Statement of financial position

A Statement of Financial Position, often called a Balance Sheet, is a financial 'snapshot' of a business. It lists everything a business owns (its assets) and everything it owes (its liabilities) on a single, specific day. The purpose is to show the financial health and value of the business at that moment. The statement is built on a fundamental rule: everything the business owns has been paid for by money from either lenders (liabilities) or the owners themselves (equity). This creates the accounting equation: Assets = Liabilities + Equity.

Assets are resources with economic value that a business owns or controls with the expectation that they will provide a future benefit. They are split into two categories: Non-Current Assets and Current Assets. Non-Current Assets (NCAs) are long-term resources that are expected to be used by the business for more than one year, such as property, machinery, and vehicles. Their value on the statement is shown after accounting for wear and tear, known as depreciation. Current Assets (CAs) are short-term resources that are expected to be converted into cash, sold, or used up within one year. Examples include inventory (stock), trade receivables (money owed by customers), and cash in the bank.

Liabilities are the financial obligations or debts of a business. They represent money that the business owes to other people or organisations. Like assets, liabilities are split into two categories: Non-Current Liabilities and Current Liabilities. Non-Current Liabilities (NCLs) are debts that are not due for repayment within the next year. The most common example is a long-term bank loan or a mortgage. Current Liabilities (CLs) are debts that must be paid back within one year. Common examples include a bank overdraft, trade payables (money owed to suppliers for goods bought on credit), and short-term loans.

Equity is the portion of the company that belongs to the owners or shareholders. It is the residual amount left over after you subtract all the liabilities from all the assets (Equity = Assets - Liabilities). It represents the total value of money invested by the owners, plus any profits that have been kept and reinvested in the business. For a limited company, equity is called 'Shareholders' Funds' and is made up of two main parts: Share Capital (the money raised from selling shares to investors) and Retained Profit (the accumulation of all the profits made by the company over time that have not been paid out to shareholders as dividends).

To build a Statement of Financial Position, you follow a standard layout. It is presented vertically and has two main sections that must balance. The top section details all the Assets, starting with Non-Current Assets, then adding Current Assets to get a 'Total Assets' figure. The bottom section details how those assets are financed. It starts with Equity (Shareholders' Funds), then lists Non-Current Liabilities, and finally Current Liabilities. These three are added together to get 'Total Equity and Liabilities'. The golden rule is that the final 'Total Assets' figure must be exactly equal to the final 'Total Equity and Liabilities' figure. This is why it used to be called a 'Balance Sheet'.

The Statement of Financial Position is not just a list of numbers; it's a tool for analysis. One of the most important things to analyse is 'liquidity' - the ability of a business to pay its short-term debts. This is measured using Working Capital. Working capital is the money available for the day-to-day running of a business. It's calculated by subtracting current liabilities from current assets. A positive working capital figure is usually healthy, as it means the business has enough short-term assets (like cash and inventory) to cover its short-term debts (like money owed to suppliers). A negative figure can be a warning sign, suggesting the business may struggle to pay its bills on time.