Topic Two: The Statement of

Financial Position (SFP)

Celine Craddock
Business eLearning
The statement of financial position equation

equals plus

Assets Equity Liabilities

 Assets

Major characteristics:

A probable future benefit must exist.

The business must have the right to control the

resource.

The benefit must arise from some past transaction

or event.

The asset must be capable of measurement in

monetary terms.
Decision Is there a probable No
chart for future benefit?

identifying Yes
an
Does the benefit arise from a No
accounting past transaction or event?
asset
Yes

Is there a right to No
control the resource?

Yes

Can the resource be reliably No

measured in financial terms?

Yes

Not an
Accounting
accounting asset
asset
 Claims

There are essentially two

types of claim against
a business:

Equity

Liabilities
 The classification of assets

The classification of assets may vary

according to the nature one of the
business:

Current assets

Non-current assets
 Current assets

Held for sale or consumption during

the businesss operating cycle

Expected to be sold within

the next year

Held principally for trading

They are cash or near

equivalents to cash
The circulating nature of current assets

Inventories
(stock)

Trade receivables
Cash (trade debtors)
Non-current assets

Do not meet the definition of

current assets
The classification of claims

Current liabilities

Non-current liabilities
 Current liabilities

Expected to be settled within the

businesss normal operating cycle

Held principally for trading

purposes

Are due to be settled within a year

after the date of the relevant
statement of financial position

No right to defer settlement beyond

a year after the date of the relevant
statement of financial position
Non-current liabilities

Do not meet the definition of

current liabilities
Accounting conventions influencing the statement of financial
position

Business entity Statement of Dual aspect

convention financial convention
position

Historic cost Going

Prudence
convention concern
convention convention
The effect of trading operations on the statement of
financial position

plus plus
equals
(minus)

Assets Equity Profit

Liabilities
(Loss)
 The Accounting Cycle

During the period: Close revenues, gains,

Analyse transactions. expenses and losses
Record journal entries in the general journal. to retained earnings.
Post amounts to the general ledger.

Prepare a complete
End of the period: set of financial statements.
Adjust revenues and expenses Disseminate statements
and related balance sheet accounts. to users.
TYPES OF ACCOUNTS
 Accounts
An organised format used by companies to accumulate the
dollar effects of transactions.

Cash Inventory

Notes
Equipment Payable
 Typical Account Titles
The Balance Sheet

Assets Liabilities
Cash Accounts Payable
Short-Term Investment Accrued Expenses
Accounts Receivable Notes Payable
Notes Receivable Taxes Payable
Inventory (to be sold) Unearned Revenue
Supplies Bonds Payable
Prepaid Expenses
Long-Term Investments Stockholders Equity
Equipment Contributed Capital
Buildings Retained Earnings
Land
Intangibles
 Typical Account Titles
The Income Statement

Revenues Expenses
Sales Revenue Cost of Goods Sold
Fee Revenue Wages Expense
Interest Revenue Rent Expense
Rent Revenue Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
 International Perspective
European companies follow IFRS to prepare their financial
statements.
U.S. companies follow GAAP to prepare their financial
statements.
Other countries have significant variations from the
accounting and reporting rules of IFRS or GAAP.

Some countries use different account titles than those used by

European or U.S. companies.
TRANSACTION ANALYSIS AND
RECORDING
Learning Objective

Apply transaction analysis to simple

business transactions in terms of the
accounting model:
Assets = Liabilities + Stockholders Equity
 Principles of Transaction Analysis
Every transaction affects at least two
accounts (duality of effects).
The accounting equation must remain in
balance after each transaction.

A = L + SE
(Assets) (Liabilities) (Stockholders
Equity)
 Duality of Effects
Most transactions
with external parties
involve an exchange
where the business
entity gives up
something but
receives something in
return.
Balancing the Accounting Equation

Accounts and effects

Identify the accounts affected and classify them by
type of account (A, L, SE).
Determine the direction of the effect (increase or
decrease) on each account.
Balancing
Verify that the accounting equation (A = L + SE)
remains in balance.
Balancing the Accounting Equation
Lets see how we keep the
accounting equation in balance
for Papa Johns.

All amounts we use are expressed in

thousands of dollars.
Papa Johns issues 2,000 of additional common
stock to new investors for cash.

Identify & Classify the Accounts

1. Cash (asset).
2. Contributed Capital (equity).

Determine the Direction of the Effect

1. Cash increases.
2. Contributed Capital increases.
 Papa Johns issues 2,000 of additional common
stock to new investors for cash.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000

Effect 2,000 = 2,000

A = L + SE
The company borrows 6,000 from the local bank,
signing a three-year note.

Identify & Classify the Accounts

1. Cash (asset).
2. Notes Payable (liability).

Determine the Direction of the Effect

1. Cash increases.
2. Notes Payable increases.
 The company borrows 6,000 from the local bank,
signing a three-year note.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000
(b) 6,000 6,000

Effect 8,000 = 8,000

A = L + SE
Papa Johns purchases 10,000 of new equipment, paying 2,000 in
cash and signing a two-year note payable for the rest.

Identify & Classify the Accounts

1. Equipment (asset).
2. Cash (asset).
3. Notes Payable (liability).

Determine the Direction of the Effect

1. Equipment increases.
2. Cash decreases.
3. Notes Payable increases.
 Papa Johns purchases 10,000 of new equipment, paying 2,000 in
cash and signing a two-year note payable for the rest.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000

Effect 16,000 = 16,000

A = L + SE
Papa Johns lends 3,000 to new franchisees who
sign five-year notes agreeing to repay the loan.

Identify & Classify the Accounts

1. Cash (asset).
2. Notes Receivable (asset).

Determine the Direction of the Effect

1. Cash decreases.
2. Notes Receivable increases.
 Papa Johns lends 3,000 to new franchisees who
sign five-year notes agreeing to repay the loan.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
(d) (3,000) 3,000

Effect 16,000 = 16,000

A = L + SE
Papa Johns purchases 1,000 of stock in other
companies as an investment.

Identify & Classify the Accounts

1. Cash (asset).
2. Investments (asset).

Determine the Direction of the Effect

1. Cash decreases.
2. Investments increase.
 Papa Johns purchases 1,000 of stock in other
companies as an investment.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
(d) (3,000) 3,000
(e) (1,000) 1,000

Effect 16,000 = 16,000

A = L + SE
Papa Johns board of directors declares and pays
3,000 in dividends to shareholders.

Identify & Classify the Accounts

1. Cash (asset).
2. Retained Earnings (equity).

Determine the Direction of the Effect

1. Cash decreases.
2. Retained Earnings decreases.
 Papa Johns board of directors declares and pays
3,000 in dividends to shareholders.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
(d) (3,000) 3,000
(e) (1,000) 1,000
(f) (3,000) (3,000)
Effect 13,000 = 13,000

A = L + SE