Financial Statements: Statement Of Financial Position (Copy)
10.1 Financial Statements
10.1.2 Statement of Financial Position
1. Meaning and Purpose
- Statement of Financial Position (Balance Sheet) shows a business’ financial position at a specific point in time.
- Purpose:
- Displays what the business owns (assets) and owes (liabilities)
- Shows equity of owners/shareholders
- Helps assess financial stability and liquidity
- Provides information for management, investors, and creditors
2. Key Contents
| Item | Explanation / Example |
|---|---|
| Non-current Assets | Long-term assets used in operations (e.g., land, buildings, machinery, vehicles) |
| Current Assets | Short-term assets convertible to cash within a year (e.g., cash, inventory, accounts receivable) |
| Current Liabilities | Obligations due within a year (e.g., accounts payable, short-term loans) |
| Net Current Assets (Working Capital) | Current Assets − Current Liabilities; indicates short-term financial health |
| Non-current Liabilities | Long-term obligations (e.g., long-term loans, bonds) |
| Net Assets | Total Assets − Total Liabilities; value of assets owned outright |
| Reserves | Retained earnings and other reserves; part of equity |
| Equity (Shareholders’/Owner’s Equity) | Capital invested by owners + retained profits; Net Assets = Equity |
3. Amendment of a Statement of Financial Position
- Adjustments may occur due to:
- Revaluation of assets
- Corrections of errors
- Changes in accounting policies
- Impact:
- Alters net assets, equity, and sometimes liabilities
- Can affect ratios like current ratio, gearing, and return on capital employed
4. Relationships with Statement of Profit or Loss
| SPoL Item | Impact on SoFP |
|---|---|
| Revenue / Sales | Increases cash or accounts receivable (current assets) |
| Cost of Sales | Reduces inventory (current assets) |
| Expenses | Reduces cash (current assets) |
| Profit for the Year | Increases retained earnings (equity/reserves) |
| Dividends | Reduces retained earnings (equity/reserves) |
- Net profit → retained earnings → equity
- Depreciation → reduces non-current assets & profit
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course