What is a statement of financial position?
A statement of financial position is also known as a balance sheet. In simple terms it captures the finances of a business at a certain moment in time. It does this by detailing three key aspects of those finances:
The liabilities carried by the business
The equity held by the business
How can a statement of financial position be used?
The statement of financial position can be useful for anyone wishing to gain an insight into the risk a business represents in terms of factors such as its liquidity, its credit, its finances and its ongoing business viability.
What are the components of statement of financial position?
The assets of your business are those items that you own or gain economic benefit through controlling. There are two kinds of assets – current and non-current. A non-current asset is likely to deliver these economic benefits over a longer period of time, whereas any assets expected to deliver economic benefits within 12 months of the financial position being drawn up are classified as current assets.
Other aspects of the assets of a business covered by the statement of financial position include whether these assets are tangible or intangible. An asset that is physical in nature – such as an item of equipment – is classified as a tangible asset, while something such as goodwill represents an intangible asset.
The inventory balance of the business will also be listed under assets, and will include the goods held by the business as part of day-to-day operations. These might include raw materials, works in progress or finished items.
Trade receivables are listed under assets and represent income that is recoverable from customers in lieu of credit sales.
Cash in hand carried by the business is listed under assets, as are any cash equivalents. They are joined by any investments that can easily be converted into specified amounts of cash.
Listed under liabilities in a statement of financial position will be any amount owed by the business to another person or business if settling that amount would involve the payment of cash or the transfer of other resources. Like assets, liabilities should be listed as current or non-current. Current liabilities are those that need to be settled within 12 months of the date of the statement of financial position being drawn up, while those to be settled over the longer term are non-current liabilities.
As with assets, liabilities are also detailed in terms of their specific nature. The categories under which they appear could include:
Liabilities due to be paid to suppliers and contractors through lines of credit, and any bills due that are too small to be listed individually.
Short-term lending such as bank overdrafts or loans that need to be paid back in less than 12 months.
Longer-term borrowing in the form of loans scheduled to take more than a year to pay off. Any instalments of a long-term loan that are due to be paid within 12 months of the date of the statement of financial position will be classed as current liabilities.
Equity is the amount a business owes to the people who own it. It can be calculated by deducting total liabilities from total assets. The figure produced by this calculation represents the stake in the business that belongs to the owners. It is usually included under these categories:
Share capital – the amount invested in the business by the owners
Retained earnings – the net profit or loss in the business after dividends have been distributed to the owners
We can help
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