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FINANCIAL POSITION → LIABILITIES

- Liabilities are the obligations of an entity arising from past


A Statement of Financial Position is a financial statement
transactions or events, the settlement of which is expected to
that reports a company's assets, liabilities, and result in an outflow from the entity of resources embodying
shareholders' equity at a specific point in time. economic benefits.

It is a financial statement that provides a snapshot of Current Liabilities


what a company owns and owes, as well as the amount - liabilities that fall due (paid, recognized as revenue) within
one year after the yearend date.
invested by shareholders. - Current liabilities are also called as short term liabilities.
- Examples include Accounts Payable, Notes Payable, Accrued
→ ASSET Expenses (example: Utilities Payable), Unearned Income, etc.
- resources controlled by the entity as a result of past
1. Accounts payable is the aggregate amount of one's short-
transactions and events and from which future economic term obligations to pay suppliers for products and services
benefits are expected to flow to the entity. that were purchased on credit.
2. Notes payable is a written promissory note. Under this
Current Assets agreement, a borrower obtains a specific amount of money
from a lender and promises to pay it back with interest over a
- Assets that can be realized (collected, sold, used up) one year predetermined period. A note payable is classified in the
after the year-end date. balance sheet as a short-term liability if it is due within the
- Current assets are arranged based on which asset can be next 12 months
realized first (liquidity). Current assets are also called as short 3. Accrued Expenses pertain to expenses incurred but not yet
term assets. paid. Common examples of these are salaries, rent, and
- Examples include Cash and Cash Equivalents, short term utilities.
investments, Accounts Receivables, Notes Receivables,
Merchandise Inventories, Supplies, Prepaid Expenses, etc. Non-current Liabilities
1. Cash are bills, coins, bank accounts, and operating funds - are liabilities that do not fall due (paid, recognized as revenue)
held by the company. Cash equivalents are highly liquid within one year after the year-end date.
investments that are convertible to know cash amounts that - Non-current liabilities are also called long term liabilities.
are subject to an insignificant risk of changes in value. - Examples include Loans Payable, Mortgage Payable, etc.
2. Accounts receivable is the amount owed to a company
1. Loans payable in any portion of the loan is still payable as
resulting from the company providing goods and/or services
of the date of a company's balance sheet. The remaining
on credit. The term trade receivable is also used in place of
balance on the loan is called a loan payable. Any other portion
accounts receivables.
of the principal that is payable in more than one year is
3. Notes receivable is an asset of a company, bank or other
classified as a long term liability.
organization that holds a written promissory note from
2. A mortgage payable is the liability of a property owner to
another party.
pay a loan that is secured by property.
4. Merchandise inventory is the cost of goods on hand and
available for sale at any given time. Merchandise inventory is
also called as Inventory. → CAPITAL OR OWNER’S EQUITY
5. Supplies are current assets representing the cost of supplies - The capital or owner's equity represents the owner's
on hand at a point in time. investment in the business minus the owner's draws or
6. Prepaid expenses refer to future expenses that the withdrawals from the business plus the net income (or minus
company had paid for in advance. the net loss) since the business began. The owner's equity is
viewed as a residual claim on the business assets. It is
Non-current assets also known as net worth.
- are assets that cannot be realized (collected, sold, used up)
- For the Sole Proprietorship business, it is called Owner’s
one year after the year-end date.
Equity, for the partnership, it is called Partner’s Equity and for a
- Non-current assets are also called long term assets.
Corporation, it is called Stockholders or Shareholder’s Equity.
- Examples include Properties, Plant, and Equipment
(equipment, furniture, building, land), Long Term investments
→ Report form
(interests, royalties, dividends, rentals etc.), Intangible Assets
presented in a vertical orientation and is essentially one column
(trademark, patent, copyright etc.) and other assets that are not
that spans the entire width of a page. Starting with assets, the
classified as
report form balance sheet provides a total value at the end of
current.
the assets section, followed by liabilities and equity, with the
1. Properties, Plant, and Equipment are long term assets that final line of the report form balance sheet providing the total
are owned by the company and are used in its operations. combined value of liabilities and equity.
Included are land, buildings, leasehold improvements, → Account Form
equipment, furnitures, fixtures, delivery trucks, automobiles, it shows assets on the left side and liabilities and owner’s equity
etc. on the right side just like the debit and credit balances of an
2. Long-term investments are non-current assets that are not account. Either form is accepted.
used in operating activities to generate revenues. In other - It is emphasized that the two are only formats and will yield
words, long-term investments are assets that are held for the same amount of total assets, liabilities, and equity. In both
more than one year or accounting period and are used to formats, assets should always be equal to liabilities and equity.
create other income outside of the normal operations of the
company.
3. Intangible assets are those assets meeting the definition of
an asset but without physical substance.
REVENUE
STATEMENT OF COMPREHENSIVE • ARISES IN THE COURSE OF THE ORDINARY ACTIVITIES OF A
INCOME BUSINESS, E.G. SALES AND SERVICE FEE

TEMPORARY ACCOUNT SERVICE FEES


• Also known as nominal accounts are the accounts found • REFERS TO REVENUE EARNED BY A SERVICE BUSINESS FROM
under the statement of comprehensive income RENDERING SERVICES

DISTRIBUTION COST (OR SELLING EXPENSES) GAINS


• Are costs attributable to selling activities • REPRESENT OTHER ITEMS THAT MEET THE DEFINITION OF
INCOME AND MAY OR MAY NOT ARISE IN THE COURSE OF
CONTRA PURCHASES THE ORDINARY ACTIVITIES OF AN ENTITY
• An account that is credited being “contrary”” to the normal
balance of purchases account EXPENSES
• ARE DECREASES IN ECONOMIC BENEFITS DURING THE PERIOD
GENERAL AND ADMINISTRATIVE EXPENSE IN THE FORM OF OUTFLOWS OR DEPLETIONS OF ASSETS OR
• Pertain to operation expenses rather that to expenses that INCREASE OF LIABILITIES THAT RESULT IN DECREASE IN EQUITY
can be directly related to the production of any goods or - EXPENSES INCLUDE BOTH EXPENSES AND LOSSES
services
EXPENSES
SELLING EXPENSE • ARISE IN THE COURSE OF THE ORDINARY ACTIVITIES OF A
• These expenses are those that are directly related to the main BUSINESS
purpose of a merchandising business
LOSSES
SINGLE-STEP APPROACH • REPRESENT OTHER ITEMS THAT MEET THE DEFINITION OF
• All revenue are listed down in one section while all expenses EXPENSES AND MAY OR MAY NOT ARISE IN THE COURSE OF
are listed in another. Net income is computed using a “single- THE ORDINARY ACTIVITIES OF THE ENTITY
step” which is total revenues minus total expenses
SALES REVENUE OR SALES
MULTI-STEP APPROACH • REFERS TO THE REVENUE EARNED BY A
• There are several steps needed in order to arrive at the MERCHANDISING BUSINESS FROM SELLING
company’s net income GOODS

FREIGHT-OUT → PRESENTATION OF EXPENSES


• Is the transportation cost associated with
The delivery of goods from a supplier to its customers NATURE OF EXPENSE METHOD
• this method, expenses are presented according to their nature
FREIGHT IN • this method is simple to apply because no reallocations of
• This account is used to record transportation costs of expenses are necessary
merchandise purchased by the company • it shows that expenses by their nature is referred to as
- In cash for the current period prepared using a single-step approach
• example, depreciation, purchases of materials, transport
costs, employee benefits, advertising costs, etc.
→ STATEMENT OF COMPREHENSIVE INCOME
• ALSO KNOWN AS THE INCOME STATEMENT FUNCTION OF EXPENSE METHOD
• SHOWS INFORMATION ON AN ENTITY’S FINANCIAL • this method, expenses are classified and presented according
PERFORMANCE DURING THE PERIOD to their function as part of cost of sales
- statement that reports the results of the operations of the • it shows that expenses by their function is referred to as
business for one accounting period. This statement contains the prepared using a multi-step approach
following information:
a. revenue generated by operating the business; THE FOLLOWING ARE THE MAJOR CATEGORIES OF EXPENSES
b. costs spent to generate the revenue; and income, which is UNDER THE FUNCTION OF EXPENSE METHOD:
the excess of revenue over costs.
• COST OF SALES (OR COST OF GOODS SOLD) - The cost of sales
- INCOME STATEMENT SHOWS ONLY THE PROFIT OR LOSS is the amount paid or payable by the business entity to its
- STATEMENT OF PROFIT OR LOSS AND OTHER supplier for the merchandise sold to the business entity’s
COMPREHENSIVE INCOME SHOWS PROFIT OR LOSS AND costumers.
OTHER COMPREHENSIVE • DISTRIBUTION COST (OR SELLING EXPENSE) - are costs
attributable to selling activities
→ ELEMENTS OF THE SCI EXAMPLE: FREIGHT-OUT OR DELIVERY EXPENSES, SALES
COMMISSIONS, ADVERTISING, SALARIES OF SALES
INCOME PERSONNEL, DEPRECIATION ON DELIVERY
• ARE INCREASES IN ECONOMIC BENEFITS DURING THE PERIOD EQUIPMENT, RENT PERTAINING TO SPACE
IN THE FORM OF INFLOWS OR ENHANCEMENTS OF ASSETS OR OCCUPIED BY THE SALES DEPARTMENT
DECREASES OF LIABILITIES THAT RESULT IN INCREASES IN • GENERAL AND ADMINISTRATIVE EXPENSES pertain to
EQUITY operation expenses rather that to expenses that can be directly
• INCOME INCLUDES BOTH REVENUE AND GAINS related to the production of any
Goods or services
EXAMPLE: INSURANCE, TAXES AND LICENSES, SALARIES OF
NON-SALES PERSONNEL, DEPRECIATION OF ASSETS NOT USED
STATEMENT OF CHANGES IN EQUITY
BY THE SALES DEPARTMENT, RENT PERTAINING TO OFFICE
SPACE - All changes, whether increases or decreases to the owner’s
• OTHER EXPENSE - includes losses, likely casualty losses and interest on the company during the period
losses on sale of properties
• INCOME TAX EXPENSE → FORM OF BUSINESS ORGANIZATION
Single/Sole Proprietorship – Statement of Owners Equity
◦ an entity whose assets, liabilities, income and expenses are
→ SINGLE-STEP APPROACH centered or owned by only one person
• ALL REVENUE ARE LISTED DOWN IN ONE SECTION
WHILE ALL EXPENSES ARE LISTED IN ANOTHER Partnership – Statement of Partner’s Capital
• NET INCOME IS COMPUTED USING A “SINGLE-STEP” ◦ an entity whose assets, liabilities, income and expenses are
WHICH IS TOTAL REVENUES MINUS TOTAL EXPENSES centered or owned by two or more persons

→ MULTI-STEP APPROACH Corporation – Statement of Stockholders Equity


• THERE ARE SEVERAL STEPS NEEDED IN ORDER TO ◦ an entity whose assets, liabilities, income and expenses are
ARRIVE AT THE COMPANY’S NET INCOME centered or owned by itself being a legally separate entity from
its owners. Owners are called shareholders or stockholders of
the company
→ FREIGHT IN VS FREIGHT OUT

FREIGHT-IN
• The shipping cost to be paid by the buyer of merchandise
purchased when the terms are fob shipping point
• freight-in is considered to be part of the cost of the
merchandise and should be included in inventory if the
merchandise has not been sold

• NOTE: IF GOODS ARE SOLD F.O.B. SHIPPING POINT, THE


PURCHASER IS RESPONSIBLE FOR PAYING FREIGHT COSTS
INCURRED IN TRANSPORTING THE MERCHANDISE FROM THE
POINT OF SHIPMENT TO ITS DESTINATION. FREIGHT COST
INCURRED BY A PURCHASER IS CALLED FREIGHT-IN, AND IS 1. Prepare the statement heading
ADDED TO PURCHASES IN CALCULATING NET PURCHASES. 2. Determine the beginning balance of the capital (equity).
3. Determine the amount of investment (additional)
FREIGHT-OUT 4. Determine the amount of the net income.
• the transportation cost associated with the delivery of goods 5. Determine the balance of the drawing account.
from a supplier to its customers 6. Determine the ending balance of the capital or owner’s
• this cost should be charged to expense as incurred and equity account.
recorded within the cost of goods sold classification on the
income statement

• NOTE: IF GOODS ARE SOLD F.O.B. DESTINATION, THE SELLER


IS RESPONSIBLE FOR COSTS INCURRED IN MOVING THE GOODS
TO THEIR DESIRED DESTINATION. FREIGHT COST INCURRED BY
THE SELLER IS CALLED FREIGHT-OUT, AND IS REPORTED AS A
SELLING EXPENSE WHICH IS SUBTRACTED FROM GROSS PROFIT
IN CALCULATING NET INCOME

→ SERVICE VS MERCHANDISING

 A SERVICE COMPANY provides service in order to generate


revenue and the main cost associated with their service is the
cost of labor which is presented under the account salaries
expense. In presenting these items on the statement of
comprehensive income, a service company will separate all
revenues and expenses.
 A MERCHANDISING COMPANY sells goods to customers and
the main cost associated with the activity is the cost of the
merchandise which is presented under the line item cost of
goods sold. In presenting these items on the statement of
comprehensive income, merchandising company will present
total sales and cost of goods sold on the first part of the
statement which will net to the company’s gross profit before
presenting the other expenses which are classified as either
administrative expenses or selling expenses.

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