Statement of Financial Position

Updated on April 5, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Statement of Financial Position?

Statement of Financial Position, also known as the Balance sheet, gives the understanding to its users about the business’s financial status at a particular point in time by showing the details of the company’s assets along with its liabilities and owner’s capital.

It is one of the most important financial statements which reports the firm’s financial position at a point in time. In other words, it summarizes a business’s financial position and acts as a snapshot of events at one point in time. It comprises three important elements (explained in detail later), namely:

The Fundamental Accounting EquationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more (also known as the Balance Sheet EquationThe Balance Sheet EquationBalance Sheet Formula is a fundamental accounting equation which mentions that, for a business, the sum of its owner’s equity & the total liabilities equal to its total assets, i.e., Assets = Equity + Liabilitiesread more) through which transactions are measured equates:

Assets= Liabilities + Shareholder’s Equity

Financial Position Statement Example

Let’s take a look at an example of Starbucks as on September 30, 2018

Statement of Financial Position Example 1

source: Starbucks SEC Filings

Effectively the above example consists of two lists:

  • A list of everything owned by the business collectively called Assets
  • A list of the various sources of finance used to fund these acquisitions can be either in the form of Liabilities or Shareholders’ Equity.

Thus, it is a statement showing the nature and amount of a business’s assets and liabilities and Share CapitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more on the other side. In other words, the Balance SheetOther Words, The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more shows the financial position on a particular date, which is usually at the end of a year.

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The Statement of Financial Position shows how the money has been made available to the company’s business and how the money is employed in the business.

The format of the Financial Position Statement

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For eg:
Source: Statement of Financial Position (wallstreetmojo.com)

Let’s understand the Statement of Financial Position format in more detail.

#1 – Current Asset

Current Assets are those cash and items which will be converted into cash in the normal course of business within one year and includes Inventory, Trade ReceivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more, Bill receivable, etc. The Total Current Assets are referred to as the Gross Working CapitalGross Working CapitalGross working capital refers to the total current assets of the company that can be converted into cash within a year, such as accounts receivables, inventory of raw material, WIP inventory, finished goods inventory, cash, and bank balance, marketable securities such as T-bills, commercial paper and short term investments.read more, also known as the qualitative or circulating capital.

#2 – Current Liabilities

Current includes all liabilities which are due within one year and includes Trade Payables, Creditors, short term borrowings such as Bills Payable, Deferred Tax LiabilitiesDeferred Tax LiabilitiesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period.read more, Current Portion of Long termCurrent Portion Of Long TermCurrent Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets.read more Borrowings, which are payable within the year, etc.

#3 – Long Term Asset

Noncurrent Assets, also known as Fixed Assets, are those assets that are bought to use in the business and usually have long lives. They may include tangible assetsInclude Tangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more such as Land, Property, Machines, vehicles, etc. Tangible Noncurrent Assets are generally valued at Cost less Accumulated DepreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.read more. However, it is pertinent to note that not all Tangible Assets depreciate, such as Land.

#4 – Long Term Liabilities

Non-Current LiabilitiesNon-Current LiabilitiesThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. read more include Long term borrowings that are not due within one year. It includes finance leasesFinance LeasesFinance lease simply refers to a method of providing finance in which the leasing company purchases the asset on behalf of the user and rents it to him for a set period of time. The leasing company is referred to as the lessor, and the user is referred to as the lessee.read more, medium-term bank loans, Bonds and Debentures, and contingent liabilities such as Guarantees, etc.

#5 – Shareholders Equity

Shareholders EquityShareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more is the amount contributed by the shareholders/owners of the business in shares. Alternatively, Shareholder’s Equity is the Net value of the business, which is derived by subtracting Assets from Liabilities.

Briefly Equity comprises of:

Limitations

We saw how a Statement of Financial Position depicts the position of the business on a particular date. However, despite so many benefits that it offers to various stakeholders of the business, it suffers from certain limitations, which are as enumerated below:

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