Understanding the Statement of Financial Position

Introduction to the statement of financial position

What is the statement of financial position?

• The statement of financial position shows the financial structure of a business at a specific point in time

  • It identifies a business's assets and liabilities and specifies the capital (equity) used to fund the business operations

• The statement of financial position is also known as the balance sheet

  • It is called the balance sheet, as net assets are equal to the total equity – the net assets and equity balance

A statement of financial position

Assets

Assets

• Assets are items owned by a business

  • There two type, namely, non-current assets and current assets

Non-current assets

• Non-current assets are owned by a business in the long-term, usually a period more than 12 months

  • Examples include tangible assets such as buildings, land, machinery and vehicles

  • Non-current assets may be intangible, such as patents, goodwill or  brand value 

Current assets

• Current assets include cash and items that can be turned into cash relatively quickly, usually within 12 months

  • The three main types of current assets are cash, trade receivables and inventory

• Cash is the most liquid form of current asset, as it can be used immediately as a method of payment

• Inventory is the least liquid form of current asset, as, before it can be used for payment, it must be sold

Liabilities

Liabilities

• Liabilities are amounts of money owed by a business (debts) 

  • Non-current liabilities are amounts owed that do not need to be paid back for at least 12 months

    • For example, long-term loans such as mortgages

  • Current liabilities are amounts owed that must be repaid within 12 months

    • For example, creditors (trade payables) and bank overdrafts

Capital employed

Capital employed

• Capital employed is the total amount of money that a business uses to operate and grow

• It usually includes:

  • Equity

    • Money invested by the owners or shareholders.

  • Non-current liabilities

    • Long-term loans or borrowings

• In the statement of financial position, capital employed is equal to net assets

Calculations based on the statement of financial position

Calculations based on the statement of financial position

Statement of financial position

Chagny Rentals Ltd at 31st December 2024

1. Calculating total assets

• Total assets are the sum of non-current assets and current assets

• This figure represents everything a business owns at a specific point in time

2. Calculating total liabilities

• Total liabilities are the sum of current liabilities and non-current liabilities

• This figure represents everything a business owes at a specific point in time

3. Calculating working capital

• Working capital is the money a business has available for day-to-day activities, such as paying bills, buying stock and covering wages

• It is calculated using the formula

$\mathrm{Working} \mathrm{capital} - \mathrm{Current} \mathrm{assets} - \mathrm{Current} \mathrm{liabilities}$

Decisions based on the statement of financial position

Decisions based on the statement of financial position

• The statement of financial position can be used to answer important questions that may support business decisions