6.4b Statements of Financial Position

Overview of Financial Statements

A financial statement provides an overview of the businesses financial position over a specific period of time. It allows managers, shareholders, and other investors to see how the business has performed.

For limited companies, an annual statement is a legal requirement.

Statement of Financial Position

Also known as a balance sheet, a statement of financial position shows:

Where a businesses money has come from
What it has spent money on
The overall value of the business

It is a snapshot of the business at a particular time — usually on the last day of the month.

Assets

Assets are what the company owns. They are split into current assets and fixed assets.

Current assets

Things the company will own for less than a year.

Examples: raw materials used to make goods which have not yet been sold, cash, or debt from customers who have yet to pay.

Fixed assets

Things the company will keep for over a year.

Examples: manufacturing equipment, office furniture, and vehicles. Fixed assets lose some of their value each year, known as depreciation.

Liabilities

Liabilities are what the company owes, including money. They are split into current liabilities and long-term liabilities.

Current liabilities

Short-term debts which need to be paid soon.

Examples: short-term loans or payments owed to suppliers.

Long-term liabilities

Debts which are paid back over a longer time.

Example: a mortgage.

Understanding Statements of Financial Position

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Equity

Equity is formed from:

Share capital

The total value of shares at the time they were issued by the business.

Retained profits and reserves

Profits the company has kept from previous years.
It may be thought of as savings for future spending.

The business’s net assets must equal its equity. This is why a statement of financial position is often called a balance sheet, because the figures must balance!