A statement of financial position is a financial statement showing the assets, liabilities and equity of a business at a particular date.
It is sometimes called the balance sheet.
→ It shows what the business owns or controls
→ It shows what the business owes
→ It shows the amount belonging to the owners
→ It helps assess the financial position and financial stability of the business
→ It can help managers, investors and lenders make decisions
Important distinction
A statement of financial position shows the position at one particular date.
For example:
Statement of Financial Position at 31 December 2026
This differs from a statement of profit or loss, which covers a period of time.
The Accounting Equation
The statement of financial position is based on:
Assets = Equity + Liabilities
Therefore:
Equity = Assets − Liabilities
This means that everything the business owns or controls has been financed either by:
→ The owners’ funds
→ Money owed to other parties
Contents of a Statement of Financial Position
A typical structure is:
Non-current assets
- Current assets
= Total assets
Less:
Current liabilities
= Net current assets
Therefore:
Net assets = Total assets − Current liabilities
Then:
Net assets = Equity + Non-current liabilities
Non-current Assets
Non-current assets are assets that are held for long-term use by the business rather than for immediate resale.
Examples:
→ Buildings
→ Machinery
→ Motor vehicles
→ Equipment
→ Fixtures and fittings
→ Long-term investments
Example
A manufacturing business may own:
→ Factory building: $500,000
→ Machinery: $300,000
→ Vehicles: $100,000
These are non-current assets because they are used in the business over several years.
Depreciation
Non-current assets may lose value over time through depreciation.
→ Depreciation reduces the carrying value of the asset.
Example:
Machinery cost = $100,000
Accumulated depreciation = $30,000
Carrying value = $70,000
Current Assets
Current assets are assets expected to be converted into cash, sold or used within the normal operating cycle or within about one year.
Common examples:
→ Inventory
→ Trade receivables
→ Cash
→ Bank balances
Inventory
Goods held by the business for sale or materials used in production.
Trade receivables
Money owed to the business by customers who have bought goods or services on credit.
Cash and bank
Money immediately available to the business.
Current Liabilities
Current liabilities are amounts the business is expected to pay within the short term, usually within one year.
Examples:
→ Trade payables
→ Bank overdraft
→ Short-term loans
→ Accrued expenses
→ Tax payable
Trade payables
Money owed to suppliers for goods or services bought on credit.
Accrued expenses
Expenses that have been incurred but have not yet been paid.
Net Current Assets
Net current assets are also called working capital.
Net current assets = Current assets − Current liabilities
Example
→ Current assets = $80,000
→ Current liabilities = $50,000
Net current assets = $30,000
→ Positive net current assets indicate that current assets exceed current liabilities.
→ A business needs sufficient working capital to meet its short-term obligations and continue normal operations.
Net Assets
Net assets represent the value of the business’s assets after deducting its liabilities.
Net assets = Total assets − Total liabilities
Alternatively:
Net assets = Non-current assets + Net current assets − Non-current liabilities
Example
→ Non-current assets = $200,000
→ Net current assets = $60,000
→ Non-current liabilities = $100,000
Net assets = $200,000 + $60,000 − $100,000
Net assets = $160,000
Non-current Liabilities
Non-current liabilities are amounts owed by the business that are due after more than one year.
Examples:
→ Long-term bank loans
→ Long-term mortgages
→ Debentures
Example
A business takes a five-year bank loan of $500,000.
→ The outstanding amount is a non-current liability, although the portion due within the next year may be classified as a current liability.
Reserves
Reserves are amounts of profits or other funds that have been retained within the business rather than distributed to shareholders.
Examples include:
→ Retained earnings
→ Other reserves created from profits or specific accounting transactions
Retained earnings can be used to:
→ Finance expansion
→ Purchase assets
→ Fund research and development
→ Strengthen the financial position
→ Provide funds for future investment
Equity
Equity represents the owners’ claim on the assets of the business after all liabilities have been deducted.
For a company, equity may include:
→ Share capital
→ Reserves
→ Retained earnings
Equity = Assets − Liabilities
Example
→ Total assets = $500,000
→ Total liabilities = $200,000
Equity = $500,000 − $200,000 = $300,000
Example of a Statement of Financial Position
| Statement of Financial Position | $ |
|---|---|
| Non-current assets | |
| Property, plant and equipment | 300,000 |
| Current assets | |
| Inventory | 60,000 |
| Trade receivables | 40,000 |
| Cash | 20,000 |
| Total current assets | 120,000 |
| Less: Current liabilities | (50,000) |
| Net current assets | 70,000 |
| Net assets before non-current liabilities | 370,000 |
| Less: Non-current liabilities | (120,000) |
| Net assets | 250,000 |
| Equity and reserves | |
| Share capital | 150,000 |
| Retained earnings/reserves | 100,000 |
| Total equity | 250,000 |
Therefore:
Net assets = Equity
Amendment of a Statement of Financial Position
A statement of financial position may need to be amended when a transaction, correction or new piece of information changes an asset, liability or equity item.
The important rule is:
Every change must maintain the accounting equation.
Assets = Equity + Liabilities
Example: Purchase of equipment for cash
A business purchases machinery for $20,000 and pays immediately.
→ Non-current assets ↑ $20,000
→ Cash ↓ $20,000
Total assets remain unchanged.
There is simply a change in the composition of assets.
Example: Purchase of equipment on credit
A business buys machinery for $20,000 but has not yet paid the supplier.
→ Non-current assets ↑ $20,000
→ Trade payables ↑ $20,000
Total assets ↑ $20,000
Total liabilities ↑ $20,000
The accounting equation remains balanced.
Example: Repayment of a bank loan
The business repays $10,000 of a loan.
→ Cash ↓ $10,000
→ Loan liability ↓ $10,000
Therefore:
→ Assets ↓ $10,000
→ Liabilities ↓ $10,000
Example: Additional capital introduced
The owner invests an additional $30,000.
→ Cash ↑ $30,000
→ Equity ↑ $30,000
Example: Depreciation
Depreciation of $5,000 is recorded.
→ Carrying value of non-current assets ↓ $5,000
→ Profit ↓ $5,000
→ Retained earnings/equity ↓ $5,000
Relationship Between the Two Financial Statements
The statement of profit or loss and statement of financial position are closely connected.
The statement of profit or loss shows performance over a period.
The statement of financial position shows the financial position at a particular date.
Profit for the year and retained earnings
One of the most important links is:
Profit for the year → increases retained earnings → increases equity
If the business makes a loss:
Loss for the year → reduces retained earnings → reduces equity
Dividends
Dividends reduce the amount of profit retained in the business.
Profit for the year − Dividends = Increase in retained earnings
Therefore:
→ Dividends reduce retained earnings
→ Dividends reduce equity
But:
→ Dividends are not an expense in the statement of profit or loss.
Revenue and Assets
Revenue earned may increase assets.
For example, when goods are sold for cash:
→ Revenue ↑
→ Cash ↑
→ Profit ↑
→ Retained earnings ↑
→ Equity ↑
When goods are sold on credit:
→ Revenue ↑
→ Trade receivables ↑
→ Profit ↑
→ Retained earnings ↑
→ Equity ↑
Expenses and Assets/Liabilities
Expenses can affect the statement of financial position.
Expense paid immediately
→ Expense ↑
→ Cash ↓
→ Profit ↓
→ Retained earnings ↓
→ Equity ↓
Expense incurred but not yet paid
→ Expense ↑
→ Current liability ↑
→ Profit ↓
→ Retained earnings ↓
→ Equity ↓
For example, if electricity expense of $2,000 has been incurred but not yet paid:
→ Expenses ↑ $2,000
→ Accrued expenses ↑ $2,000
→ Profit ↓ $2,000
→ Equity ↓ $2,000
Cost of Sales and Inventory
Cost of sales is closely linked to inventory.
When goods are sold:
→ Inventory decreases
→ Cost of sales increases
→ Gross profit decreases
However, the relationship depends on whether the goods have been sold.
Purchases → inventory increases
Goods sold → inventory decreases → cost of sales increases
This is why:
Cost of sales = Opening inventory + Purchases − Closing inventory
Depreciation
Depreciation affects both statements.
→ Depreciation is an expense in the statement of profit or loss.
→ It reduces profit.
→ The carrying value of the non-current asset falls in the statement of financial position.
→ Retained earnings/equity also falls.
Depreciation expense ↑ → Profit ↓ → Retained earnings ↓ → Equity ↓
and:
Accumulated depreciation ↑ → Carrying value of non-current asset ↓
Taxation
Taxation links the two statements.
→ Taxation reduces profit for the year.
→ If tax has not yet been paid, it may appear as a current liability.
Tax expense ↑ → Profit for the year ↓ → Retained earnings ↓
If tax is owed:
→ Current liabilities ↑
Overall Relationship
The two statements should not be viewed separately.
Business transactions
↓
Revenue, cost of sales and expenses change
↓
Profit or loss changes
↓
Retained earnings change
↓
Equity changes
↓
Assets and liabilities may also change
Key exam links
→ Profit for the year ↑ → Retained earnings ↑ → Equity ↑
→ Loss for the year ↑ → Retained earnings ↓ → Equity ↓
→ Dividends ↑ → Retained earnings ↓ → Equity ↓
→ Revenue ↑ → Profit ↑ → Retained earnings ↑, assuming related costs are unchanged.
→ Expenses ↑ → Profit ↓ → Retained earnings ↓ → Equity ↓
→ Depreciation ↑ → Asset carrying value ↓ and Profit ↓
→ Taxation ↑ → Profit for the year ↓ → Retained earnings ↓
→ Asset purchased for cash → one asset increases while cash decreases
→ Asset purchased on credit → assets ↑ and liabilities ↑
The fundamental relationship remains:
Assets = Equity + Liabilities