CHAPTER 15
STATEMENT OF FINANCIAL POSITION
- LEARNING OUTCOMES
By the end of this chapter students are expected to be able to prepare a statement of financial position.
- PURPOSE OF THE STATEMENT OF FINANCIAL POSITION
In the previous, chapter you looked at the accounting process. You will recall that the last step in this process is the production of financial statements. A statement of financial position is one of the components of financial statements which should be prepared as one way of communicating financial information. The statement of financial position shows the position of a business at any particular point in time. Financial position is presented in terms of the business’s assets, liabilities and capital.
- FORMAT OF A STATEMENT OF FINANCIAL POSITION
The statement of financial position contains assets, liabilities and capital of a business.
Assets
Assets represent resources which are owned by the business. When preparing the statement of financial position, assets are grouped into two: x Non-current assets and; x Current assets
Non-current assets
Non-current assets are assets which are expected to be used by the organization for a long time in the course of generating revenue or income for the business. The business will benefit through the use of these assets for a long period of time. The intention of the business is to use the assets and not necessarily reselling them. Land, buildings, fixtures, plant and machinery are the examples of non-current assets.
You should remember that non-current assets are generally depreciated. However, there are other non-current assets which are not depreciated. An example of such assets is land. Depreciation has been covered in chapter 12.
Current assets
Current assets are assets that are held only for a short time and are certainly going to change their form within twelve months of the date of the statement of financial position. These assets are not depreciated. Examples of current assets are inventories, trade receivables, cash at bank and cash in hand.
Current assets are presented in the statement of financial position according to their liquidity. Liquidity means the easiness of current assets when they are being converted into cash. So we start with those current assets that are furthest away from being converted into cash and finish with the cash itself.
The order of presenting current assets will be as follows:
- Inventory
- Accounts receivable
- Cash at bank
- Cash in hand
Liabilities
Liabilities represent obligations which the business expects to settle. Liabilities are also classified into two:
x Current liabilities x Non-current liabilities
Current liabilities
Current liabilities are obligations that must be paid within a year from the end of the previous accounting period. Examples of current liabilities are accounts payables and bank overdrafts.
Non-current (long-term) liabilities
Non-current (long-term) liabilities are obligations that will be paid in a period of more than one year from the end of the previous accounting period. They include loan notes/debentures and bank loans
Capital
Capital represents money and other resources put into the business by the owner. The net profit for the year increases capital. On the other hand, drawings (amounts withdrawn by the owner from the business for personal use), reduce capital. When preparing the
statement, assets are equal to capital plus liabilities. You will recall that this is the accounting equation.
SUMMARY OF THE CHAPTER
This chapter has focused on the preparation of the statement of financial position. You have leant that the purpose of this statement is to show the financial position of a business as at any particular point in time in terms of assets, liabilities and capital.