LORD’S ANGELS MONTESSORI SCHOOL, INC.

149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan

Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

Fundamentals of Accountancy, Business and Management Part 2

Module 3 Week 3
I. Title

Statement of Financial Position (SFP) part 2 Liabilities

II. Introduction

“A good accounting student knows by now that Total Assets = Total Liabilities + Total Equity. From this equation, we can also
determine net assets, which are determined as follows: Total Assets – Total Liabilities = Net Assets. O.K., this is simple so far.” (Kieso,
Weygandt, & Warfield, 2016). Now for ABM students, how do we present the equation in a report? This question will be answered
in this module – Statement of Financial Position.

This module will discuss the Liabilities and Owner’s Equity part of the Statement of Financial Position. The presentation of the SFP is
also included in this module.

III. Objectives

The lesson objectives are the following:

1. Understand the purpose of the Statement of Financial Position or Balance Sheet.

2. Identify and describe the elements of the Statement of Financial Position or Balance Sheet.
3. Classify the elements of SFP.
4. Prepare an SFP for single/sole proprietorship business using the report form or account form.
5. Prepare a classified SFP for single/sole proprietorship business.

IV. Pre-Test

V. Discussion

Module 02 discussed the asset part of the SFP. This module will now discuss the Liabilities and Owner’s Equity.

LIABILITIES

An obligation arising from previous transactions that requires a company to give up a resource is a liability. “Claims of those to
whom the company owes money (creditors) are called liabilities.” (Weygandt, Kimmel, & Kieso, 2015) From our lessons in FABM1
we have learned that you may make purchases without any cash outlay, however you have to recognize that you need to pay at a
future time by recording a liability. For example, you purchase office equipment with a down payment and the balance is to paid
after a month, you can record your asset by debiting office supplies and recording the cash payment by crediting cash and the
balance is recognized by crediting a payable account.

CURRENT LIABILITIES

Like assets, liabilities are also classified into current and non-current. A liability is classified as current if it is due to be paid within
one year or the operating cycle of the business whichever is longer. If a liability does not fall into this classification, it is considered
non-current.

Here are some examples of current liabilities: (Kieso, Weygandt, & Warfield, 2016)

 Payables resulting from the acquisition of goods and services: accounts payable, wages payable, taxes payable, and so
on.
 Collections received in advance for the delivery of goods or performance of services, such as unearned rent revenue or
unearned subscriptions revenue.
 Other liabilities whose liquidation will take place within the operating cycle, such as the portion of long-term bonds to
be paid in the current period or short-term obligations arising from the purchase of equipment.

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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

Trade Payables

Accounts Payables

These payables maybe trade or non-trade. It is considered trade if the liability was incurred because of the operating activities of
the company. Most common term used in accounting to show trade payable is accounts payable. Accounts payable is recorded by
a company when they purchase goods or services on account from their suppliers. Evidence of accounts payable are usually sales
invoices issued by supplier when the goods are delivered or services has been performed.

Sample of a sales invoice.

Suppliers gives their customers different terms for paying their purchases. The term may start from 30 days to 90 days or more. The
term depends on the agreement between the supplier and the customer.

Let us take this for an illustration: Goyong Company purchased merchandise from Tasyo Enterprises that amounts to ₱50,000 on
July 1. They agreed on the terms 2/10 n/30 (reads two ten, net thirty). The terms mean that Goyong needs to pay the whole
amount in 30days, but if Goyong will pay witin 10 days he would get a 2% discount on the amount.

Note that the amount of cash paid to suppliers is reduced. Goyong had a 1,000 savings from the purchase. The purchase discount is
reported in the Statement of Comprehensive Income and will be discussed on a separate module.

Notes Payable

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 LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

Notes payable may also arise during the course of the company’s activities. These are usually evidenced by a promissory note. A
promissory note is a legal document that expresses the debtor’s or borrower’s promise to pay. The borrower records the promissory
note as a note payable, while the holder of the promissory note or the creditor will record a note receivable. Note payable is
presented as current if it is expected to be paid within one year from the date of the SFP or within the operating cycle of the
business whichever is longer.

Illustration – NOTES PAYABLE: from Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Quezon City: Rex Bookstore Inc.

Read the excerpt of the Promissory Note below:

Promissory Note
November 1, 20X1

1. Promise to Pay. For value received, Friendly Convenience Store, represented by Juana Dela Cruz, the manager, (borrower) promises to pay United Bank
(lender) ₱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 installments of ₱5,000 each at monthly intervals on the 30 th day of the month. First payment is due on November 30,
20X1.
3. Application of Payments. Payments will be applied first to interest and then to principal.
4. Prepayment. Borrower may prepay all or any part 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 is due
immediately, together with the interest that has accrued.

Answer the following questions:

1. Who will record the Notes Payable?

2. Who will record the Notes Payable?
3. Compute for the payment due on November 30, 20X1 and December 30, 20X1
4. Determine the balance of notes payable as of December 31, 20X1

Solution:

1. According to the PN, the borrower is Friendly Convenience Store. A note payable will be reflected on the SFP of the store.
2. According to the PN, the lender is United Bank. A note receivable will be reflected on the SFP of the bank.
3. Payment due on the following dates:

30-Nov 30-Dec
Unpaid balance beginning 25,000 20,000
Stated interest 6% 6%
Interest period 1/12 1/12
Interest to be paid 125 100
Monthly principal payment 5,000 5,000
Payment due 5,125 5,100
*Stated interest of 6% is expressed on a per annum basis. Simply put, it means 6% per 12-month period. To get interest for one month, its 6%/12 months.

4. The balance of the note payable on December 31, 20X1 is ₱15,000. Following the payment schedule, Juana, should have already made two payments of
₱5,000 each as of December 31, 20X1. Hence the remaining unpaid balance is (₱25,000 - ₱10,000) ₱15,000.

Accrued Expenses

Accrual is one of the important concept in accounting. Under this expense recognition principle, expenses should be recognized or
recorded in the period it is incurred regardless on when it is paid. The accrual of expenses was discussed during one of the
important topics in FABM1 the adjusting entries. During the discussion we were introduced to various account titles likes, salaries
payable, utilities payable, rent payable, interest payable and others.

Look at your electricity bill, note that when it is sent your household the bill does not require you to pay the amount immediately
but on a certain future date. For example, you can be billed for the month of January and receive the bill in February. The utility
company will ask for your payment in February. Now, the expense should be reported in the month of January, even if it is paid in
February.

You can go back to our lessons in FABM1 Adjusting entries for examples and illustrations.

Unearned Revenues

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 LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

There are instances when a company would receive cash in advance for services not yet rendered or goods not yet delivered. The
cash is not yet considered as revenue. This should be considered as a liability until the services are rendered or the goods are
delivered. Take a catering business for example. The catering company would receive cash as down payment for services to be
performed in the future. The company would use the cash to buy food supplies and materials using the money it received.
However, the company can only recognize the revenue after the agreed event is finished.

LONG TERM LIABILITIES

“Long term liabilities refer to obligations with due dates that fall more than one year from the date of the SFP.” (Salazar, 2017)
“Long-term liabilities are obligations that a company does not reasonably expect to liquidate within the normal operating cycle.
Instead, it expects to pay them at some date beyond that time.” (Kieso, Weygandt, & Warfield, 2016) Note that if the company
would use current assets to pay for long term liabilities that will mature within the current operating cycle of the business, the
liability will be classified as current.

Generally long-term liabilities are of three types: (Kieso, Weygandt, & Warfield, 2016)

1. Obligations arising from specific financing situations, such as the issuance of bonds, long-term lease obligations, and long-
term notes payable.
2. Obligations arising from the ordinary operations of the company, such as pension obligations and deferred income tax
liabilities.
3. Obligations that depend on the occurrence or non-occurrence of one or more future events to confirm the amount payable,
the payee, or the date payable, such as service or product warranties and other contingencies.

Illustration – LONG TERM PAYABLE: from Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Quezon City: Rex Bookstore Inc.

In order to construct the store, Juana borrowed ₱50,000 from Universal Bank and ₱25,000 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, 20X3.
United Bank: The bank requires Juana to pay five monthly installments of ₱5,000 plus interest on the unpaid balance. The loan was taken on November 1, 20X1 and
first monthly installment is due on November 30, 20X1.

Which of the two loans should be reported as Long-term Liability on the Store’s calendar year 20X1 SFP?

Solution:

A. While interest is payable monthly, the principal on the Universal Bank loan is payable on October 1, 20X3. The due date is one year and 10 months from
the date of the SFP December 31, 20X1. This loan is classified as long-term liability because due date is beyond one year of SFP date.
B. Given the monthly principal payments, the United Bank loan will be fully paid by the end of March 20X2. This is only three months from the SFP date of
December 31, 20X1. Hence, the United Bank loan is a current liability and may be reported as note payable.

For interest that was accrued before it is paid, the necessary adjustment must be prepared to reflect the amount of accrued interest payable. The accrued interest
payable is a current liability.

EQUITY

Owner’s equity or equity section of the SFP is presented according to the business organization. From our FABM1 lessons recall that
there are three types of businesses according to how it was organized, sole proprietorship, partnership and corporation. The
owner’s equity in asset in a single proprietorship is reported in a single capital account. The balance of the equity account is the
accumulated amounts for the owner’s investment, withdrawals and the company’s results of operations. For a partnership, multiple
equity accounts for each of the partners. Same as a single proprietorship’s equity account, a partnership equity balance is the total
of the partner’s investment, withdrawals and the company income or loss from operations. A corporation’s equity is presented
differently. The investments by owners are represented by shares of stocks and the results of operations are shown in the retained
earnings. Dividends represents the return of investments to owners.

A separate module for Statement of Changes in Equity will discuss the details for equity.

HOW TO PRESENT THE STATEMENT OF FINANCIAL POSITION?

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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

There are two acceptable ways to present a statement of financial position. The first one is the account form. In this type of report,
the assets on the left side and the liabilities and equity on the right side just like the T-account. This report highlights the amount of
the assets is equal to the amount of liability and equity. Please representation below:

The second format is the report form statement of financial position. This form is a simple list beginning from the assets up to
equity. The report format is commonly used.

What is presented above is what is commonly called a report form classified statement of financial position. A classified statement
financial position shows the classification of the accounts if it is current or non-current.
When preparing the balance sheet please take note of the following:
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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

The header. This should include the company name,

the title of the statement (in this case) Statement of
Financial Position. For SFP take note that “as of
December 31, 2019” was written. This is to inform the
user that the amounts shown is for that particular
point in time.

The SFP is classified.

The amount of the Total Assets

should equal the amount of Total
Liabilities and Equity.

References
Ferrer, R. C., & MIllan, Z. V. (2017). Fundamentals of Accountancy, Business and Management Part 2. Baguio City:
Bandolin Enterprise.

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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

Kieso, D., Weygandt, J., & Warfield, T. (2016). Intermediate Accounting 16th Ed. Hoboken NJ: John Wiley & Sons, Inc.

Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Quezon City: Rex Bookstore Inc.

Stice, E. K., Stice, J. D., & Skousen, K. F. (2006). Intermediate Accounting 17th ed. South-Western College Pub.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Accounting Principles 12th Edition. US: John Wiley & Sons, Inc.

Prepared by:

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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

Name: _____________________________________________________ FABM2 Module 3

Accountancy Business and Management Grade 12

VI. Assessment

A. What are the major limitations of a statement of financial position as a source of information? Why is it important to know
these limitations?

B. The following are the major balance sheet classifications: (Jerry J. Weygandt PhD, C., Paul D. Kimmel PhD, C., & Donald E. Kieso
PhD, C. (2015). Accounting Principles 12th Edition. US: John Wiley & Sons, Inc.)

Current Assets (CA) Current Liabilities (CL)

Long-term Investments (LTI) Long-term Liabilities (LTL)
Property, Plant and Equipment (PPE) Owner’s Equity (OE)
Intangible Assets (IA)

Match each of the following accounts to its proper balance sheet classification. Write the codes on the space provided.

_______ Accounts Payable _______ Income Tax Payable

_______ Accounts Receivable _______ Debit Investment (long term)
_______ Accumulated Depreciation – Building _______ Land
_______ Buildings _______ Inventory
_______ Cash _______ Patents
_______ Copyrights _______ Supplies

C. The adjusted trial balance columns of the worksheet for Omega Company, owned by A. Paras, are as follows:

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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: [email protected]

Instructions: Prepare a classified statement of financial position in good form. Note: Follow the steps in preparing financial
statements from the adjusted trial balance. (Note: 5,000 of the note payables become due in 2020) A worksheet may be used to
present you answers.

D. Albert Rein had just finished its December recording. At the end of the month, after journalizing and posting the December
transactions and adjusting entries, Albert Rein prepared the following adjusted trial balance.

Prepare an income statement and an owner’s equity statement for the 2 months ended December 31, 2016, and a classified balance
sheet at December 31, 2016. The note payable has a stated interest rate of 6%, and the principal and interest are due on November
16, 2018. You may use a worksheet to present your solution.

Solutions Guide

C:\Users\acer\Documents\001 Ronald v2\03 LAMS\FABM2\FABM2 Module 00 - Introduction to Financial Statements.xlsx