The Statement of Financial Position, or Balance Sheet, shows how much money has been invested in an enterprise and what it has been spent on.
- It is normally produced once a year, usually on the last day of the financial year
- The statement is a snapshot of the enterprise’s financial situation on that day
The basic equation of the Balance Sheet:
Net current assets = Current assets – current liabilities
Net Assets = Current Assets + Non-current Assets
Net assets = Capital Employed. They must always BALANCE. Essentially, the business is worth (assets) what has been invested (Financed by) and what it owes.
Where:
- Assets represent what the company owns.
- Liabilities represent what the company owes to external parties.
- Capital Employed represents where the business got its money from.
- Current means within 12 months
- Non-current means longer than 12 months
Remember for the exam:
Assets
Assets are things that the business owns (possesses). There are two types of assets:
- Non-current (Fixed Assets) – long-term, used for profit over 12 months.
- Current Assets – short-term, to be sold within 12 months
Non-Current (Fixed) Assets: These are assets that a company holds for the long term. Examples include:
- Buildings: The company’s office or manufacturing facilities.
- Equipment: Machinery and tools used for production.
- Land: Property owned by the company.
- Intangible Assets: Patents or trademarks that provide exclusive rights.
Current Assets: These are short-term assets that can be easily converted to Cash within a year. Examples include:
- Cash: The company’s available cash on hand.
- Accounts Receivable: Money owed by customers who haven’t paid yet.
- Inventory: Goods held for sale or production.
- Short-Term Investments: Investments that mature within a year.
Liabilities
Liabilities are things that the company owes (needs to pay out). There are two types of liabilities:
- Current liabilities – these need to be paid in the next 12 months
- Non-current liabilities – these need to be repaid long term, longer than 12 months, e.g. repaid over 5 years.
Current Liabilities: These are short-term obligations the company needs to settle within a year. Examples include:
- Accounts Payable: Money owed to suppliers for goods or services.
- Short-Term Loans: Loans that need to be repaid within a year.
- Salaries Payable: Employee wages that haven’t been paid yet.
Non-Current Liabilities: These are long-term obligations that extend beyond a year. Examples include:
- Long-Term Loans: Loans that are repaid over several years.
- Bonds Payable: Debt securities issued by the company.
- Deferred Tax Liabilities: Taxes that will be paid in the future.
Capital
Capital is where the business gets its money from (capital employed).
Share (Owners’) Capital: This represents the money invested by the company’s owners. Shares represent a percentage of ownership for investment. When you own shares of a company, you become a shareholder and hold a portion of that company’s ownership. Companies issue shares as a way to raise capital to fund their operations, investments, and growth initiatives.
Capital Employed: This is the total amount of capital used to run the business. It includes both share capital and debt. Examples include:
- Share capital: The value of the owner’s investment in the company.
- Long-Term Debt: Debt that’s due in more than a year.
Alternative Terminology
This is a new course and we don’t yet know the terminology that could be used in the exam. The following are alternative terms used to refer to these categories:
Current Assets:
- Short-term Assets
Fixed Assets:
- Long-term Assets
- Non-current Assets
Current Liabilities:
- Short-term Liabilities
Long-Term Liabilities:
- Non-current Liabilities
