Republic of the Philippines

Department of Education
Region IV-A CALABARZON
St. Ignatius Technical Institute of Business and Arts

FUNDAMENTALS OF ACCOUNTING AND BUSINESS

MANAGEMENT 2
(Module 1 ABM2)

Prepared by:
Arnaldo D. Bernabe
 Course Description:

The course deals with the preparation and analysis of financial

statements of a service business and merchandising business using
horizontal and vertical analyses and financial ratios. Knowledge
and skills in the analysis of financial statements will aid the future
entrepreneurs in making sound economic decisions.

Performance Standards
Content Standards
The learners shall be able to… solve
The learners demonstrate an exercises and problems that require
understanding of… account preparation of an SFP for a single
titles under the assets,
proprietorship with proper
liabilities, and capital
classification of accounts as current
accounts of the Statement of
Financial Position, namely, and noncurrent using the report form
cash, receivables, and the account form.
inventories, prepaid
expenses, property, plant
and equipment, payables,
accrued expenses, unearned
income, long-term liabilities
and capital that will equip
him / her in the preparation
Learning Competencies
of the SFP using the report
form and account form. At the end of the lesson, learners should be able to:
1) Identify the elements of the SFP and describe each of them
(ABM_FABM12-Ia-b1)
2) Classify the elements of the SFP into current and noncurrent items
(ABM_FABM12-Ia-b-2)
3) Prepare the SFP of a single proprietorship (ABM_FABM12-Ia-b-
3)
4) Prepare an SFP using the report form and the account form with
proper classification of items as current and noncurrent
(ABM_FABM12-Ia-b-4)
Lesson 01: Statement of Financial Position (SFP)

✓ Will you be able to reflect on the

importance of preparing the SFP?
✓ Will you be able to reflect on the
separation of current and non-current
items in the SFP?
✓ Will you be able to reflect on the
difference of the report form and the
account form?
✓ Will you be able to identify the
elements of the SFP and describe each
of these items for a single/sole
proprietorship business?
✓ Will you be able to prepare an SFP for
a single/sole proprietorship business
using the reports form?
✓ Will you be able to prepare SFP for a
single/sole proprietorship business
SFP for a single/proprietorship
business using the account form.

Activity: Review:

1) Accounting Equation
2) Single/Proprietorship
3) Assets
4) Liability give at least three (3) examples of
5) Expenses each specific title accounts
 Motivation:

Prepare Personal SFP

a) Get ½ piece of paper.

b) Write your current savings and everything that you own
(clothes, pen, etc.)
c) Write the amount you owe to a friend, family members,
parents (tuition)
d) Deduct the amount you owe from the amount you own
e) Associate amounts owned with assets and amount owed
with liabilities with the net amount as equity.

Statement of Financial Position

Also known as the Balance Sheet. This statement included the amount of
the company’s total assets, liabilities, and owner’s equity which is totality
provides the condition of the company on a specific date. (Haddock, Price,
& Farina 2012)

Permanents Accounts

As the name suggest, these accounts are permanent in a sense that their
balance remain intact from one accounting period to another.

Examples of permanent account

• Cash • Accounts Payable

• Accounts • Loans Payable
Receivable Capital among
others.

Basically, assets, liabilities and equity accounts are

permanent accounts. They are called permanent
accounts because the accounts are retained permanently
in the SFP until their balances become zero. This is in
contrast with temporary account which are found in the
Statement of Comprehensive Income (SCI). Temporary
accounts unlike permanent accounts will have zero
balances at the end of the accounting period.
CONTRA ASSETS

Contra assets are those accounts that are presented under the assets portion of
the SFP but are reductions to the company’s assets. These include Allowance
for Doubtful Accounts and Accumulated Depreciation. Allowance for Doubtful
Accounts is a contra asset to Accounts Receivable. This represents the
estimated amount that the company may not be able to collect from delinquent
customers. Accumulated Depreciation is a contra asset to the company’s
Property, Plant and Equipment. This account represents the total amount of
depreciation booked against the fixed assets of the company

Example of SFP:

Differentiate the Report Form and Account Form

Report Form

A form of the SFP that shows asset accounts first and then liabilities and owner’s equity accounts
after. (Haddock, Price, &Farina, 2012). The balance sheet shown earlier is in report form.
Account Form

A form of the SFP that shows assets on the left side and liabilities
and owner’s equity on the right side just like the debit and credit
balances of an account. (Haddock, Price, & Farina, 2012).
Emphasize that the two are only formats and will yield the same
amount of total assets, liabilities, and equity. Emphasize that assets
should always be equal to liabilities and equity.
Group accounts under:
• Currents Assets
• Non-Currents Assets
• Current Liabilities
• Non-Current Liabilities and Owner’s Equity

Current Assets

Assets that can be realized (collected, sold, used up) one year after year-end date.

Examples include

- Cash,
- Accounts Receivable,
- Merchandise Inventory,
- Prepaid Expense, etc.

Current Liabilities

Liabilities that fall due (paid, recognized as revenue) within one year after year-end date.

Examples include

- Notes Payable,
- Accounts Payable,
- Accrued Expenses (example: Utilities Payable),
- Unearned Income, etc.

“Current Assets are arranged based on which asset can be realized first (liquidity). Current assets
and current liabilities are also called short term assets and shot term liabilities.”
Non-current Assets

Assets that cannot be realized (collected, sold, used up) one year after year-end date.

Examples include

- Property, Plant and Equipment (equipment, furniture, building, land),

- Long Term investments,
- Intangible Assets etc.

Non-current Liabilities

Liabilities that do not fall due (paid, recognized as revenue) within one year after year-end date.

Examples include

- Loans Payable,
- Mortgage Payable, etc.

” Non-current assets and noncurrent liabilities are also called long term assets and long-term
liabilities”

Difference of the Statement of Financial Position of a Service Company and

of a Merchandising Company

The main difference of the Statements of the two types of business lies on
the inventory account. A service company has supplies inventory classified
under the current assets of the company. While a merchandising company also
has supplies, inventory classified under the current assets of the company, the
business has another inventory account under its current assets which is the
Merchandise Inventory, Ending.

Tips: “The “as of” in the amounts in the SFP are permanent meaning that the
amounts are cumulative from the beginning of the life of the company.”
Different parts of the Statement of Financial Position

The terms usually denote the

meaning already like
“Prepaid Expenses” – expenses
that were paid in advance which is
different from
“Unearned Income” – income that
is not yet earned by the company.
can also use local phrases such as
“bayad muna, bago gamit”

(Prepaid Expense on the point of

view of the one requesting, for the
service while Unearned Income on
the point of view of the one
rendering the service).

“Rules on single/sole rule and

double rule: When there is an
operation (addition, subtraction),
single/sole rule. Total assets are
double ruled, and total liabilities
and equity is double ruled because they represent the end of a part of the financial statement”
A. Heading
- Name of the Company
- Name of the Statement
- Date preparation (emphasis
on the wording – “as of”)

B. Sample of a Report Form SFP –

refer to the one above

Sample of Account Form

A company can have a lot of assets but still have very low equity.

When the company has a lot of assets (example: cash, accounts

receivable, prepaid expenses), owners may sometimes think
that the company is doing well. There are instances that owners
forget that they might also have a lot of liabilities which may
result to their equities having a very small balance. With the
preparation of the SFP, the owner can easily see the assets,
liabilities and equity balances of his/her company which will
show exactly the financial position of the company as of a
given point in time.

Other important matters:

A. Without the SFP, the company cannot know if it truly owns anything
because in case of bankruptcy, liabilities are paid first.
• Small businesses don’t usually account for their assets and liabilities
if the owners see that cash is coming in. They sometimes forget that
when liabilities become due, if they don’t have enough current assets
to be able to pay those liabilities, then they can get in trouble with
their debts.
B. The importance of the format:
• Report form vs Account form – these are just formats. Usually depends on the reader for
preference
• Report form is the normal format for those not familiar with accounting.
Account form easily shows that the SFP is balanced and separates assets
from liabilities and equities.
• Separation of the current and noncurrent – current liabilities are
upcoming liabilities and the company should be prepared to pay them.
Companies should prepare as early as today for payment of noncurrent
liabilities as these usually have large balances. Current assets show the
company’s ability to sustain its current operations while noncurrent
assets show the company’s ability to sustain long-term operations.
Activity: I. Answer the following transactions in a piece of paper.

Easy:
1) Learning is Fun Company had current assets amounting to Php
100,000. Noncurrent assets for the year totaled Php 76,000. How much
is the company’s total assets?
2) Happy Selling Company’s total liabilities amounted Php 10,000. Total
equity had an ending balance of Php 20,000. How much is total assets?
Medium:
1) Happy Selling’s had the following accounts at year end: Cash -250,000, Accounts Payable-
70,000, Prepaid Expense-15,000. Compute for the company’s current assets.
2) Happy Selling’s Accounts Receivable amounted to Php 500,000.
Prepaid Expense and Unearned Income totaled Php 30,000 and Php 10,000
respectively. Cash balance amounted to Php 100,000 while Accounts Payable
and Inventory totaled to Php 20,000 and Php 10,000respectively. How much is
the company’s current assets? Current liabilities?
Difficult
1) Company’s Total Liabilities and Equity amounted to Php 285,000. Total non-
current assets ended at Php 85,000. Cash totaled Php 50,000, Inventory
amounted to Php 100,000. Assuming the company had no other assets,
how much is Accounts Receivable? Total assets amounted to Php 575,000.
Total equity amounted to Php 250,000. Accounts Payable amounted to
Php 50,000 while Unearned Income totaled Php 85,000. Assuming there are
no other current liabilities, compute for the company’s noncurrent liabilities.

II. Answer the following and give the topic of the transaction in a piece of paper.
1) If assets are Php 17,000 and owner's equity is Php 10,000, liabilities are ____________
2) At the end of the first month of operations for Juana’s Delivery Service, the business had
the following accounts: Accounts Receivable, Php 1,200; Prepaid Insurance, Php 500;
Equipment, Php 36,200 and Cash, Php 40,650. On the same date, Juana owed the following
creditors: Nena’s Supply Company, Php 12,000; Maria’s Equipment, Php 9,500. The
current assets for the Juana’s Delivery Service are _________.
 3) At the end of the first month of operations for Juana’s Delivery Service, the business had
the following accounts: Accounts Receivable, Php 1,200; Prepaid Insurance, Php
500; Equipment, Php 36,200 and Cash, Php 40,650. On the same date, Juana owed the
following creditors: Nena’s Supply Company, Php 12,000 (due in 6 months); Maria’s
Equipment, Php 9,500 (due after 2years). Current liabilities are _________.
4) If during the year total assets increase by Php 75,000 and total liabilities decrease by Php
16,000, by how much did owner's equity increase/decrease?
5) Prepare a Statement of Financial Position using the following accounts (one in report
form and one in account form):
- Cash 5,000
- Loans Payable 77,500
- Accounts Receivable 2,600
- Supplies 2,300
- Equipment 17,000
- Owner’s equity 40,000
- Accounts Payable 22,400
- Building 113,000
You can use any business name and the end of the current year for the heading.

6.) You were hired by Mr. Juan Dela Cruz to prepare his sari-sari store’s Statement of Financial
Position. To prepare the statement, you identified the following assets and liabilities of Mr. Dela
Cruz:
a. His sari-sari store has cash deposited in a bank account amounting to P50,000.
b. His sari-sari store had a lot of uncollected sales from customers amounting to P75,000
c. The total amount of merchandise left inside the store is P30,000.
d. He already paid one year’s rent in advance amounting to P12,000.
e. The value of all the company’s furniture amounted to P100,000
f. He bought merchandise from his supplier amounting to P25,000 and the supplier
agreed that payment can be made 2 months after year-end
g. SSS, Philhealth and Pag-ibig Payables for his one employee totaled P5,000
h. The sari-sari store had outstanding liabilities to utility companies amounting to P3,000
i. He had a loan from the bank amounting to P50,000 to be paid in 3 years
Prepare a Statement of Financial Position for the company (one in report form and one in account
form).

References:
Kevin Troy M. Chua
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
The Commission on Higher Education in collaboration with the Philippine Normal University
.