What is a Statement of Financial Position?

A statement of financial position is a financial statement that summarises a company’s assets (what it owns), liabilities (what it owes), and equity (assets less liabilities) as of a specific date, typically at the end of a fiscal month or year.

It depicts a company’s financial situation as of the date of the statement. As a result, it is a critical tool for evaluating your company’s financial health, making sensible financial decisions to sustain and expand your firm, and securing financing from investors and lenders.

When completing your company’s annual reports, the statement of financial situation is also quite crucial. It is one of three required financial reports, together with an income statement (sometimes known as a profit and loss statement) and a cash flow statement.

Components of a Financial Position Statement

There are three main components, which are listed below:

Assets
Liabilities
Equity Investments

#1. Assets

The assets side of the statement of financial position assists investors or creditors in evaluating the financial statements to determine what resources the company has invested in and how efficient they are in employing them. It aids financial analysis by evaluating ratios such as the current ratio, which demonstrates whether short-term assets are sufficient to cover short-term obligations.

The assets can be classified into three types:

Current Assets: These are cash or cash equivalents that will be converted to cash within the next year. Cash, accounts receivable, inventory, prepaid expenses, and affiliate dues are examples.

Non-current assets: These are a company’s long-term assets that reflect a longer-term investment because they cannot be converted to cash fast. They are typically owned by a firm for more than one year. Equipment, land, property, interests in other companies, long-term loans payable, and so on are examples.

Intangible Assets: These are assets that do not have a physical existence or substance, making them difficult to analyse. Patents, copyrights, goodwill, franchises, trademarks, trade names, mineral rights, and other intangible assets are examples.

#2. Liabilities

These are the financial responsibilities and debts that a firm incurs during its business operations. These are classified into the following groups:

Current Liabilities: These are amounts owed that must be paid within one year. Accounts payable, accumulated expenses, current share of longer-term debt, unearned revenue, and so on are examples.

Non-current liabilities: These are often a company’s longer-term obligations that are expected to be paid after one year. Notes payable, loan payable, mortgage payable, long-term leasing commitments, delayed income, and so on are examples.

Owner’s debt: There are instances when a company needs long-term credit facilities that are no longer available since banks are not financing at reasonable rates. As a result, the corporation can borrow money from the shareholders at predetermined interest rates.

#3. Equity

This simple calculation shows that shareholder equity equals the residual value of assets less liabilities. Equity can also be computed directly as the sum of contributed capital (common stock + preferred stock – treasury stock) and retained earnings (net income + other comprehensive income – dividends paid).

What is The Statement of Financial Position Formula?

The basic accounting equation and the statement of financial position have a similar form:

Asset = liabilities + owners equity

For a company, the calculation will be

Assets = Liabilities + Stockholders’ Equity

Assets = Liabilities + Net Assets is the nonprofit organization’s formula.

How to Make A Statement of Financial Position

Financial statements are created by combining accounting data into a standardised set of financials. The procedures listed below are part of the process of creating financial statements (the exact order may differ from firm to company).

#1. Check the Receipt of Supplier Bills

To ensure that all supplier invoices have been received, compare the reception log to accounts payable. Any unpaid invoices should be included in your total budget.

#2. Examine the Customer Invoice Release

Compare the shipping record to the receivables to ensure that all client invoices have been issued. Invoices that aren’t paid in whole must be filed.

#3. Compile Unpaid Payroll

As of the end of the reporting period, add an expense for any wages earned but not yet paid.

#4. Calculate Depreciation

Determine the depreciation and amortisation expense for each fixed asset in the accounting records.

#5. Important Stock

To determine the ending inventory balance, use a physical inventory count or another method. Determine the cost of the goods sold using this information, and then record your findings in the accounting books.

#6. Accounts must be Reconciled

Perform a bank reconciliation and make any necessary changes to journal entries to ensure that the accounting records match the bank statement.

#7. Post Account Balances

Post all subsidiary ledger balances to the main ledger.

#8. Examine the Accounts

Examine the balance sheet accounts and use journal entries to adjust the account balance.

#9. Examine the Budget

The financial statements should be printed and reviewed for inaccuracies. There will almost certainly be mistakes, so make journal entries to remedy them and reprint the financial statements. Continue until all errors are rectified.

#10. Compile the Income Taxes

Accumulate an income tax expense using the updated income statement as a guide.

#11. Accounts must be Closed

Close all existing ledges and open the subsidiary ledgers for the upcoming reporting period.

#12. The Financial Statements Should be Itemised

The final financial accounts should also be printed. Create footnotes for the statements based on this data. Last but not least, write a cover letter that highlights important financial statistics. Then, bundle this information and disseminate it to the usual set of recipients.

Example Financial Position Statement

Here is an example of a statement of financial condition as of December 31, 20XX:

Fixed assets
Tangible assets	£42,000
Intangible assets	–
Depreciation	£8000
Total fixed assets	£42,000
Current assets
Debtors	£3000
Cash	£500
Bank	£8500
Total current assets	£12,000
Current liabilities
Creditors	(£2000)
Tax	(£3000)
Loans	(£3000)
Total current liabilities	(£8000)
Net current assets	£4,000
Net assets	£46,000
Capital and reserves
Share capital	£10,000
profit/loss	£36,000
Capital at the end of the year	£46,000

What is the Purpose of a Financial Position Statement?

A statement of financial position, if prepared well, plays a vital role for both profit and non-profit organisations. Some of these roles include

#1. Legal Requirements

A statement of the financial situation demonstrates the entire worth of the company. All limited companies are required by law to prepare a statement of their financial position.

#2. Investor Decision Making

A statement of financial situation can help investors and potential investors decide if they will obtain a good return on their investment.

#3. Suppliers and Creditors Risk Assessment

Suppliers and creditors might use it to assess the risk of lending or providing to the firm.

#4. Ratios For Informed Decisions

A financial statement can be used to analyse ratios that can be compared to past years or those of competitors. This will help future decision-making.

#5. Comprehensive Assets and Liability Overview

The value of all current assets, non-current assets, liabilities, and non-current liabilities can be shown on a statement of financial position. The statement of financial status plays an important role in proving what the non-profit financial situation is at the moment.

Advantages Of The Financial Position Statement

A company’s annual income is reflected in financial statements. Despite fluctuations in sales, a financial position statement should be able to establish a trend over years of sales data. For example, when a new product is introduced, the company may see increased sales. After a year or so on the market, sales may begin to decline.

Because it reveals potential and sales patterns, it assists management in forecasting a drop in sales. The budgets of the company are also indicated in the financial statements, which are useful for future planning and decision-making.

The budgets show how much money is available for the company to invest in new product development, marketing strategy development, or office space expansion. By knowing how much cash is available for planning and decision-making, the organisation can stay within budget.

Disadvantages Of a Financial Position Statement

Even though analysts and investors rely on the balance sheet of the statement of financial position for critical information about their company, it is not without problems.

#1. The Financial Position of a Company May Not Be Reflected Accurately in a Balance

Many financial ratios rely on information from the more dynamic income statement and statement of cash flows, in addition to data from the static balance sheet, to provide a complete picture of a company’s operations. As a result, a balance sheet statement may not adequately reflect a company’s statement of financial position.

If executives choose to use financial statements to make future predictions, they should analyse several financial statements from previous months and years to get a full picture of how the organisation is operating. A continuous assessment of the financial statement is preferable to a single statement.

#2. Dependence on the Market

One downside of using financial accounting to make decisions is that its facts and numbers are more market-dependent. Because the market can change quickly, executives should not expect the statistics from a previous financial statement to remain the same or increase.

It does not follow that a corporation will continue to sell the same number of products, if not more, simply because it sold 5 million in a single year. If a competitor launches a comparable product, it may sell far less.

#3. Vulnerability

Last but not least, a balance sheet or statement of financial position is susceptible to expert judgment decisions that can have a substantial impact on the report. For example, receivables must be examined for impairment regularly and updated to account for any uncollectible debt.

A corporation must estimate and submit its best guess on the statement of the financial position balance sheet because it cannot forecast which receivables it will most likely receive.

Limitations Of Statement Of Financial Position

We observed how a statement of financial situation displays the company’s situation on a specific day. However, despite the numerous benefits it provides to various business stakeholders, it has some limitations, which are listed below:

This statement is created using the going concern assumption and hence does not represent the realisable or replacement value of assets.
The judgement of management and the numerous accounting policies applied by them have a significant impact on asset valuation.
It only evaluates financial elements and fails to quantify non-financial aspects that have a significant impact on an enterprise’s operating outcomes and financial situation.
It displays historical costs but does not reveal the company’s present value.

What are the Various Financial Statements that a Non-profit Organisation Prepares?

Nonprofits employ four basic financial reporting statements: the balance sheet, income statement, cash flow statement, and statement of functional expenses. Three of these are identical to typical for-profit corporation statements, with the functional expenditures statement being the exception.

How should a Non-profit Organization’s Balance Sheet be Prepared?

A non-profit organisation’s balance sheet or statement of financial position is prepared in the same way that a business enterprise’s balance sheet is. The organisation’s assets are documented on the right side, and its liabilities are written on the left. Capital is not used by non-profit organisations.

Which of the following Terms Should Be Used in Non-profit Accounting?

For tracking expenses and income, a non-profit organisation can use either cash accounting or accrual accounting. When money changes hands, a cash accounting method records the transaction amounts. When a transaction happens, the accrual accounting technique records the amounts.

Why is it called a Statement of Financial Position?

It is called a statement of financial position, also known as a balance sheet, because it offers accurate facts about the company’s assets and liabilities, allowing shareholders or creditors to make constructive and productive decisions.

What is the Formula for Profitability?

A profit metric divided by revenue is the formulaic structure of a profitability ratio. To convert the ratio to percentage form, multiply the resulting amount by 100.

Conclusion

Aside from being one of the three financial reports that must be included in your company’s yearly accounts, the statement of financial position is an important tool for assessing the financial health of your firm at any given time. A statement of financial position is a document that outlines what a non-profit organisation’s financial position is.

Whether you just wish to compare the company’s performance to prior months or years, acquire finance from lenders or new investors, or determine the business’s future sustainability, the statement will provide useful insight and aid in your decision-making.

What is a Statement of Financial Position?

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