Statement of Financial Position (AS Level) Financial accounting

 

 Statement of Financial Position (SFP)  

Definition and Purpose

A Statement of Financial Position is essentially a list of the assets and liabilities of a business at a particular date.

Key Characteristics:

• Position Statement: Unlike the Income Statement, which covers a period of time, the SFP is a 'position' statement showing the business’s position at a particular moment in time. The full date must be included in the heading (e.g., "at 31 December 2015").
• Purpose: It helps a trader determine whether the business is likely to continue to provide an income and remain viable for the foreseeable future.
• Relationship to Double-Entry: The SFP is not part of the double-entry model. It is prepared after all the nominal accounts (revenue and expenses) have been closed off and transferred to the Income Statement. The SFP simply lists the remaining ledger balances, which represent assets and liabilities.

 Preparation: Closing the Capital Account

Before the SFP can be finalized for a sole trader, the Capital account must be adjusted to reflect the profit generated and the money/goods taken out by the owner.

The closing balance on the Capital account is the net amount which the business owes to the owner. This process involves:

1. Opening Balance: Starting with the Capital introduced or the balance carried forward from the previous year.
2. Adding Profit (or Deducting Loss): The Profit for the year (or ‘the bottom line’) figure calculated in the Income Statement is credited to the Capital account, as profit increases capital. If a loss had been made, it would be debited to the account.
3. Deducting Drawings: The Drawings (money or goods taken from the business by the owner) are deducted from the capital.
4. Final Balance: The resultant figure is the closing balance, which is carried down (c/d) and then brought down (b/d) for the start of the next year.

 Structure and Classification of Items

The presentation of the SFP requires items to be grouped under clear headings.

1. Assets (What is Owned or Owed to the Business)

Assets are categorized based on their duration and liquidity:

Classification	Definition	Examples
Non-current assets	Items acquired for use in the business and not for resale; intended to be kept for many years.	Premises, motor vans, office furniture, plant and machinery
Current assets	Cash and other assets expected to give rise to cash in the course of trading within 12 months.	Inventory, trade receivables, cash/bank balance

The list of non-current assets is typically grouped together and totalled, often listing those likely to have the longest useful life first.

Order of Liquidity (Current Assets): Current assets should be listed in order of liquidity, meaning how quickly they can be converted to cash. The standard order is:

1. Inventory (Closing Inventory). Inventory is explicitly noted as not a liquid asset because it must first be sold.
2. Trade receivables (Debtors).
3. Cash and cash equivalents (total of cash in hand and a debit bank balance, if any).

2. Liabilities and Capital (What the Business Owes)

The bottom half of the SFP details how the assets are financed (Capital) and what the business owes to external parties (Liabilities):

Classification	Definition	Examples
Capital	The owner's interest in the business, calculated after adjusting for profit and drawings.	Owner's Capital, Profit/Loss, Drawings
Non-current liabilities	Items the business must pay more than 12 months after the statement date.	Long-term loans (e.g., loan repayable in 2020).
Current liabilities	Items the business must pay less than 12 months after the statement date.	Trade payables (creditors), bank overdraft.

 The Accounting Equation and Working Capital

The SFP must always demonstrate the fundamental accounting equation:

Assets - Liabilities = Capital

The sum of non-current and current assets, less total liabilities (current and non-current), must equal the closing balance on the Capital account. If the total assets are greater than total liabilities, the remainder is known as the net assets of the business.

Working Capital: Working capital (or net current assets) is an important measure of liquidity calculated within the SFP: Current Assets - Current Liabilities = Working Capital

The working capital figure is crucial because if current assets are insufficient to cover current liabilities, the trader may be forced to sell non-current assets, which could threaten the business’s existence.

Presentation Detail: For good presentation, the Capital account details (opening capital + profit - drawings) are typically shown in full on the SFP, rather than just showing the final balance figure.