financial Position

Overview As provided in the revised Philippine Financial Reporting Standard (PFRS)
based on the International Accounting Standards (IAS), the Statement of
Financial Position should be prepared following the new accounting concept
of materiality and aggregation, i.e., a separate schedule would be attached to
the report to explain the amounts with corresponding "notes". It is also
required that a separate statement of changes in equity be prepared, and
therefore, the owner's equity section of the Statement of Financial Position
would show only the ending balance of the capital account as shown in the
given illustration.
The following discussions will provide readers information on how the
account and report format of Statement of Financial Position may be
prepared.

Account Form In the account form of Statement of Financial Position, the assets are listed on
the left side of the report and the liabilities and proprietorship on the right
side. The example below illustrates the account form:
JOSEPH LABRADOR, COMPANY
Statement of Financial Position
December 31, 20XI

ASSETS LIABILITIES AND OWNER'S EQUITY

Current Assets Current Liabilities
Cash & cash equivalents (7) P 20,000 Trade & Other Payables (11) P 55,000
Investments in trading securities 10,000 Current Portion of
Trade & Trade Receivables (8) 30,000 Mortgage Payable 20,000
Prepaid Expenses (9) 29,000
Total Current Assets P 89,000 Total Current Liabilities P 75,000

Non Current Assets Non Current Liabilities
Prop, Plant & Equipment (10) 791,000 Notes Payable
(due in 3 years) P 70,000
Mortgage payable 180,000
Total non current liabilities 250,000
Total liabilities P 325,000
Owner's Equity
Labrador, Capital 555,000
TOTAL LIABILITIES
TOTAL ASSETS P880,000 AND OWNER'S EQUITY P 880,000
======= =======


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Report Form A Statement of Financial Position prepared in report form shows the assets on
the top section of the statement and the liabilities and owners equity on the
bottom section. The example below illustrate the report form:
JOSEPH LABRADOR, COMPANY
Statement of Financial Position
December 31, 20X1

A S S E T S
Current Assets Notes
Cash & cash equivalents (7) P 20,000
Investments in Trading Securities 10,000
Trade & Other Receivables (8) 30,000
Prepaid Expenses (9) 29,000
Total Current Assets P 89,000

Non Current Assets
Property, plant & equipment (10) 791,000

TOTAL ASSETS P 880,000
=======
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Trade & other payables (11) P 55,000
Current portion of mortgage payable 20,000
Total Current Liabilities P 75,000

Non Current Liabilities
Notes Payable (due in 3 years) P 70,000
Mortgage Payable 180,000
Total Non-Current Liabilities 250,000

Total Liabilities P 325,000

Owners Equity
Joseph, Capital 555,000

TOTAL LIABILITIES AND OWNER'S EQUITY P 880,000
=======

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Notes Note 7 - Cash & cash equivalents
Cash on Hand P 5,000
Cash in Bank 15,000
Total cash and cash equivalents P 20,000
======
Note 8 Trade & other receivables
Accounts Receivable P 20,000
Less: Allowance for Doubtful Accounts 1,200 P 18,800
Notes Receivable 7,500
Interest Receivable 700
Advances to Employees 3,000
Total trade & other receivables P 30,000
======
Note 9 Prepaid expenses
Office Supplies on Hand P 6,000
Prepaid Insurance 20,000
Prepaid Advertising 3,000
Total Prepaid expenses P 29,000
======
Note 10 Property, plant & equipment
Land P 300,000
Building P 450,000
Less: Accumulated Depreciation 70,000 380,000
Office Equipment P 110,000
Less: Accumulated Depreciation 20,000 90,000
Furniture & Fixtures P 25,000
Less: Accumulated Depreciation 4,000 21,000
Total Carrying value P 791,000
=======
Note 11 Trade & other payables
Accounts Payable P 20,000
Notes Payable 18,000
Interest Payable 2,000
Accrued Salaries Expense 5,000
Unearned Rent Income 10,000
Total trade & other payables P 55,000
=======

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Parts of the Statement of Financial Position

Overview This portion will enumerate the different parts of a Statement of Financial
Position and their corresponding placement in the financial report being
prepared.

Statement
Heading
Includes the name of the business, tells the kind of statement it is, and gives
the date for which the report is prepared

Asset, Liability,
Proprietorship
Items are grouped and each group of items is identified by special captions.

Captions Classifications of each group of items appear against the left margin of the
statement.

Account titles Individual account titles in each classification are indented.

Current Assets The individual current assets are usually listed in order of their liquidity, with
the most liquid asset, Cash appearing first.

Plant, Property,
Equipment
The plant assets are often listed in order of their expected useful life with the
assets with the longest expected useful life, Land appearing first.

Note (#) The separate schedule attached to the report explaining in detail the
aggregated amount presented on the face of the financial statement.



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Current
Liabilities
The current liabilities are in theory listed in order of due date, with the debt
with the earliest due date appearing first.

Captions
Indicating
Totals
Each group of items (i.e., total current assets, total plant, property and
equipment, total current liabilities, etc.) is indented further.

Single Rule
Line
The last figure in each group of items is underlined.

Final Totals The two final totals (i.e., total assets and total liabilities and owners equity)
appear as the last line in their respective sections and are underlined twice
(double ruled) to indicate a final total.

Peso Sign Peso signs are used (a) to the left of the first amount of a group of amounts
being combined and (b) to the left of each final total.

Peso Amount The peso amount for the detailed items is shown in one column; the total of
each classification is extended into the last column on the right-hand side of
the statement.

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Accounting Equation

Overview One important feature of the Statement of Financial Position relates to a very
simple fact. The Statement of Financial Position of any business must show
total assets exactly equal in amount to the sum of the liabilities and the
capital. This relationship exists regardless of the size of the enterprise or the
variety of its assets, liabilities and ownership interest. This identity is called
the basic accounting equation. Often it is stated as:
ASSETS = LIABILITIES + OWNERS EQUITY

which means, assets equal liabilities plus proprietorship. Other times the
equation appears as:
ASSET - L IABILITIES = OWNERS EQUITY
or
ASSET - OWNERS EQUITY = L IABILITIES


Assets This includes anything owned or possessed by the business which is capable
of being expressed in terms of money or possessing monetary values, and
which, consequently, is available for the payment of the debt of the business.
In short, assets represent the resources of the business.

Liabilities Economic obligations (i.e., debts) payable to an individual or an organization
outside the business.

Owners Equity This represents the claim of an owner of a business over the assets of the
business after the claims of the creditors have been satisfied.

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Current Assets

Overview This includes cash and any other assets that are reasonably expected to be
converted into cash or consumed during one year or one operating cycle, i.e.,
whichever is longer.

Cash Currency, coins and checks that the business has received from customers and
other sources that have not yet been deposited in its bank account, as well as
the amount the business has on deposit in its bank account, against which
checks may be drawn in payment of bills.

Investments in
Trading
Securities
Short-term investment in stocks of other business (also known as marketable
securities).

Notes
Receivable
The amount due in the near future from persons or companies on the basis of
their formal, written promises to pay cash to the business on the date specified
in the promissory note.

Interest
Receivable
The amount of interest due as of the Statement of Financial Position date on
notes received from customers.

Accounts
Receivable
The total amount owed to the business by charge account customers.

Advances to
employees
Cash advance given to an employee to be liquidated in the form of service.



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Merchandise
inventory
The purchase price of the particular line of goods the business expects to sell
to its customers for cash or on a charge account basis. This represents goods
on hand as of the Statement of Financial Position date.

Accrued
Income
Income already earned but not yet collected, such as interest earned on
promissory note issued by the customer before the maturity date of the note.

Supplies on
hand
The cost value of such things as wrapping paper and packaging tape and
twine, (Store Supplies on Hand), computer ribbons, envelopes, stamps, paper
(Office Supplies on Hand) , and other assets of a similar nature that the
business will use up in performing its activities.

Prepaid
insurance
That part of the premium cost of all kinds of insurance carried by the business
after the Statement of Financial Position date. Prepaid insurance is always
classified as current assets even if the amount of the unexpired premiums
covers a period longer than one year, the time limit used in defining current
assets.

Prepaid rent Rent paid by the business for facilities to be used after the Statement of
Financial Position date. For example, on December 1, 20x1, a business paid
P30,000 for December, January, and February rent. On a Statement of
Financial Position dated December 31, 20x1, the amount of Prepaid Rent
would be shown as P20,000 the amount paid for the use of the facilities for
January and February, 20x2.

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Non-Current Assets (Plant, Property and Equipment)

Overview Assets are classified as plant, property and equipment if they meet the
following criteria: (1) they must have physical existence; (2) they must be
more or less permanent in nature; (3) they must not be for sale; (4) they must
be used in business operations; and (5) they must undergo depreciation
(except land). (Pefianco and Mercado, 1983)

Land The cost of land the business uses to carry on its activities - the lot on which
its factory or office building stands.

Building The original cost less accumulated depreciation is shown to give the
depreciated value of the structures in which the business carries on its
operation. This item could be separated into such things as Factory Building,
Office Building, Warehouse, and any other type of building the business
wishes to show on its statement of financial position.

Equipment The original cost less accumulated depreciation is shown to give the
depreciated value of the equipment used in the operations of the business.
The title equipment may also be separated into whatever special assets of this
type the business cares to identify. The business may use such titles as Office
Equipment for the value of the adding machines, calculators, and computers
the office employees use, and Delivery Equipment, for the value of the trucks
and automobiles the business uses to deliver its merchadise to customers. A
manufacturing enterprise would probably show the value of the machines in
its factory as Factory Machinery and Equipment.



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Furniture and
Fixtures
The original cost less accumulated depreciation is shown to give the
depreciated value of furniture and fixtures used in the operation of the
business. The title Furniture and fixtures almost explains it and may also be
subdivided. Desks and chairs and cabinets and counters used by office
employees might be listed as Office Furniture and Fixtures. Display cases,
chairs used by customers, and merchandise counters in a department store
could be entitled Store Furniture and Fixtures.

Accumulated
Depreciation
All property and equipment accounts except land are subject to depreciation.
Depreciation is the allocation of the cost of a property account to its period of
usefulness in order to recognize a decline in its value because of wear and
tear, obsolescence or inadequacy. The total amount of depreciation
accumulated over a number of years is called accumulated depreciation.

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Current Liabilities

Overview Current liabilities are debts or obligations of a business that are expected to be
liquidated by the use of assets classified as current or by the creation of
another current liability.

Accounts
payable
The total amount owed by the business as of Statement of Financial Position
date for purchases of merchandise, supplies, and services made on a charge
account basis and due within one year from the Statement of Financial
Position date.

Notes Payable The amounts owed by the business on the basis of formal, signed notes such
as the thirty-day or six-month notes signed when borrowing from a bank. If
merchandise is bought and the creditor requires the business to sign a note for
the amount of the purchase, the title Notes Payable is used. If the same
business borrowed from a bank, the liability may be shown also as Notes
Payable. This is classified as current liability if the note is due within one
year.

Interest
Payable
The amount of interest owed by the business as of Statement of Financial
Position date for money borrowed on interest bearing promissory notes issued
by the firm. This interest debt builds up each day. The loan is outstanding-
the interest accrues-and it is shown as a separate liability apart from the face
value of the note, which appears in the Notes Payable account.

Deferred or
Unearned
Income
Income already collected but not yet earned. For example, rental payment
received by the lessor from the lessee may be treated as unearned rent income
by the former.

Taxes Payable The amount of taxes owed by the business as of Statement of Financial
Position date.

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Non-Current Liabilities or Long-Term Liabilities

Overview Long-term liabilities are debts or obligations that will become due and
payable after one year from Statement of Financial Position date.

Notes Payable
Long Term
Amounts on signed formal notes due after one-year from the date of the
Statement of Financial Position.

Installment
Contracts
Payable
Amounts payable after one year from the Statement of Financial Position date
on long-term installment notes, such as those signed by the consumers when
buying automobiles and household appliances. Installments due within one
year from the Statement of Financial Position date are listed as current
liabilities.

Mortgage
Payable
A debt due after one year from the Statement of Financial Position date that
has some of the business property, such as land, buildings, or equipment-
pledged as security.

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Owners Equity

Overview Owners equity or sometimes called capital or proprietorship is the excess of
assets over liabilities of a business.

Capital The amount invested in the business by the owner as of the Statement of
Financial Position date.

Withdrawal When the owner withdraws cash or other assets from the business for
personal use, its assets and its owners equity both decrease. The amounts
taken out of the business appear in a separate account entitled Withdrawals, or
Drawing. If withdrawals were recorded directly in the capital account, the
amount of owner withdrawals would be merged with owner investments. To
separate these two amounts for decision-making, businesses used a separate
account for Withdrawals. This account shows a decrease in owners equity.
There are two types of withdrawals made by the owner of the business: (1)
Withdrawals made by the proprietor that is permanent in nature, this means
that the owner has no intention of returning the amount to the business fund.
Such withdrawals are treated as permanent drawings and would directly
reduce or decrease the capital account. (2) Temporary withdrawals on the
other hand are drawings made by the owner in future anticipation of profits.
Thus, this would use a Drawing Account and will not directly reduce the
capital account.

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Debit and Credit of Statement of Financial Position Items

Overview Analyzing business transactions would involve a dual effect in any of the
elements of the accounting equation. These dual effects would be analyzed
and recorded in terms of debit and credit. This part of the study guide will
introduce the readers on the basic understanding of the rules of debit and
credit affecting Statement of Financial Position items.

Account The basic summary device of accounting is the account. This is a detailed
record of the changes that have occurred in a particular asset, liability or
owners equity during a period of time.

T-Account For the purpose of analyzing the statement of financial position items into
debit and credit, we will be using in our illustrations the T-account. It takes
the form of the capital letter T. The vertical line in the letter divides the
account into its left and right sides. The account title rests on the horizontal
line.
For example, the cash account of a business appears in the following T-account
format:
CASH

Left side
Debit
Right side
Credit

The left side of the account is called the debit side, and the right side is called
the credit side. Often beginners in the study of accounting are confused by the
words debit and credit. To become comfortable using them, simply remember
debit = left side
credit = right side

The type of an account determines how increases and decreases are recorded.
Increases in assets are recorded on the left (the debit) side of the account.
Decreases in the assets are recorded on the right (the credit) side of the
account. Conversely, increases in liabilities and owners equity are recorded
by credits. Decreases are recorded by debits.


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Accounting
Equation
This pattern of recording debits and credits is based on the accounting
equations:
ASSETS = LIABILITIES + OWNERS EQUITY
Rules of Debit Credit Debit Credit Debit Credit
Debit and for for for for for for
Credit Increase Decrease Decrease Increase Decrease Increase

Illustration The following examples illustrate the accounting equations:
Joseph Labrador invested P100,000 cash to begin his accounting business.

ASSETS = LIABILITIES + OWNERS EQUITY

Cash Labrador, Capital
Debit
for increase
Php 100,000
Credit
for increase
Php 100,000

The business purchased office supplies on account for P5,000.

ASSETS = LIABILITIES + OWNERS EQUITY

Office Supplies Accounts Payable
Debit
for increase
Php 5,000
Credit
for increase
Php 5,000

The following examples illustrate the continuation of the accounting
equations:
The business paid one year rental for its office space, P24,000.

ASSETS = LIABILITIES + OWNERS EQUITY

Prepaid Rent Cash
Debit
for increase
Php 24,000
Credit
for increase
Php 24,000








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The business paid of the amount owed in buying office supplies.

ASSETS = LIABILITIES + OWNERS EQUITY

Accounts Payable Cash
Debit
for increase
Php 2,500
Credit
for increase
Php 2,500