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
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.
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.
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 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.