What is the statement of financial position?
A statement of financial position is commonly called a balance sheet. It summarizes all the assets, liabilities and equity of a company as reported on a specific day.
Although there are several financial statements that you might need to compile in any given year, the statement of financial position is not like other financial reports because it discloses the financial obligations of a company on a specific day, as opposed to other financial reports which disclose financial information over a period of time.
It is important for businesses and corporations to compile a statement of financial position regularly as it provides insight into their financial situation and health. It also gives insight on the future performance of the business.
Example of statement of financial position
Here is a statement of financial position report example to help you understand the financial statement format and what it should look like.
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What is the use of the statement of financial position?
A statement of financial position helps track the growth of a business. Since they are done on a regular basis and regroup all the financial data surrounding your business, assets, liabilities and equity, it allows you to see how your finances have changed over time.
In addition to the insight that it can provide for your own business, it is also an easy way for outsiders, such as investors, to fully understand your business's financial position. Put simply, a statement of financial position conveys what you own, what you owe as well as the value accumulated over time, which is a good indicator of how risky it is to invest in your company.
What is included in a statement of financial position?
The three subsections of a balance sheet are assets, liabilities and equity. Assets are the things the company owns which can include anything from property to vehicles, to the entirety of the inventory they have in stock. Liabilities include everything the company owes and is paying out. This includes anything like amounts owed to suppliers, loans, taxes, etc.
Both assets and liabilities are split into long-term and short-term. The cutoff between short term and long term is one year.
An example of a long-term asset is any land or property that the business will use for several years. An example of a short-term asset is any inventory that the business owns at the period end and that is expected to be sold over a couple of months.
An example of a long-term liability is any mortgage or loan that the company owes, whereas a short-term liability can be things such as accounts payable and tax currently payable which should be disbursed shortly.
As for the equity of a company, it tells you what a company is worth. It is calculated by subtracting the liabilities from the assets. Therefore, if you were to sell your business, liquidate all your assets and pay off all your loans and debts, what you have left is your equity.
What are the three major elements of the statement of financial position?
The three major elements of a statement of financial position are the assets, liabilities and equity.
1 - Assets
Assets are anything the company owns. On the balance sheet, they are divided into long-term and short-term assets. Short-term assets are often referred to as current assets, whereas long-term assets are often referred to as fixed assets.
The short term elements are interesting, as it indicates if the company is able to pay its short term obligations with liquid assets. Obviously, this includes cash as it is the easiest thing to liquidate, but also accounts receivables, prepaid expenses and inventory.
The balance sheet also records long-term assets which includes things such as property, plant and equipment (PP&E), equipment and intangible assets. They are mostly used to run the operations. Long term assets are what the company owns that should bring benefits over a long period of time (at least over one year).
2 - Liabilities
Liabilities refer to anything that your business or company owes. Again the liabilities are split into long-term and short-term liabilities.
Short-term liabilities cover a wide array of different things that you might need to pay. This includes accounts payable which could mean any outstanding loans that you owe to creditors and vendors or could also include payroll that you still owe employees.
Long-term liabilities are any debts that you owe that are at least a year or more out of the current date. This most frequently means mortgage payments and long-term debt used to purchase long term assets.
The liabilities account for the remaining amounts to pay, rather than the cumulative amounts.
3 - Equity
Equity conveys how much the shareholder actually owns. In other words, it’s how much the company is valued at. You can reach this value by subtracting the liabilities from the assets, also known as the net assets.
In addition to the capital injected from investors, the retained earnings and net income are accumulated in the equity.
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