Chapter 2.statement of financial position clc

Principle of Accounting

Chapter 2
Statement of Financial Position

Foreign Trade University

(Balance Sheet)
 An accounting report that summarizes the
financial status of a business at a particular
point in time.
 Three main sections of a statement of
financial position:
 Assets
 Liabilities
 Owner’s equity

 The accounting equation is the basis of the
statement of financial position.
 Assets = Liabilities + Owner’s equity
 T-form statement of financial position
 Narrative form statement of financial position

T-form statement of financial position

City Traders: Statement of financial position as at 30 June 2005

Assets Liabilities
Cash at bank 3 000 Creditors 5 000
Debtors 5 000 Loan 10 000
Stock 20 000 15 000
Office equipment 4 000 Owner’s equity
Vehicle 18 000 Capital –
K. Wilson 35 000
Total equities &
Total assets $50 000 liabilities $50 000

City Traders: Statement of financial position as at 30 June 2005 Narrative
form

Assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000
Office equipment 4,000
Vehicles 18,000
Total assets $50,000
Liabilities
Creditors 5,000
Loan (due 30/6/07) 10,000 15,000
Owner’s equity
Capital – K. Wilson 35,000
Total equities $50,000

City Traders: Statement of financial position as at 30 June 2005 Narrative
form
Owner’s equity
Capital – K. Wilson $35,000
Is represented by
Assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000
Vehicles 18,000
Total assets 50,000
Less Liabilities
Creditors 5,000
Loan (due 30/6/07) 10,000 15,000
Net assets $35,000

Classification in the Statement of
Financial Position
 A classified statement of financial position
separate both assets and liabilities into
those that are current and those that are
non-current.
 The assets are usually classified according
to their liquidity, which is how quickly they
are expected to be turned into cash or used
up.
 Liabilities are classified on the basis of the
urgency of repayment.

Financial Position (Cont’d)
 Current assets: Assets that are expected to be
realised in cash or used up within the next 12 months.
 Current assets include cash on hand, cash at bank,
short-term investments, inventory, debtors.
 Non-current assets: Assets that are acquired with
the intention of controlling them for a period of time
greater than 12 months.
 Non-current assets include property, equipment,
machinery, furniture, vehicles, long-term investments.

Financial Position (Cont’d)
 Current liabilities: obligations that will be satisfied
within the next 12 months.
 Current liabilities include bank overdrafts, short-term
loans, creditors.
 Non-current liabilities: obligations that are deferred
over a period greater than 12 months.
 Non-current liabilities: include long-term loans.

Classified statement of financial
position (T-form)

Current assets Current liabilities

Cash at bank 3,000 Creditors 5,000

Debtors 5,000 Loan 5,000 10,000

Stock 20,000 28,000 Non-current liabilities

Loan (due 30/6/07) 5,000
Non-current assets

Office equipment 4,000 Owner’s equity

Vehicles 18,000 22,000 Capital – K.Wilson 35,000

Total assets 50,000 Total liabilities & equity 50,000

Classified statement of financial position – Narrative form
Current assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000 28,000
Non-current assets
Vehicles 18,000 22,000
Total assets $50,000
Current liabilities
Creditors 5,000
Loan 5,000 10,000
Non-current liabilities
Loan (due 30/6/07) 5,000
Owner’s equity
Capital – K.Wilson 35,000
$50,000

Classified statement of financial position – Narrative form
Owner’s equity
Capital – K. Wilson 35,000
Is represented by
Current assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000 28,000
Less Current liabilities
Creditors 5,000
Loan 5,000 10,000
Working capital 18,000
Non-current assets
Vehicles 18,000 22,000
40,000
Less Non-current liabilities
Loan (due 30/6/07) 5,000
Net assets $35,000

Classification of loans
The classification of loans depends on the term of
loans and the type of loan.
 Term of loans:
 Short-term loan: current liability

 Long-term loan: non-current liability

 Type of loans:
 Interest only loan: non-current liability as it does not

involve an obligation due within 12 months.
 Installment loan: two components.

 Current liability component: installment to be paid within 12
months.
 Non-current liability component: instalments outstanding
for more than 12 months.

Classification of loans (Cont’d)
 Interest-only loan: the principal of the loan is repaid until the
loan period expires.
 Advantage: borrower has time to repay the principal.
 Disadvantage: borrower needs to be well-planned to repay the
whole principal.
 Installment loan: repayments are made throughout the life of the
loan. These installments are usually sated as a dollar amount
per month or per quarter.
 Advantage: avoid having to make one lump sum payment.
 Disadvantage: borrower is under pressure to make periodic
repayments.

Effect of financial transactions on the

Net profit = Revenues - Expenses
Increase in net profit -> Increase in owner’s
equity
Decrease in net profit ->Decrease in owner’s
equity

Example
Transaction Assets Liabilities Owner’s equity

Owner deposited $30,000 +30,000 +30,000

Took out a loan of $20,000 +20,000 +20,000

Bought shop fittings for +10,000
$10,000 - 10,000
Purchased stock on credit for +15,000 +15,000
$15,000
Sold goods for $2,000 (cost of +2,000 +800
goods sold $1,200) -1,200
Paid weekly wages $500 -500 -500

Final result 65,300 35,000 30,300

Practice questions
Exercise 2.2
Exercise 2.5

Homework
 Exercise 2.3
 Exercise 2.6

Quiz
Pete prepared the following balance sheet for Island
Enterprise as at 31 December 2005. He asked you to review
it for accuracy.
Island Enterprises
Balance Sheet
For the year ended December 31, 2005

Assets $ Liabilities and $
capital
Trade creditor 29,600 Trade debtor 23,200
Cash 14,750 Capital 213,850
Drawings 16,000 Stock control 12,200
Building and equipment 177,300

Chapter 2.statement of financial position clc

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Chapter 2.statement of financial position clc