Finance

What Is A Statement Of Financial Position?

Allison S Robinson | 17 May 2022 | 2 years ago

balance-sheet

A statement of financial position, also known as a balance sheet, summarises all of a company’s assets, liabilities, and equity as of a specific date.

Although several financial statements may be required in any given year, the statement of financial position differs from other financial reports in that it discloses a company’s financial obligations on one specific day, as opposed to other financial reports that disclose financial information over a length of time, generally equating to a 12 month period, usually from tax year to tax year (April to April).

Since these reports are done on a regular basis, a statement of financial position helps to track the growth of a business and basically regroups all the financial data surrounding a business including assets, liabilities and also equity.  The statement of financial position allows you to see how the finances of the business have changed over time.

In addition to the insight that it can provide for a business, it is also an easy way for outsiders, like investors for example, to fully understand a business’s financial position.

Simply put, a statement of financial position conveys what a company owns, what it owes, and the value of assets the business has accumulated over time, which is a strong indicator of how risky it is to invest in a particular company.

It is vital for businesses to compile a statement of financial position on a regular basis since it provides insight into their financial situation and health, as well as insight into the business’s future performance.

A statement of financial position is among four business documents that a public company must file each year in order to maintain its status. A statement of retained earnings, an income statement band a cash flow statement are the other three.

As previously stated, financial statements are usually referred to as ‘balance sheet.’ When a company or business is classed as a non-profit organisation or Government, the term ‘statement of financial position’ is more often used.  If you intend to run any type of business, you must know how to implement, track, and interpret this document.

It can provide you with a basic understanding of accounting principles, and it is usually prepared and released as one of the last events for a specific accounting period. All transactions are listed on a separate document and posted to a ledger. Simply put, a statement of financial position is a snapshot of a company’s entire financial position over a specific time period. Its goal is to illustrate a company’s financial activity changes.

Balancing Assets, Liabilities and Equities

Balancing Assets, Liabilities and Equities

A company’s statement of financial position is essentially a type of numerical report. It differs somewhat from standard bookkeeping documents in that it reports the balances of the company’s liabilities, assets, and equity accounts. ‘Equity’ is the term used to describe what the company owns outright. The terms ‘liabilities’ and ‘assets’ refer to the items (and their monetary equivalents) that the company owes and the resources that the company has to work with during its day to day operations.

In general, the statement of financial position follows the ‘accounting equation.’

Liabilities + equities = Assets.

The statement of financial position must always be balanced in order to be considered credible. This means that the assets of the company must equal the sum of its equities and liabilities. The purpose of the statement is not to show whether the company is making a profit or a loss. Its primary goal is to demonstrate the balance – and that the equation adds up. Aside from required reporting, financial analysts can also use the statement of financial position to assess a company’s overall health and profitability.

Double Entry Bookkeeping

A statement of financial position is a far more detailed and complicated document than the more fundamental elements of bookkeeping. It is not like an income statement, which begins with revenues (earnings) and subtracts expenses to arrive at net profit. This is how a person might keep their chequebook. However, in order to prepare an accurate statement of financial position, you must first comprehend double entry bookkeeping.

At its most basic, this occurs when any financial document entry causes at least two variations in the numerical accounts. A credit (or gain) in one account results in a debit (or expenditure) in another. This process of double bookkeeping frequently necessitates the addition of a second algorithm to the mix.

A debit is not like a credit in linguistic terms. However, in finance, it is determined by the location of the credit or debit on the statement of financial position. The statement of financial position could be thought of as having two sides. The assets are on one side, and the liabilities and equities are on the other. On the equities and liabilities side, a credit is created when the value of a liability is increased. When it is reduced, it is referred to as a debit. On the asset side, increasing the value of the assets is referred to as a debit, while decreasing the value of the assets is referred to as a credit. They are, essentially reverse oriented.

As strange as it may sound, the balance of the balance sheet was in mind when double bookkeeping was designed. If an asset increases or decreases in value, appropriate financial manoeuvres in liabilities or equities must be implemented to balance it out. This is a safeguard against mismanagement or rather, worse, fraud.

Expanded Reports

A statement of financial position has to be much more in-depth and comprehensive, the larger the company is and the amount of accounts it has. It is crucial to include all information on the balance sheet. Both the ‘equities and assets’ and ‘liabilities’ sides of the statement will have many major subcategories to make them easier to read.

Asset Categories

Assets are frequently classified into four categories: current assets, properties and equipment, funds, and intangible assets and long-term investments.

Current assets will be those that, in theory, can be converted into cash quickly. This is referred to as a ‘short time’ asset and it is usually defined as 12 months or less.

Actual cash, accounts receivable, short-term investments, inventories, and prepaid expenses are examples of current assets. Long-term investments and funds are unable to be converted as quickly as short-term investments and funds. These include stock and bond ownership, as well as many other investments that would take more than a year to convert. In both cases, these are referred to as ‘liquid assets.’

The opposite is the case for property and equipment assets. They are tangible assets. Buildings, machines, factories, large computer systems and also vehicles are some good examples. Because these items depreciate in value over time, the cost and value of these items are charged against income. This means that with each passing year, the item becomes less valuable. Intangible assets would be those which cannot be touched but are completely associated and owned by the company and generate revenue. Copyrights, patents, brand images and trademarks are some good examples.

Liabilities and Equity Categories

Liabilities and Equity Categories

Liabilities and equities are also divided into four categories: current liabilities, contributed capital, long-term liabilities and retained earnings. A liability is best thought of as a commitment or something that the company must do or owes. Bills, debt payments, and warranty obligations are examples of such obligations.

Current liabilities would be those that can be paid off in less than a year. Long-term liabilities, on the other hand, are obligations that do not come due in the current financial year. They can include bank notes that must be paid, bonds that must be paid, or long-term financial arrangements for purchase, such as loans.

One of the main areas under the equity header is contributed capital. This is the amount invested by stockholders through the acquisition of stock from the company itself. This money, or capital, has facilitated the company.  Hence the name contributed capital.

Typically, contributed capital is divided into stated capital, which represents the average value of the stock, and additional paid-in capital, which represents the money paid in excess of the average value. The company’s profits after everything else has been paid are really a type of equity that is reflected in earnings. This is really the money that remains after all dividends have been paid. When a financial gain on stock is made, a dividend is paid to shareholders. What is left is classified as belonging to the company and should be disclosed as a type of income.

The statement of financial purpose is the primary source for recognising a company’s financial life which can be used to examine past, present, and current practise. Any business accountant must understand how to create one. When tackling something as complex as producing a statement of financial position, figuring out some basic accounting tips is a good starting point.

Keeping accurate financial records is essential for running a successful business. This is extremely important. This document will be reviewed by government agencies and analysts amongst others. Those who will, essentially, want to comprehend in a numerical way, how your company operates. They may also need to look into the legal aspects of your financial activities. If you are unable to produce a standardised and easy-to-follow statement of financial position, you may be opening a can of worms for yourself or your business.

Finally, when working on documents such as a financial statement of purpose, you’ll want to use the most recent accounting software. Most businesses use Quickbooks, or a similar Accounting Software for this type of financial work.  Others, on the other hand entrust it to a competent bookkeeper or accounting firm.

Summary

The Importance of a Statement of Financial Position

It goes without saying that the statement of financial position is crucial because they accurately reflect the company’s current financial position and also its business performance. Furthermore, it assists everyone associated with the company including management, stakeholders, analysts and investors, in evaluating and making appropriate business and financial decisions by comparing past and current performance and thus predicting future performance and growth of the company, displaying the company’s current financial position, and providing detailed investments of the company’s asset investments, debts, and equities.

For Management

Because of the complexities and size of the business, management must have up-to-date, accurate, and detailed information about the business and its financial position.

The financial position assists management in knowing the company’s performance in comparison to other organisations and the sector.Providing accurate information to management allows them to create appropriate policies for their companies and make sound decisions.

These statements rank management’s performance; the performance of such statements will assist management in justifying their work to all parties associated with the business.

For Shareholders

Shareholders own the company but do not participate in decision-making or day-to-day operations. These results, however, are shared with shareholders at the annual meeting.

These statements provide shareholders with information about the company’s performance. It also enables them to assess current and future performance.

For existing and future customers, statements of financial position are the most important information source.

The essential performance indicators in these statements judge factors such as liquidity, debt, and profitability. Creditors and lenders are particularly concerned about the company’s debt position. If the debt level exceeds that of other businesses in the same industry, the company is over-leveraged.

Analysing these statements will assist them in deciding whether or not to continue, as well as determining the best course of action for the future.

For the Government

Then there’s the government. Another reason financial statements are important would be that the government uses them to calculate taxes. The government evaluates the economy’s performance based on business performance of such companies in various sectors.

Topic

Finance

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