The statement of financial position is one of the main aspects of a company’s financial statements. Others include the statement of cash flow, income statement, statement of changes in equity, and the notes to financial statements.
Check out our guide below for more information on how to create a statement of financial position correctly.
What is a statement of financial position?
A statement of position is a report that lists a company’s assets, equity, and liabilities. It is also known as a balance sheet.
Information in a balance sheet assesses an organisation’s internal or external monetary fees.
These include comparing current liabilities to existing assets, or comparing equity to debt.
Typically, you complete a statement of financial position alongside a cash flow statement and an income statement.
Your balance sheet signifies:
- What your company controls and owns (the assets)
- What it owes (its liabilities)
- The investment the owner has contributed (the equity)
You can do this using the accounting equation: Assets = Liabilities + Equity.
The purpose of a statement of financial position
A statement of financial position is commonly used in companies that operate using a double-entry accounting system, containing information and updates to the asset, equity, and liability accounts.
The purpose of the statement is to indicate the organisation’s financial position by showing data about its liabilities, assets, and equity.
The statement can be useful in conducting financial analysis and making investment decisions. You can also compare it to previous statements to assess your company’s performance.
Assets and liabilities definition
When creating a statement of financial position, it’s essential to understand the definition of assets and liabilities.
Assets are things that benefit and improve your company’s economic status like cash, investments, real estate, and inventory. You can categorise assets into three sections:
- Current assets, such as petty cash and stock
- Fixed assets, such as office equipment
- Intangible assets, such as intellectual property or trademarks
Liabilities are the outgoings you owe to third parties. These include taxes, wages, mortgages, and bank debt. Liabilities may be short-term, such as overdrafts, or longer-term, such as secured bills and loans.
In short, liabilities remove money from your accounts, while assets increase the money in your account. It’s worth knowing that your assets must be more than your liabilities to be successful.
What does a balance sheet show?
A balance sheet is a snapshot or condensed report of company assets (the amount a firm owns) and liabilities (the amount a firm owes).
It shows a company’s equity by presenting how much money would be left over if you paid all your debts and sold all your assets.
A balance sheet shows the financial position using a basic formula – assets minus liabilities to equal owner equity.
At any time, a statement of position must balance out on either side of the equation, hence the term ‘balance sheet’.
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Understanding all the guidance on a statement of financial position can be complex and laborious.