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What is a Statement of Financial Position?

Statement of Financial Position

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Statement of Financial Position

A Statement of Financial Position, commonly known as the Balance Sheet, is one of the primary financial statements used by accountants, analysts, investors, and business owners to gauge a company’s financial health and structure. It provides a snapshot of a company’s financial position at a specific point in time, typically at the end of a fiscal quarter or year.

The Statement of Financial Position is based on the accounting equation:

Assets = Liabilities + Equity

  • Assets: Resources owned by the business that are expected to provide future economic benefits. Assets are typically categorized as:
    • Current Assets: Expected to be used or converted into cash within a year (e.g., cash, accounts receivable, inventory).
    • Non-Current Assets (or Long-Term Assets): Expected to provide economic benefits beyond one year (e.g., property, plant, equipment, intangible assets).
  • Liabilities: Obligations the business owes to external parties. They represent claims against the company’s assets. Liabilities can be:
    • Current Liabilities: Obligations due within a year (e.g., accounts payable, short-term loans).
    • Non-Current Liabilities (or Long-Term Liabilities): Obligations due beyond one year (e.g., long-term debt, deferred tax liabilities).
  • Equity: Represents the residual interest in the assets of the entity after deducting liabilities. It reflects the ownership interest of the shareholders and typically includes items like issued share capital, retained earnings, and other reserves.

Example of a Statement of Financial Position

Let’s illustrate the Statement of Financial Position (Balance Sheet) using a fictional company named “GreenWave Innovations Ltd.” for the date December 31, 2023:

GreenWave Innovations Ltd.
Statement of Financial Position
As of December 31, 2023

Assets

Current Assets:

  • Cash: $60,000
  • Accounts Receivable: $25,000
  • Inventory: $15,000
  • Prepaid Expenses: $5,000
    • Total Current Assets: $105,000

Non-Current Assets:

  • Property, Plant, and Equipment: $200,000 (less accumulated depreciation of $50,000): $150,000
  • Intangible Assets (Patents): $20,000
    • Total Non-Current Assets: $170,000
  • Total Assets: $275,000

Liabilities

Current Liabilities:

  • Accounts Payable: $30,000
  • Short-term Loans: $20,000
    • Total Current Liabilities: $50,000

Non-Current Liabilities:

  • Long-term Loans: $80,000
    • Total Non-Current Liabilities: $80,000
  • Total Liabilities: $130,000

Equity

  • Common Stock: $100,000
  • Retained Earnings: $45,000
    • Total Equity: $145,000

To verify the balance in the Statement of Financial Position: Total Assets ($275,000) = Total Liabilities ($130,000) + Total Equity ($145,000)

From the above example, as of December 31, 2023:

  • GreenWave Innovations Ltd. has total assets worth $275,000, which are funded by:
    • Liabilities amounting to $130,000 (amounts owed to external parties).
    • Equity amounting to $145,000 (the owners’ stake in the company).

Remember, the Statement of Financial Position always balances, as demonstrated by the accounting equation.

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