Good morning, everyone. Today we are going to talk about the Statement of Financial Position, which you might also hear called the balance sheet. Think of it as a snapshot of a business’s finances at a specific moment. It shows three main things: what the business owns, what it owes, and what belongs to the owners. In simple terms, it answers the question: if the business closed today, how much would be left for the owners after paying all debts?
Let’s start with Non-Current Assets, or fixed assets. These are long-term items the business uses for more than a year. Examples include buildings, machinery, vehicles, or patents. These assets often lose value over time due to wear and tear, which we call depreciation. For instance, a factory building purchased for $500,000 is a non-current asset.
Next, we have Current Assets. These are resources the business expects to turn into cash within a year. This includes cash itself, inventory, and money owed by customers, which we call accounts receivable. For example, if a business has $30,000 in cash and $10,000 in stock, these are current assets.
On the other side, we have Current Liabilities, which are debts the business must pay within a year. This could be invoices from suppliers, short-term loans, or overdrafts. For example, if a supplier invoice of $8,000 is due in 30 days, it counts as a current liability.
From this, we can calculate Net Current Assets, also known as working capital. This is simply current assets minus current liabilities. A positive figure means the business can comfortably meet its short-term obligations.
We also have Non-Current Liabilities, which are long-term debts not due within the year, such as a 5-year bank loan of $100,000. Subtracting all liabilities from the total assets gives us Net Assets, which represent the total value of the business.
Finally, Equity shows the owners’ claim on the business. This includes share capital, which is money invested by shareholders, and reserves, like retained earnings from profits that were not distributed. For example, if the company earns a net profit of $40,000 and keeps it, this adds to equity.
Sometimes, the statement may need amendments, like correcting errors, revaluing assets, adding new capital, or updating for loan repayments. For example, if a machine’s value was overstated, reducing its value will also reduce net assets.
There is a strong link between the Statement of Profit or Loss and the Statement of Financial Position. Profit earned increases retained earnings in equity. Revenue might increase accounts receivable, while unpaid expenses increase accounts payable. Depreciation reduces asset values and affects net profit. For instance, if a business earns a net profit of $20,000 and keeps it, retained earnings in equity rise by $20,000.
In conclusion, the Statement of Financial Position is a crucial document showing a business’s financial health and structure. It complements the profit and loss statement by showing how profits are used or retained. By examining it, stakeholders can assess liquidity, solvency, and overall financial strength to make informed decisions.
