A statement of financial position (Sometimes referred to as a balance sheet) is a snapshot of a business's net worth at a particular point in time, normally the end of the year. It is a summary of everything that the business owns (its assets) and owes (its liabilities). A statement of financial position therefore states the value of a business at a given point in time.

These can be shown in horizontal or vertical format, vertical being most common and the one we will focus on. It is typically presented as:

Non-Current Assets (Expect to have for more than a year)

• intangible assets

• tangible assets

plus Current Assets (Expect to use within a year)

minus current liabilities (Bills expected to be paid within a year)

minus non current assets/liabilities

minus non current liabilities  (Bills expected to last more than a year)

minus net assets

This is the first half of the balance sheet that calculates the net assets- that is the worth of the business. If the business were to close today and you sold off all of its assets then paid all of the liabilities this is the amount you that you would be left with.

Non-Current assets

These are items of value owned by the business and likely to stay within the business for more than one year. These can be:

• Tangible Assets- These are physical items which can be touched e.g. Machinery or premises.

• Intangible Assets- These are not physical and cannot be seen or touched, or example a trademark, recognised name, website/softeware or customer loyalty.

Tangible assets include premises, fixtures and fittings, equipment and vehicles. It is important that when these are shown in the statement of financial position they are given a realistic value. For this reason they are depreciated on an annual basis. As we have already seen when looking at depreciation the value of assets can decrease over time. The statement of financial position should therefore show the historic cost of an asset, the amount by which it has depreciated over its life and then a current value for the asset. This final figure is called the net book value and this represents what the asset is thought to be worth at that point in time. Shown opposite.

Intangible Assets is something that adds value to the business but does not have a physical presence. One example of this that you might see on a balance sheet is "good will". This means when someone buys an already established business, they are also buying the goodwill that the business has built up, such as brand recognition or a loyal customer base. Examples include logo, copyright, patents, website/software, customer relations to name a few.

Amortisation

The value of an intangible asset can change over time. If a decision is made to decrease the value of an intangible asset, a principle similar to depreciation is applied. This is called "amortisation" where a one-off charge is made to the value of the intangible asset. This will be shown in the statement of financial position to record the cost, amortisation and net book value of the intangible asset.

Current Assets 

Current assets are those items of value owned by a business whose value is likely to fluctuate on a regular basis. Every time a business makes a transaction, the value of its current assets will fluctuate. Current assets include:

• inventories (Value of stock held at that point in time can include raw materials, work in progress and finished goods)

• trade receivables (Customers that owe the money business)

• prepayments (An expense which is paid in advance of the period it relates to, it still has value as it hasn't been used yet)

• cash in the bank

• cash in the hand

Current Liabilities

A current liability is something owed by the business that should be paid back in under one year. Examples of current liabilities are outlined below.

• Overdrafts (Money withdrawn from current account which business does not have)

• Accruals (Money for an expense which is paid after the period to which it relates)

• Trade payables (People or businesses the business owes money to.)

Net Current Assets/Liabilities

Net current assets/liabilities is a very important figure for a business it represents the businesses ability to repay short term debts. A business with insufficient net current assets (also known as working capital) does not have enough current assets to meet its current liabilities. This is not good and may require the business to sell an asset in order to meet it's liabilities. Net current assets is calculated as current assets minus current liabilities.

• Current assets are greater than current liabilities= net current asset

• Current assets are less than current liabilities= net current liabilities

Non Current Liabilities

A liability is something that the business owes. If it is classed as non-current, this means the business will pay it back in more than one year. Examples of non-current liabilities include bank loans and mortgages.

Net assets

Net assets are the figure that  represents the total value of all the assets minus the value of the liabilities. Net assets are calculated as follows:

Non-current assets + current assets- (current liabilities+ long term liabilities)

Capital

The second half of the statement of financial position then asks how this has been financed. This shows the capital employed and is presented as:

owner's or shareholders' capital

plus retained profit

minus drawings

equals capital employed

Opening Capital is the capital in the business at the start of trading. This is the money invested in the business from the owners.

Retained profit is the profit kept from previous years plus the net profit from the current year. This will be transferred from the statement of financial position.

Drawings are withdrawals made by owners from the business. 

For a statement of financial position to balance, net assets must be equal to capital employed.

Adjustments will be made between the statement of comprehensive income and the statement of financial position to ensure that both records are showing a true and fair picture of the business's activity. These adjustments are outlined below.

Depreciation

• Annual depreciation is shown as an expense on the statement of comprehensive income.

• Depreciation is deducted from the net book value of an asset to show the value of the asset at the end of the year; this is the value of the asset recorded in the statement of financial position.

Prepayments

• A prepayment is when an expense is made in advance of the periods to which it relates.

• The expense is therefore taken out of expenses in the statement of comprehensive income and shown as a current asset in the statement of financial position.

• If, for example, broadband is paid for 12 months in advance, and the accounts are produced halfway through the year, half of the payment  would be recorded as a prepayment under the current asset heading on the statement of financial position.

Accruals

• An accrual is when an expense is paid after the periods to which it relates.

• The expense is therefore added as an expense in the statement of comprehensive income and shown as a current liability in the statement of financial position

• An example would be electricity paid quarterly in arrears; a figure would be shown in the statement of financial position to account for the value of electricity already consumed.

Once produced the statement of financial position can be used internally by management to help measure the financial health of the business and inform future decision making. It can also be used externally by potential investors and creditors. An investor, for example, might look at the business's statement of financial position when deciding whether or not ot offer capital to the business. The statement of financial position may be analysed in a number of ways. These include making:

• comparisons between figures with the statement of financial position, e.g. current assets in relation to current liabilities

• comparisons between years, i.e. value of fixed assets or current liabilities in one year compared with previous years

• Intrafirm comparisons to see how different aspects of the business are performing, e.g. debtors for one branch compared with another branch to identify any potential concerns regarding bad debts

• Interfirm comparisons to see how the business is performing in relation to its competitors.

When interpreting and analysing a statement of financial position, it is also useful to consider working capital because this is a measure of th efirm's ability to meet day-to-day expenses. The statement of financial position is a useful indicator of how effectively management are running the business. Both statements of financial position and statements of comprehensive income are interpreted with the use of ratios.

Advantages

Net current assets measure the business’s ability to meet day-to-day expenses, and whether the business has sufficient liquid assets to repay any trade credit offered.

Figures from the statement of financial position can be compared over a number of years to establish trends. This allows management or potential investors to get a better picture of the businesses development over time.

Figures from the statement of financial position can be compared in relation to other figures, e.g. current assets can be measured in relation to current liabilities. This could be used to look at the liquidity of the business and identify potential problems.

Comparisons can be made to assess how the business is performing in relation to its competitors which will help the managers or investors consider relative competitiveness and therefore the stability of the business.

 Ratio analysis can be used by the management/investors to analyse the financial data in detail.

Disadvantages

The statement of financial position presents data for a set point in time, which limits its value as at other times of year the situation may differ, especially for a seasonal business

The figures are calculated on past data and therefore may not be a true reflection of the current performance of the business

The figures cannot predict future performance and therefore not indicate the future creditworthiness of the business. The figures may even mislead the supplier based on past business success

 Other qualitative factors may be more valuable regarding the business’s worthiness for investment. e.g. change of senior manager over recent months leading to new strategic ideas/direction or the introduction of a new technology in production.

Accounts could have been window dressed (made to look better than they actually are)