Statement of financial position

A statement of financial position shows the value of a business on a particular date.

A balance sheet shows:

Statement of financial position for Business Ltd as at 31 March 2019
£0£0
Fixed assets
Property £500,000
Vehicle£100,000
£600,000
Current assets
Inventory + £100,000
Cash at bank £50,000
£150,000
Less current liabilities
Trade payables£50,000
Working equity£100,000
Net assets employed£500,000
Non-current liabilities
Bank loan£100,000
Net assets£400,000
Equity and reserves
Shares£300,000
Profit for the year£100,000£400,000

Non-current assets

Non-current assets show the current value of major purchases that help in the running of the business, like delivery vans, premises or PCs.

In this case £150,000 of non-current assets are owned. Non-current assets are usually owned for longer than a year.

Current assets

Current assets show the cash or near-cash available to the firm. This includes stock ready to sell, money owed to them by debtors and cash in the bank.

There are £25,000 worth of current assets. The value of current assets is likely to change in the short term.

Current liabilities

Current liabilities are any debts a business owes that will need to be paid back within a year (short-term debts).

Deducting all the current liabilities from the total amount of fixed and current assets gives the value of the business on the day the balance sheet was drawn up.

This business is worth £75,000, financed by £75,000 of share capital and reserves. Capital and reserves are in effect liabilities, because the firm owes this money to the owners. What a firm owns, it owes.

Working equity

Working equity is money that a business can access immediately, rather than money that is tied up in investments or property.

A business is solvent if it can meet its short-term debts when they are due for payment. To do this it needs adequate working equity.

You can calculate a firm's working equity by using the following equation:

working equity=current assets-current liabilities

Non-current liabilities

Non-current liabilities usually include long-term loans such as a long-term bank loan or debentures that do not need paid back within a year.

In this case the businses has non-current liabilities worth £100,000

Net assets

Net assets show the value of the company once all the liabilities have been taken from the assets.

It shows the overall worth of the business. In this case the overall worth of the business is £400,000.

Equity and reserves

Equity and reserves show the money that has been invested by the owners and any profit that has been kept by the business (retained profits).

Purpose of a statement of financial position

  • A statement of financial position shows the overall value of the business. It is a legal requirement for all limited companies to prepare a statement of financial position
  • Investors and potential investors can use a statement of financial position to determine whether they will get a good return on their investment.
  • Suppliers and creditors can use it to determine the level of risk involved in lending or supplying to the business
  • A statement of financial position can be used to analyse ratios which can be compared with previous years or those of competitors. This will better aid future decision-making
  • A statement of financial position can be used to show the value of all current assets, non-current assets, liabilities and non-current liabilities