Key facts about statement of financial position
Final s show the financial health of a business and are useful to owners/investors, banks, the government, staff, and management.
Statement of financial position (balance sheet) shows the value of what a business owns and owes at a specific point in time, indicating its overall value.
The statement includes three main categories: assets, liabilities, and equity.
Assets are what the business owns.
Liabilities are what it owes
Equity represents the owner's claim on the business.
The total assets should equal the total of equity and liabilities.
Final s: what are they?
Final s are documents which show the financial health of a business.
They could be useful to the following individuals:
| Group | Why would they be interested in the s? |
|---|---|
| Owners / investors | Is the value of the business increasing or decreasing, over time? How well is the business making use of the owners’ / investors’ funds? |
| Banks | Should the bank lend the business money? Will it be able to pay it back? |
| Government | How much tax is the business paying? Also: if the business is growing, is it going to create more jobs for local people? |
| Staff | Are jobs secure at this business? Should I be getting paid more? |
| Management | Are we doing a good job? How can we improve? |
The statement of financial position (balance sheet)
what is it?
what does it show?
what is in it?
| What is an Statement of Financial Position? | A Statement of Financial Position is a document which shows the value of what a business owns and owes, at a point in time. |
| What does it show? | In a word, it shows the VALUE of a business at a point in time. It shows if the business is growing and becoming more valuable, or not. It is of particular value to potential investors who want to know how much a business is worth before they pay money to be a part-owner of the business. Otherwise, they will not know how much they should pay! |
| What is in it? | There are three main categories listed in a statement of financial position: • assets • liabilities • equity |
Example: Statement of Financial Position for a Fish and Chip restaurant as at 31/03/2024
| £000’s | £000’s | |
| These are items that the business owns and intends to keep for more than a year, such as machinery or equipment.: | ||
| Land and buildings owned by the business, if the business owns it. If the business rents its premises, they will not appear here as they do not own it. | 112 | |
| Any machines used eg in factory | 35 | |
| A van used to collect / deliver stock | 10 | |
| TOTAL NON-CURRENT ASSETS: | 157 | |
| These are items owned by the company which are either cash, or will be turned into cash (eg sold) within the next 12 months: | ||
| Stock eg what the business sells | 4 | |
| Money owed to the business by customers | 5 | |
| Money in bank or cash | 4 | |
| Inventory + Trade receivables + Cash : | 13 | |
| TOTAL ASSETS: | 170 | |
| The owner/s’ claim on the business : | ||
| The original start-up investment in the business | 45 | |
| Profits from previous years which have been reinvested in the business (eg used to buy a new building or a machine, or to buy more stock) | 6 | |
| Withdrawal of funds from the business by the owner/s. This reduces the overall claim on the business by the owner/s. | 4 | |
| (Capital + Net Profit) - Drawings : | 47 | |
| Debts of the business which will last more than 12 months (eg a bank loan taken over 3 years): | ||
| Bank loan | 15 | |
| A mortgage is a type of loan. It is usually a large amount of money used to pay for a property. | 100 | |
| Debts of the business which will have to be repaid within 12 months: | ||
| Short term debts owed to suppliers, electricity company, landlord, marketing agency, etc. | 6 | |
| An overdraft lets a business borrow money through their current by taking out more money than they have in the – in other words they go “overdrawn”. | 2 | |
| TOTAL CURRENT LIABILITIES: | 8 | |
| Total Equity + Total Liabilities : | 170 |
The statement of financial position:
| Items | Explanation |
|---|---|
| Assets | Items that the business owns |
| Non-current assets | Assets which the business intends to keep for more than 12 months (eg land/ buildings/ machinery/ fixtures and fittings/vehicles) |
| Current assets | Assets which the firm intends to turn into cash within the next 12 months (eg inventory / trade receivables / cash) |
| Liabilities | Things which the business owes |
| Current liabilities | Liabilities which will become due within the next 12 months (eg trade payables/ overdraft) |
| Non-current liabilities | Liabilities which will become due after 12 months eg bank loan/mortgage/capital (including retained net profit, but minus any drawings). |
| Equity | The owner/s’ claim on the business. This is: Owner’s Capital + Net profit - Drawings |
| Owner’s capital | The value of the original investment put in by the owner/s |
| Add: Net Profit | Any profit which has been made and reinvested, since the business has been trading |
| Less: Drawings | A business owner is allowed to take money out of the business (after all, they own it!) BUT they have to show this withdrawal in the s. These withdrawals are called “drawings” and reduce the value of the owner/s’ overall claim on the business. |
Will what the business owns and owes balance?
TOTAL ASSETS = (TOTAL EQUITY + LIABILITIES)
The business is worth the value of all the assets, minus any claims on the business from the owners and people who are owed money from it (eg banks who loaned the business money, suppliers who haven’t been paid yet, or the government if any tax is still due).
Try the statement of financial position quiz
Question 1:
Calculate the total value of the non-current assets for the fish and chip restaurant.
Need a Total non-current assets = premises + machinery + delivery van
Total Non-Current Assets = Premises + Machinery + Delivery Van
Total Non-Current Assets = £112,000 + £35,000 + £10,000
Answer: = £157,000
Question 2:
Determine the total value of the current liabilities for the restaurant.
Need a Total current liabilities = trade payables + overdraft
Total Current Liabilities = Trade Payables + Overdraft
Total Current Liabilities = £6,000 + £2,000
Answer: = £8,000
Question 3:
What is the total equity of the business after considering the drawings?
Need a Total equity = (capital + net profit) - drawings
Total Equity = (Capital + Net Profit) - Drawings
Total Equity = (£45,000 + £6,000) - £4,000
Answer = £47,000
Question 4:
Calculate the total liabilities of the fish and chip restaurant.
Need a Total liabilities = non-current liabilities + current liabilities
Total Liabilities = Non-Current Liabilities + Current Liabilities
Total Liabilities = £115,000 + £8,000
Answer: = £123,000
Question 5:
Using the information provided, calculate the net assets of the business.
Need a Net assets = total assets - total liabilities
Net Assets = Total Assets - Total Liabilities
Net Assets = £170,000 - £123,000
Answer: = £47,000
Question 6:
If the business wanted to increase its cash balance by 50%, what would be the new cash balance?
Need a Current cash balance = £4,000. New cash balance = £4,000 + (50% of £4,000)
Current Cash Balance = £4,000
New Cash Balance = £4,000 + (50% of £4,000)
New Cash Balance = £4,000 + £2,000
Answer: = £6,000
Final check:
What are the three main categories listed in a Statement of Financial Position?
The three main categories listed in a Statement of Financial Position:
- assets
- liabilities
- equity
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