Fundamentals of Accountancy, Business and Management 2 for Grade 12 - Module 1 (Chapter 1/Week 1)
Summary
TLDRThis web class by Teacher Jeans delves into the fundamentals of accountancy, focusing on the statement of financial position, also known as the balance sheet. It explains the components of assets, liabilities, and equity, and their classification into current and non-current items. The lesson guides students through preparing a balance sheet for a single proprietorship, emphasizing the importance of this financial statement in assessing a company's financial health and predicting future earnings.
Takeaways
- 📚 The video script is a lesson on the fundamentals of accountancy, focusing on the statement of financial position, also known as the balance sheet.
- 🔍 The balance sheet presents the financial position of an entity at a specific date and helps assess the financial health and trends of a business over time.
- 💼 It is crucial for identifying the entity's liquidity, financial, credit, and business risks, and for comparing with competitors' financial statements.
- 📈 The statement of financial position consists of assets, liabilities, and equity, reflecting what the business owns, owes, and the residual interest belonging to the owners.
- 🏦 Assets can be classified as current (to be realized within one year) or non-current (long-term assets held over one fiscal year).
- 💰 Current assets include cash, cash equivalents, accounts receivable, and inventories, while non-current assets include property, plant, equipment, intangible assets, and investment properties.
- 📋 Liabilities are obligations that can be current (to be settled within one year) or non-current (not expected to be liquidated within one year).
- 🏢 Examples of current liabilities include accounts payable, notes payable, and taxes payable, while non-current liabilities may include long-term loans and bonds payable.
- 📊 Equity for a sole proprietorship is referred to as owner's equity, reflecting the net effect of investments, withdrawals, net income or loss, and other adjustments.
- 📝 Preparing a statement of financial position involves presenting a heading with the entity's name, statement title, and reporting period, followed by assets, liabilities, and owner's equity.
- 📊 The statement can be presented in report form (vertical format) or account form (horizontal format), with a double rule to indicate the final figures.
Q & A
What is the purpose of the statement of financial position in business?
-The statement of financial position, also known as the balance sheet, presents the financial position of an entity at a given date, helping users assess the financial health or soundness of the company or business, and identifying underlying trends in the financial position of the firm.
How does the statement of financial position help in assessing a company's risks?
-The statement of financial position can help in determining the state of the entity's liquidity risk, financial risk, credit risk, and business risk, especially when used in conjunction with other financial statements of the entity or its competitors.
What are the three main components of the statement of financial position?
-The three main components of the statement of financial position are assets, liabilities, and equity.
What is the accounting equation that represents the relationship between assets, liabilities, and equity?
-The accounting equation is Assets = Liabilities + Equity, which shows that the total assets of a business must be equal to the sum of its liabilities and equity.
What is the difference between current and non-current assets?
-Current assets are those expected to be realized within one year from the reporting date, while non-current assets are long-term assets that a company expects to hold over one fiscal year.
Why is cash considered a current asset?
-Cash is considered a current asset because it can be readily converted within one year and can be used to pay short-term obligations, including bills and coins in hand, bank accounts, and operating funds.
What are some examples of current assets other than cash?
-Examples of current assets other than cash include cash equivalents, accounts receivable, notes receivable, trading securities, and inventories.
How are property, plant, and equipment (PPE) presented in the statement of financial position?
-PPE are presented in the statement of financial position after deducting the related accumulated depreciation, as they are depreciated over their estimated useful life, except for land, which is not depreciated.
What are the two main forms of presenting the statement of financial position?
-The two main forms of presenting the statement of financial position are the report form, which lists assets first followed by liabilities and owner's equity, and the account form, which has assets on the left side and liabilities and owner's equity on the right side.
How is the owner's equity calculated in a sole proprietorship?
-In a sole proprietorship, owner's equity is calculated as the net result of the owner's investments, withdrawals, net income or loss for the year, and other adjustments from the beginning balance of owner's equity.
Outlines
📚 Introduction to Financial Position Statement
This paragraph introduces the fundamentals of accountancy, business, and management, focusing on the statement of financial position, also known as the balance sheet. It outlines the objectives of the lesson, which include understanding and classifying the elements of the statement, preparing it for a single proprietorship, and using different forms. The statement of financial position is essential for assessing a company's financial health and identifying trends over time, which can indicate liquidity, financial, credit, and business risks. The paragraph also explains the basic accounting equation: assets = liabilities + equity, and describes the components of a financial position, including assets, liabilities, and equity.
💼 Classification of Assets in Financial Position
The second paragraph delves into the classification of assets as either current or non-current. Current assets are those expected to be realized within one year and include cash, cash equivalents, accounts receivable, notes receivable, trading securities, and inventories. Non-current assets, on the other hand, are long-term and include property, plant, and equipment (PPE), intangible assets, investment properties, and biological assets. The paragraph provides examples and explanations for each type of asset, highlighting their significance in a company's financial position.
🏢 Understanding Non-Current Assets and Liabilities
This section continues the discussion on non-current assets, providing examples such as biological assets and explaining the concept of liabilities. Liabilities are obligations that a business owes to others, arising from past events and expected to result in an outflow of resources. The paragraph differentiates between current and non-current liabilities, with current liabilities being those expected to be settled within 12 months of the balance sheet date. Examples of current liabilities include accounts payable, notes payable, interest payable, accrued expenses, and income tax payable. Non-current liabilities, which are not expected to be liquidated within the same timeframe, are also briefly mentioned.
💼 Equity Components and Balance Sheet Preparation
The fourth paragraph discusses the components of equity in a balance sheet, including retained earnings, revaluation reserves, and the distinction between different business structures such as sole proprietorships, partnerships, and corporations. It then outlines the steps for preparing a statement of financial position, emphasizing the importance of the heading, the presentation of assets, liabilities, and owner's equity. The paragraph also touches on the interconnectedness of this topic with business finance and organization and management.
📋 Steps for Preparing a Statement of Financial Position
This paragraph provides a detailed guide on how to prepare a statement of financial position, starting with the heading that includes the entity's name, the title of the statement, and the reporting period. It then explains how to present assets, distinguishing between current and non-current assets, and how to present liabilities, differentiating between current and non-current. The paragraph concludes with the addition of owner's equity to complete the equation of assets equals liabilities plus equity, ensuring that the total assets are equal to the sum of liabilities and owner's equity.
📊 Presentation Formats of the Statement of Financial Position
The final paragraph discusses the two common presentation formats for the statement of financial position: the report form and the account form. The report form presents assets first, followed by liabilities and owner's equity, in a vertical format. The account form, on the other hand, uses a horizontal format with assets on the left side and liabilities and owner's equity on the right side. The paragraph emphasizes the importance of double ruling to indicate the end of sections and the total of the statement. It concludes with a reminder to present the statement in the appropriate format and to ensure that the basic accounting equation is maintained.
Mindmap
Keywords
💡Statement of Financial Position
💡Assets
💡Liabilities
💡Equity
💡Current Assets
💡Non-Current Assets
💡Current Liabilities
💡Non-Current Liabilities
💡Accounting Equation
💡Depreciation
💡Owner's Equity
Highlights
Introduction to the fundamentals of accountancy, business, and management, focusing on the statement of financial position.
The statement of financial position, also known as the balance sheet, presents an entity's financial position at a given date.
The balance sheet helps assess the financial health and soundness of a company and can identify underlying trends over several accounting periods.
Financial position components include assets, liabilities, and equity, with the accounting equation being assets = liabilities + equity.
Assets are classified as current or non-current based on their expected realization within one year from the reporting date.
Examples of current assets include cash, cash equivalents, accounts receivable, and trading securities.
Inventories are part of current assets and include goods for resale, work in progress, and materials and supplies for production.
Non-current assets include property, plant, and equipment (PPE), which are depreciated over their estimated useful life.
Intangible assets, such as trademarks and patents, are amortized over their useful lives or tested for impairment annually.
Investment properties and biological assets are classified as non-current assets based on their long-term use or appreciation.
Liabilities are obligations that a business owes to others, classified as current or non-current based on their expected settlement within one year.
Current liabilities include accounts payable, notes payable, interest payable, and income tax payable.
Non-current liabilities are long-term obligations such as long-term bank loans, bonds payable, and mortgage payable.
Equity categories differ for sole proprietorships, partnerships, and corporations, reflecting the ownership's interest in the entity.
The preparation of a statement of financial position involves presenting assets, liabilities, and owner's equity in a report or account form.
The report form of the statement of financial position lists assets first, followed by liabilities and owner's equity in a vertical format.
The account form presents assets and liabilities in two columns, reflecting the accounting equation in a horizontal format.
The statement of financial position must balance, with the total assets equaling the sum of liabilities and owner's equity.
Transcripts
hi good day this is your web teacher
teacher jeans welcome to our class of
fundamentals of accountancy business and
management too we will discuss our first
topic for this week statement of
financial position
the end of this lesson you are expected
to be able to describe the elements of
the statement of financial position
to classify the elements of statement of
financial position into current and
non-current items to prepare the
statement of financial position of a
single proprietorship and to prepare a
statement of financial position using
the report form and the account form
with proper classification of items as
current or non-current so this topic has
been discussed in your 5 m1 subjects but
this time
we will discuss this
in a more detailed way so statement of
financial position
is also known as balance sheet and it
presents the financial position of an
entity at a given date so
this date
means
that this statement should
be stated as at or as of the end of the
period
so this
balance sheet
um helps users of financial statements
to
assess the financial health or
soundness of the company or the business
so
when analyzed over several accounting
periods
these balance sheets may assist in
identifying underlying trends in the
financial position of the firm
and this is very helpful now
particularly in determining the
state of the entity's liquidity risk the
financial risk its credit risk and of
course its
business risk so
when used in conjunction with other
financial statements of the entity in
the
financial statement of its competitors
balance sheet may help to identify
relationships and trends which
are
indicative of potential problems or
areas for further improvement
and another one is the analysis of this
statement could
therefore assist the users of financial
statements to predict the amount
timing
and volatility of entities future
earnings
meant a financial position consists of
the following components or elements we
have assets liabilities and
equity so
the assets of an entity may be financed
from internal sources like share capital
and profit
so and also from external credit like
um trade creditors bank loans so since
the total assets of a business must be
equal to liabilities and equity
so this leads to the accounting equation
assets equals liabilities plus equity so
assets
are
something that an entity owns or
controls in order to derive economic
benefits from its use and liabilities
so these are obligations that a business
owes to someone
and
its settlement involves cash now the
transfer of cash or other resources and
the last one we have equity so this is
what the business owes to its owners so
it's derived from deducting
the total liabilities from the total
asset so
it therefore represents the residual
interest in the business that belongs to
the
owners
so here the
basic account equation we have assets
plus liabilities equals equity so
this is very important
so here again
something that an entity owns or
controls in order to derive economic
benefits from its use so
it can be classified as current or
non-current assets
so assets must be classified in the
balance sheet or in the statement of
financial position as current
or
non-current assets so
um current assets
these are
assets that are expected to realize not
to be realized within one year from the
reporting date
and
this non-current assets are long-term
assets that a company expects to hold
over one fiscal year so
if it is six months or less than a year
or within a year
so that can be considered as current
assets and it is more than one year
that is labeled as non-current assets
so cash examples of current assets
number one example of this is cash so
cash is considered a
current asset because it can be readily
converted within one year
and can be used to pay short term
obligations and
cash includes bills and coins in hand
bank accounts and operating funds
for example
bills and coins inside a restaurant's
cash register or included the company's
cash account
also
cash deposited in banks under the
company's name are also classified as
cash
unless they are restricted
so finally
operating and working funds
here are also classifieds as
cash
another example
is cash equivalent so this is short term
highly liquid investments that are
readily convertible to known amounts of
cash and which are subject to an
insignificant risk of changes in value
so
this has been defined now by the ias 7
the statement of cash flows iasp
and also this term short term the term
short term here
so this is subject to the entities
policy and ordinarily the instruments
that acquired 90 days before the year
before the
maturity
are classified as cash equivalent so
to
sum up the bills and coins on hand plus
bank accounts plus operating funds
are considered as cash
and this one cash equivalents are those
instruments that acquired 90 days before
their maturity
so another we have
accounts receivables so these are
amounts owed
by the customers to the
entities ordinarily
entities sell on credits over cash
so the entity records at trade accounts
receivables or accounts receivables
while waiting for the collection of cash
on due date so this
receivables are called open accounts
since they do not have documentary
support other than the sales contract
and another one we have notes receivable
so
this are evidenced by a promo sorry note
so
there are three key
elements of notes receivable so remember
this
first
is a principal amount of the amount
collectible by the entity from the
customer
second notes receivable would have
maturity dates which can be for 30 60 or
90 days upon the date of ishe
and lastly it must have a corresponding
interest like six percent or
seven percent
and interest receivables so
um these are collectible amounts due to
the cost of
borrowing money so these are related to
the notes receivable no from the
previous example
and this in the interest of this is
computed as principal
multiplied by interest rate and
multiplied by the related time factor
and
another one we have trading securities
so
this securities that have been purchased
by a company
for the purposes of realizing a
short-term profit
another term for this is
what we call the faf
vpl or the financial assets at fair
value true
through profit of loss so this means
that the entity must carry these
instruments
with short-term profit-taking motives
like
changes in
market price
and of course inventories so these are
merchandise held for resale so the
international accounting accounting
standard board
so it includes the following
items as part of inventories first you
have the
um
goods for resale in the normal course of
business so
they are conventionally called finished
goods so these are part of inventories
so for example
a real estate company selling land will
classify their land as inventories as
such are held for resale
or held for sale in the normal courts of
business so
on the other hand assume that a
manufacturing entity owns a piece of
land where its manufacturing plant
stands so
this land will not be classified as
inventory since such is not held for
sale so
those
um considered only for held for resale
and second
inventories include goods in the process
of production
so these are conventionally called as
work in progress or goods in princess
and lastly
inventories include materials and
supplies to be consumed in the
production process so
this are conventionally called
raw materials for example a beverage
company producing bottled orange juice
will include
fresh oranges and concentrates a cereal
material so it could be part of the
inventories
and supplies and other prepaid assets so
these include office supplies to be
consumed by the business and prepaid
assets so
a common example of prepaid assets is
prepaid rent
so
that one
so first example for the non-current
assets we have property
plant
and
equipment so
this assets
include fixed assets that are used in
the normal operating cycle or
production of the business and
these assets also include
land and buildings being used by the
company the manufacturing plants
manufacturing equipment
vehicles
furnitures and fixtures and result
improvements are also included in this
category so
as long-lived assets
property plant and equipment or ppe are
depreciated over their estimated useful
life so however
land is not depreciated since
um
it is deemed with perpetual benefit and
ppe this property plan and equipment
are presented in the statement of
financial position after deducting the
related accumulated depreciation
next we have
intangible assets so
these are assets
meeting definition of asset but without
physical substance
so common intangible assets include
trademarks
so we have trademarks for brand names
patents for inventions
and copyrights for artistic or literary
work so intangible assets with
definite useful lives are amortized over
their
useful lives and
those with indefinite
useful lives however are annually tested
for
impairment so for ppe you have
depreciation
for intangible assets you have
what
you have
amortization so next
so another one we have investment
properties so these are long-lived
assets
not
remember this one not used in
production so the company's intention
for these assets
is to lease out or for long-term capital
appreciation so for example
um we have this lopez company that
purchases a land
and erects a building in the said land
for its corporate headquarters so such
is classified as property plant and
equipment
because the property is to be used by
the entity
but if that lopez company purchases the
same property and erects a building to
be listed out
to renters
then it is called
an investment properties why
because this property will be used to
generate rental income
and not for company use
next we have another example for
non-current assets
it's a
biological asset so
these are living plants or animals held
by the business for resale
or for
breeding so these assets include
trees in plantations plants dairy cattle
pigs
bushes figs and fruit trees
so the next component we have
liability so these are obligations that
a business owes
to
someone so this um
this is a present obligation arising
from past events
so the settlement of which is expected
to result in an outflow from the entity
of resources embodying economic benefits
or from the assets so
again these are present obligations
arising from from past events and
can be classified as current or
non-current liabilities so if we have
current assets and then current assets
we also have current liabilities and
non-current liabilities
so current liabilities are those
that the company expects to settle
within 12 months of the date on the
balance sheet so
um the settlement comes either from the
use of current assets such as cash on
hand or from the current sale of
inventory
settlement can also
come from swapping out one current
liability for another so at present so
most liabilities show up on the balance
sheet at historic cost rather than
fair value so there is no generally
accepted accounting principle or what we
call gap requirement for the order in
which they show up on the balance sheet
as long as
they are properly classified as current
so example of current liabilities we
have accounts by a ball nodes by a ball
and earned income
wages payable and taxes payable so the
next one we have none current
liabilities so
of these are um the ones the company
recons and are not going anywhere soon
so
in other words the company doesn't
expect to liquidate them within
12 months of the balance sheet dates
examples are long-term bank loan
bans payable and
mortgage payable
so again
some examples of current liabilities we
have accounts payable so or trade
accounts payable so these are open
accounts
relating to purchase of goods
or
raw materials so if the seller has
accounts receivable for uncollected
accounts then the buyer will have
accounts payables for
unpaid amounts next one we have notes
payable so unlike trade accounts payable
notes payable are evidenced by a
promissory note so if a seller receives
a note receivable
then the buyer then issues a note
payable so
as in the notes receivable
notes payable would have a principal
amount maturity date and
interest rate another example we have
interest payable so interest payable are
related to the notes payable
so interests are considered as cost for
borrowing money so interest are computed
as principal amount multiplied by time
factor and
interest rate so
another one we have other accrued
expenses so what are this this accounts
pertain to expenses incurred
but not yet paid so common examples of
these accurate expenses are salaries
rent and utilities
we have here our last example for
current liabilities there are more but
we will have a limited examples for this
lesson so income tax payable
so
business organizations tax liability to
the government where it
operates so
um income taxes are normally paid on the
5th of april of the succeeding year so
you can also check my other video for
this
for the introduction for fab m2
so before we proceed to this one so
again another exam um we also have done
current liabilities so i forgot to put
it in the slide but
um
as i have mentioned the examples for
this are the long-term bank loan loans
unpayable bonds payable mortgage payable
so this topic notes a statement of
financial position
is also interconnected with your
business finance your accounting one
subject
and for the
your interrupt even in in your interest
in your organization and management so
this one
for categories of equity in the last
portion of your balance sheet
so for sole proprietorship you use
owner's equity and that is net off
withdrawal and for partnership you use
partners equity
net of partners withdrawal and share in
net income or
net loss and for corporation you use
stockholders equity so actually for
corporation you have their share capital
that represents the amount invested by
the owners in the entity you also have
retained earnings that comprises the not
total net profit or loss retained in the
business after distribution to the
owners in the form of
dividends and of course you also have
revaluation reserve
contains the net surplus of any upward
revaluation of property plant and
equipment that is recognized directly in
equity
so let's move to the
preparation in
preparing a simple
statement of financial position or
balance sheet so first you have to start
with the heading
second you have to present the
assets third one you have to present the
liabilities in the last one you have to
add the owner's equity again owner's
equity if sole proprietorship since
we will only
um be discussing the single
proprietorship
statement of financial position so we
will use
owner's equity
so step one start with the heading
so
um the heading includes sorry for this
the heading includes the name of entity
individual or company
name of the statement
so we have statement financial position
and the reporting period so for example
we have december 31
20 21 so some complex forms of business
may include a more detailed heading
like when
reporting a consolidated balance sheet
and or
when presenting comparative years so
the next slide is an example of a simple
heading in the balance sheet
that is stated in the local currency
so this is the example of
a simple heading
so you have there the name of the
individual
um
the title statement financial position
and of course the date
step two you have to present the assets
so classify the assets into
current and non-current assets so again
current assets are cash cash equivalents
assets held for collection sale or
consumption within the entity's normal
operating cycle
and assets
could also
assets that are held for trading within
the next 12 months so the rest are
considered
non-current assets
so example
again you're heading the name of the
entity or the individual the title
the date then you have to present the
asset portion so current
and non-current assets
so here and you have to you have the
total assets current plus none current
so
again as i have mentioned
um non-current assets the ppe
what will you show in the balance sheet
is
the net
the net of the depreciated amount
so delivery equipment for 50 000 less
accumulated depreciation because it
depreciates
so the third step you have to present
the liabilities so after presenting the
total assets next are the liabilities so
you should also
know the liabilities as the current or
non-current
so after presenting the assets current
assets and then current assets and also
the liabilities we have current
liabilities and then current liabilities
and you have their total liabilities
so the statement of financial position
looks like this
and the last step you have to add the
owner's equity so the statement of
financial position is an equation of
assets equals liabilities plus equity so
there is need to add the owner's equity
the liabilities and equity section of
the statement of the financial position
so here this is the example i hope you
can see it clearly
so here assets
so first step you have the title the
heading
the assets the liabilities and the
owner's equity
so
there is a need to again to add this
owner's equity in this liability and
equity section this is
this one
this one is the liability and
owner's equity section
so the owner's equity presented may only
show the ending balance
so this one
so
that is the ending balance amount shown
in the statement of changes in owner's
equity so
this amount
is already the result of the adjusting
after adjusting the investments um
withdrawals the net income or loss for
the year
and other adjustments from the beginning
balance of owner's equity so after
presenting the owner's equity
the statement of financial position will
look like this so remember
the equation the basic account equation
assets equals liabilities plus owner's
equity so this one must be equal
so this is the total assets 777
800
and
you add up the cur the total liabilities
567 plus
um
owner's equity 210 so it will result to
777 800 same with the total asset so
this one must be equal to the sum of the
total liabilities and owner's equity so
for your presentation of your statement
of financial position if that's your
final answer do not forget to
double rule
so this one
you have to put a
double rule
at one
okay
so
so
in the statement financial position you
may present it in a
report form or in an account form so the
report form it shows assets accounts
first and then liabilities and owner's
equity accounts after so it provides
information in a vertical format
vertical format one column
that goes
so here
it should be in the vertical format one
column that goes the full width of the
page so you have here the
assets the liabilities and owner's
equity so that is a report for
starts with assets providing a total
value of at the end of the asset section
you also have liabilities
then equity so the final line of the
report providing the total combined
value of liabilities and equity
so the one we have we had
presented
so it was a
report
form it started with assets liabilities
and owner's equity so again do not
forget
to have a
double rule
so for account form
so it has two columns
two columns
so that shows assets
on the left side here
and the liabilities and owner's equity
on the right side so just like the debit
and credit balances of an account so if
you observe account form so that is
based on the accounting equation assets
assets equals liabilities plus owner's
equity so this one you start with the
assets on the left side then the
liabilities and honors equity on the
right side so it provides information in
an essentially
horizontal
format so the left column again list of
companies assets
and the final line on the left side of
the sheet provides the total value of
the assets
and the column on the right list of both
liabilities and equity so
um the final line on the right side of
the total combined assets
um that is the total amount of
liabilities and equity so for ex example
of this is shown in the next line this
is the example of a
account form so
it's in
the
horizontal format
so this left side composer assets the
right side are your liabilities and
equity
thank you so much see you in our next
web class
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