Key Takeaways
- The Statement of Financial Position, also known as Balance Sheet, provides a snapshot of a company’s financial position at a specific point in time.
- Assets and liabilities can be classified into current and noncurrent or in the order of increasing or decreasing liquidity if it could provide information that is more reliable and relevant.
- The presentation of equity items in the statement of financial position depends on the legal structure or form of the company whether it is a sole proprietorship, a partnership or a corporation.
Introduction to the Statement of Financial Position
The Statement of Financial Position, also called Balance Sheet, is a financial statement that gives a detailed information about the financial position of an entity at a specific point in time.
The Statement of Financial Position or Balance Sheet, is one of the financial statements that businesses prepare for their stakeholders. It is usually compared to a photograph or a snapshot of your company’s financial position, i.e. where your company financially stands at a given point in time.
Financial Position refers to the status of your company’s assets, liabilities and equity, and their relationship with each other. The financial position of your company is usually affected by its economic resources, financial structure, liquidity, and solvency.
Below is an example of a statement of financial position.
Economic Resources
Assets are the economic resources of your company used to produce a product or service and generate revenues. The way your company increases and utilizes its resources over time is a good indicator of its ability to generate additional resources in the future.
An increase in the company’s resources may be a sign of improving financial position while a decrease could be an indicator of mismanagement of resources. Analyzing how a company manages its economic resources is very helpful to those investors who are looking into investing their money in the company.
Financial Structure
To acquire assets without using any profits from your company, you have two options: via equity financing and via debt financing. Thus, the financial structure of your company will always be a mixture of debt and equity instruments.
A healthy mix of debt and equity financing can help your company achieve its goals efficiently. Having a higher amount of liabilities than equity is a red flag and may indicate that the company relies too much on debt financing and is unable to produce enough profits to sustain its operations.
Analyzing the financial structure of a company is useful when predicting how future profits and resources will be distributed among its creditors and owners. It is also useful in determining the future financing needs of the company and its ability to raise them.
Liquidity and Solvency
Liquidity is the ability of your company to convert its current assets into cash to pay for short-term liabilities. Solvency, on the other hand, is the ability of your company to pay for its long-term financial obligations as they fall due.
When the amount of liabilities are disproportionately higher than the assets, it may indicate the company’s inability to pay its debts. And if a company has a reputation of not being able to pay its debts on time, it could have a hard time borrowing funds and entering into a credit agreement with a potential supplier. In worst case scenarios, the inability to pay may lead to involuntary bankruptcy of the company.
Asset
An Asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Assets are usually the first items that you’ll see in a statement of financial position.
For your company to achieve its goals and earn profits, it needs assets that it could use for its operations. Some examples of these assets are cash, merchandise inventories, computers, vehicles, office buildings, factories, patents, trademarks, computer software, franchise, and financial assets such as stocks and bonds.
Assets can be in the form of physical properties such as land and building, items of value such as financial assets, and rights that are owned and controlled by the business such as intangible assets. They are used up immediately or over a period of time in your business operations to generate profits.
When a company is just starting out, its first assets usually come from investments made by the owner or its founder. As the business grows and additional assets are needed, the company may acquire assets using financing coming from investors and creditors.
Characteristics of an Asset
Based on the definition above, the following are the characteristics of an asset:
- The asset is a present economic resource.
- The asset, as a present economic resource, is a right that has the potential to produce economic benefits.
- The asset, as a present economic resource, is controlled by the company as a result of past events.
Right
Some examples of a right that has the potential to produce economic benefits are as follows:
- Right to receive cash.
- Right to receive goods or services.
- Right over physical objects such as fixed assets or inventories.
- Right to use intellectual property.
- Right established by a contract or legislation such as owning a physical object, owning a debt or equity instrument, or owning a registered patent.
Potential to produce economic benefits
The potential to produce economic benefits does not need to be certain, or even likely, that the right will produce economic benefits. It is only necessary that the right already exists.
An economic benefit is a benefit that can be quantified and expressed in terms of money that it generates. It can be in the form of income or cost savings.
Under the control of the entity
A company has control over the economic resource if it has a present ability to direct the use of an economic resource and obtain the economic benefits that may flow from it. Having control means management can freely employ or dispose the asset. In addition, any future economic benefit that may be produced by the asset must flow only to the company instead of another entity.
The result of a past event
A transaction or event that occurred in the past gave the company control over the economic resource. An expectation of transaction or event to occur in the future won’t by itself give rise to any asset. To be considered an asset, the economic resource must exist now as opposed to being created or delivered in the future.
The most common way to obtain an asset is by purchasing or producing them. However, a company can also receive an asset by way of a government grant designed to provide an economic benefit or to encourage economic growth.
Assets can be classified as either Current Assets or Noncurrent Assets.
Current Assets
Current assets are assets that are expected to be sold, consumed, or converted into cash within twelve months or the normal operating cycle, whichever is longer. This includes assets held for trading purposes and unrestricted cash and cash equivalents.
The International Accounting Standards (IAS 1) sets out the requisites of a current asset as follows:
- Expected to be realized or intended to be sold or consumed in the entity’s normal operating cycle.
- Held primarily for the purpose of trading.
- Expected to be realized or converted into cash within twelve months after the reporting period.
- Cash and cash equivalents which are not restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
When presenting current assets in your company’s statement of financial position, they are usually the first ones to be shown in the assets section. However, other forms of presentation are available such as presenting noncurrent assets first before the current ones. Furthermore, businesses can also present assets by increasing or decreasing order of liquidity rather than categorizing them as current or noncurrent.
Current assets are liquid assets that your company controls that include any of the following:
- Cash and cash equivalents that are readily available to be spent without any restrictions.
- Assets that can be immediately converted into cash within twelve months after the reporting period.
- Assets that are intended to be sold or consumed within the normal operating cycle of your business. If the normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
Below are some examples of current assets.
Cash and Cash Equivalents
Cash and Cash Equivalents are the most liquid assets that every company has. They generally include the following:
- Cash – this includes cash on hand and demand deposits
- Cash Equivalents – these are short-term, highly liquid investments that can be readily converted to a known amount of cash and that are subject to an insignificant risk of change in value because of very short maturity dates.
The term Cash refers to:
- Paper currency and coins that are legal tender and in circulation within a country or jurisdiction.
- Negotiable instruments such as checks, bank drafts, government treasury warrants, and postal money orders that is payable in money and acceptable by the bank for deposit and immediate credit.
The Cash account in the statement of financial position includes the following:
- Cash in Bank – includes cash deposited in demand deposits of banks such as checking or savings account. These accounts are used for depositing sales and paying bills or other operating expenses.
- Cash on Hand – includes cash that is kept in the company’s drawer or vault, or held under the custody of the business owner or an officer in charge of safekeeping.
- Cash Funds – includes cash that are set aside for use in the current operations of the company. Examples of cash funds include payroll funds, petty cash funds and interest funds. These are either held as cash on hand or cash in bank.
Some investments can be considered cash equivalents and presented together with cash in the statement of financial position. Examples of cash equivalents are commercial papers, government treasury bonds, preference shares with specified redemption date, money market funds, and time deposits that meet any of the following criteria:
- Have maturity or term of three months or less, or
- Have maturity or term of more than three months but are acquired by the company three months before their maturity date or redemption date.
Short-term Investments
Short-term Investments are highly-traded financial assets such as stocks and bonds that a company purchases with the intention to sell in the short term to make a profit from price increases. These investments are actively traded in financial markets. Also included in short-term investments are time deposits, treasury bills, money market instruments, and commercial papers that have maturity terms of more than three months but within one year.
If your company has excess or idle cash sitting around, you can invest them in short-term investments with the intention of earning a higher amount compared to the interests that a demand deposit account offers.
Trade and Other Receivables
Receivables are amounts owed by customers to your company for the goods, services or credit that they have received but not yet paid. Receivables can be classified as Trade Receivables and Nontrade Receivables.
Trade Receivables are amounts that are receivable from your customers for goods or services delivered to them in the ordinary course of your business operations. They are typically evidenced by sales invoices that are issued to customers when goods are shipped or services are performed.
Trade receivables are usually recorded in an Accounts Receivable account which is classified as a current asset since they are expected to be realized or converted into cash within the entity’s normal operating cycle or one year after the reporting period, whichever is longer.
Nontrade Receivables, on the other hand, are amounts owed to your business other than the sale of goods and services on account. They are typically receivables from other activities that are not considered part of the normal operating activities of your business. Examples of nontrade receivables are Interest Receivables, Advances to Employees, Dividends Receivable, and Notes Receivable.
Nontrade Receivables are classified as current assets if they are expected to be paid within one year, regardless of the length of the entity’s normal operating cycle. If payment is to be made for a period longer than a year, nontrade receivables are classified as noncurrent assets.
Inventories
The type of inventories you may have would depend on the legal form of your company. If you’re a manufacturer, your inventory accounts would include the following:
- Finished Goods Inventory – goods held for sale in the ordinary course of business.
- Work in Process Inventory – unfinished goods currently in the process of production.
- Raw Materials Inventory – materials or supplies to be consumed in the production process or in the rendering of services.
On the other hand, the inventory account you’ll only use as a merchandiser is the Merchandise Inventory account which represents the stock of finished goods that are available for sale by your business. Service-based businesses generally don’t carry any inventory that is for sale to their customers.
Prepaid Expenses
Prepaid Expenses, also called Prepayments, are advance payments that can be made by your company for certain expenses or services that it will receive in the future. These expenditures are usually paid in full in one accounting period but the benefits from which will apply in future accounting periods.
A prepaid expense is considered an asset due to its nature as an expense that was already paid in advance but not yet incurred. As a result, your company does not have to pay for it anymore in the future. Examples of prepaid expenses are Prepaid Insurance, Prepaid Supplies, and Prepaid Rent.
Since prepaid expenses are usually consumed within a year or less, they are initially recognized as a current asset in the statement of financial position. When the asset is actually used or consumed afterwards, the cost is eventually charged as an expense and reflected in the income statement.
Noncurrent Assets
Noncurrent Assets are assets that are not easily realized or converted into cash within twelve months after the reporting period or within the normal operating cycle.
As defined by IAS 1, all other assets not classified as current assets shall be classified as noncurrent assets. These assets last for more than one accounting period and are not liquid, which means that converting them into cash or using them could take a longer time.
Let’s have a brief overview of some of the noncurrent assets below.
Property, Plant and Equipment
Property, Plant and Equipment (PP&E), also called Fixed Assets or Capital Assets, are physical assets that could support your operations and has the potential to produce economic benefits for your business over a long period of time, i.e. more than one year. These tangible assets are generally used in the production or supply of goods and services, for rental, or for administrative purposes.
Fixed Assets are illiquid and are not intended to be sold like merchandise inventories in a normal course of business operations. They are part of the production base of a business especially in capital-intensive industries such as manufacturing where a large portion of the company’s assets are fixed assets.
Some examples of PP&E are as follows:
- Land or Real Properties – these are property lots owned by a company on which a building or plant can be constructed. If the land is intended as held for sale or as an investment, it is not considered as PP&E.
- Buildings – these are structures that a company owns and are used for its operations. It includes office buildings, plant or factories, warehouses, and retail shops.
- Furniture and Fixtures – furnitures are movable assets that are not permanently connected to the structure of a building. They include work desks, tables, chairs, filing cabinets, bookcases, and partitions. Fixtures are those attached or fixed at a specific position or place in a building such as fixed lighting, ceiling fans, wall decors, toilets, sinks, and partitions. They are categorized into either Office Furniture and Fixtures or Store Furniture and Fixtures depending on the location where they are used.
- Equipment – these are assets that are used to perform specific tasks in business operations such as in the production of goods or rendering of services. Examples of equipment are machinery, power tools, apparatus, air conditioners, cash registers, computers, calculators, delivery equipment, and typewriters. They are also categorized into Office Equipment and Store Equipment depending on where they are used.
- Motor Vehicles – these assets include cars and trucks that are used by a company for transportation of personnel and delivery of goods. Motor vehicles should only be used for business purposes and not for the personal needs of an employee.
Long-Term Investments
Long-Term Investments include investments that can be held by your company without any intention of being sold within one year after the reporting period. These investments include ownership shares of another company, bonds issued by another company, money market instruments, promissory notes, and treasury bonds with a maturity term of more than one year.
Land or building that are held to earn rentals or for capital appreciation are called Investment Properties and are also treated as long-term investments. Bond Sinking Funds which are used for the retirement of long-term bond liabilities issued by a company are classified as long-term investments.
Intangible Assets
Intangible Assets are identifiable non-monetary assets without physical substance that can be controlled by your company as a result of past events and which has the potential to produce economic benefits are for the business. Examples of intangible assets are patents, trademarks, goodwill, copyrights, and franchise.
Other Noncurrent Assets
Noncurrent assets that are not included in the above categories are classified as Other Noncurrent Assets. An example of this is the portion of a prepaid expense that is unlikely to be consumed within twelve months after the reporting period. Another example are advances to officers and employees that can be collected beyond twelve months after the reporting period.
Liability
A Liability is a present obligation of the entity to transfer an economic resource as a result of past events.
Liabilities are usually presented next to assets in the statement of financial position.
Liabilities are economic obligations of a company owed to creditors or outside parties for assets or services acquired in a past event with the promise to pay in the future. They represent the portion of the company’s assets provided and claimable by creditors.
Qualifications of a Liability
For a liability to exist, three criteria must all be satisfied:
- The entity has an obligation.
- The obligation is to transfer an economic resource.
- The obligation is a present obligation that exists as a result of past events.
Let’s briefly explain each requirement below.
The entity has an obligation
An obligation is a duty or responsibility that your company has no practical ability to avoid. It is always owed to another party which could be a person, another entity, a group of people or other entities, or society at large.
Obligations arise from normal business practices, from binding contracts or from statutory requirements.
The obligation is to transfer an economic resource
An obligation should have the potential to require your company to transfer an economic resource to another party to pay for it. Some ways to transfer economic resources as settlement of a present obligation of your company can be as follows:
- Payment of cash.
- Delivery of goods or services.
- Exchange of economic resources with another party on unfavorable terms such as in the case of a forward contract.
- Transfer economic resources if a specified uncertain future event occurs.
The obligation is a present obligation that exists as a result of past events
The present obligation of your company exists as a result of a past transaction or event where economic benefits were already received by your business. As a consequence, your business has to transfer an economic resource that it would not otherwise have had to transfer.
Some examples:
- The acquisition of goods or the use of services gives rise to trade payables.
- The receipt of a bank loan results in an obligation to repay the loan.
- The sale of goods in the past may also give rise to rebates and warranty liabilities.
The obligation must be present and existing for it to qualify as a liability. For this reason, you should not recognize a liability in anticipation of a future obligation. For example, a plan to acquire assets in the future does not give rise to a present obligation.
Liabilities can also be classified as either Current Liabilities or Noncurrent Liabilities.
Current Liabilities
Current liabilities are obligations that are expected to be settled within one year or the normal operating cycle, whichever is longer. This includes liabilities that are held for trading purposes and those that are due to be settled within twelve months after the reporting period, and for which the entity does not have an unconditional right to defer settlement for at least twelve months.
IAS 1 sets out the requisites of a current liability as follows:
- Expected to be settled within the entity’s normal operating cycle.
- Held primarily for the purpose of trading.
- Due to be settled within twelve months after the reporting period.
- For which the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
Current liabilities usually appear first in the liabilities section of the statement of financial position. However, your company can also opt to present liabilities in another way for as long as such presentation provides information that is reliable and more relevant. For example, if your company is a financial institution, it can present liabilities with increasing or decreasing order of liquidity.
Below are some common examples of current liabilities.
Accounts Payable
Accounts Payable is a liability that is owed by your company to trade creditors or suppliers for the purchase of goods or services that have already been received by your business in the ordinary course of its operations. It is usually supported by a sales invoice that is issued by your supplier.
Accounts payable are considered current liabilities because it is expected to be settled within twelve months after the reporting period or within your company’s normal operating cycle, whichever is longer.
Notes Payable
Notes Payable is a current liability that is supported by a promissory note which is due within twelve months after the reporting period. A promissory note is a written contract in which the maker or debtor promises to pay the creditor or payee a definite sum of money in the future. It can either be an interest bearing note or a non-interest bearing note.
In some cases, your company may issue a promissory note to replace any accounts payable the business has if an extension in payment terms is needed.
Loans Payable
Loans Payable is an amount that your company may owe to a bank or a financial institution for money borrowed under a loan arrangement. It can also be supported by a promissory note. The loan amount is subject to accrued interests that are paid until the principal amount is fully settled. Loans that are due within twelve months after the reporting period are classified as current liabilities.
Warranty Liability
A Warranty Liability is an example of an estimated liability where your company makes an estimate of the amount of repair or replacement costs that it expects to incur for any defective products sold that are still under their warranty period. The warranty liability is recorded at the time of the sale or delivery of the product to the customer.
The estimated amount is usually based on past experiences of the company in providing repairs or replacements of defective products during the warranty period.
Unearned Revenues
Unearned Revenues or Deferred Revenues are obligations that arise when your company receives cash from a customer as an advance payment for goods or services that it still has to deliver in the future. In essence, unearned revenue is income that is already received in the current period but will be earned in a future period when your company delivers the product or service to your customer.
An example of unearned revenue is when a company that rents out office spaces receives advance rental payments from its tenants at the beginning of the year to cover a one-year rental period. As each month passes, the company determines the earned portion of the advance rental payments and recognizes rental income corresponding to the earned portion.
Another example is when a media company receives a one-year magazine subscription fee in advance to cover the issuance of digital magazines to customers for a twelve-month period. The company recognizes subscription revenue for each of the twelve months as it delivers the magazines monthly.
Accrued Expenses
Accrued Expenses are expenses that are already incurred but not yet paid by your business. When your company buys a product or a service, it is expected to pay for its cost. Sometimes, the payment will be made on a future date even if your company has already received the benefits of the product or service that it purchased in the present. A liability is then recognized to account for the accrued expenses that is yet to be paid in the future.
Accrued expenses are typically paid within one year after the reporting period that is why it is generally classified as a current liability. Examples of accrued expenses include interest expenses, utilities, payroll, and taxes that can be accrued in anticipation of future payments.
Accrued Interest Payable is usually recorded when an interest accrues at the end of an accounting period on the money that your company borrowed. This accrued interest is usually paid at the beginning of the next reporting period.
Utilities Payable is the amount due to utility companies for providing electricity, gas, and water services to your business. An accrued liability is recognized for the unpaid amount of utility bills at the end of the reporting period.
Payroll Liabilities or Salaries Payable are recorded for the amounts to be paid to employees or workers for the services that your company receives from them during the payroll period where payment of which will still be made on the next period or payment cycle.
Tax Payable is a current obligation of your company to the government where payment is anticipated on the next accounting period.
Other Current Liabilities
The examples above are just some of the common current liabilities that you can see in a statement of financial position. Other liabilities are also recognized as current liabilities if they are expected to be paid within twelve months after the reporting period or within your company’s normal operating cycle.
If your company has a long-term liability that is due to be paid within one year after the reporting period, the liability will be reported as a current liability. Also considered as a current liability is the portion of a long-term debt that is payable within twelve months after the reporting period.
Noncurrent Liabilities
Noncurrent Liabilities are long-term obligations that are expected to be settled beyond one year and may exist for several accounting periods.
According to IAS 1, all other liabilities not classified as current liabilities are to be classified as noncurrent liabilities.
Below are some examples of non-current liabilities:
Long-Term Notes Payable and Loan Payable
Any promissory notes or loans your company owes that are payable for more than one year after the reporting period is classified as noncurrent liabilities. However, the portion of the notes payable or loans payable that is payable within one year after the reporting period will be reported as a current liability.
Mortgage Payable
Mortgage Payable is a long-term obligation that is secured by the real properties of your business. Mortgages are used to finance the purchase of large real estate properties without the need to pay the full purchase price up front using any available funds of your business.
In a mortgage agreement, real properties such as land and building serve as collateral to protect the bank or any lender against the borrower’s default. In case of default, the borrower losses the property in foreclosure proceedings that are favorable to the lender.
Bonds Payable
Bonds Payable are liabilities owed by the bond issuer to the investor or bondholder. They are typically long-term liabilities with maturity dates beyond one year and are classified as noncurrent liabilities.
A bond is a fixed income debt instrument containing a formal promise made under seal by the bond issuer (borrower) to pay the bondholder (lender) a specified sum of money at a determinable future date with periodic interest payments until the principal amount is paid. Governments and corporations issue bonds to raise money to finance projects, operations and capital assets.
Other Long-Term Payables
Any other debts and obligations your company may have that are not mentioned above and that are payable in more than twelve months after the reporting period are classified as noncurrent liabilities. This also includes the portion of unearned or deferred revenues that are realizable in more than a year.
Always remember that any portion of a noncurrent liability that is due within twelve months after the reporting period is reported as a current liability. However, if your company has a long-term debt that is expected to be refinanced and your company has the discretion to do so, the debt is classified as noncurrent, even if the liability would otherwise be due within twelve months after the reporting period.
What is Equity?
Equity is the residual interest in the assets of the entity after deducting all of its liabilities. It is also referred to as Net Assets.
The equity portion of your company’s statement of financial position represents the right or claim of the owner or owners over the assets of the business. It is the remaining amount due to the owners after all debts to creditors have been repaid, and is computed by deducting the total liabilities from the total assets.
The reporting or presentation of equity items in the statement of financial position depends on the legal form of the business organization – sole proprietorship, partnership and corporation.
Equity Accounts of a Sole Proprietorship
For a sole proprietorship, the term used to report the equity section in the statement of financial position is Owner’s Equity. It consists of two accounts only that represent the owner’s capital contribution and withdrawals.
Owner’s Capital
The Owner’s Capital account represents the ownership interest of the proprietor or owner in the business. The transactions that affect this account are as follows:
- Initial investments such as cash and fixed assets by the owner to the business.
- Additional investments made by the owner during the existence of the business.
- Net Income earned by the business during the current reporting period.
- If the business operations during the period result in a net loss, the amount of the net loss will decrease the owner’s capital account.
Owner’s Drawing
The Owner’s Drawing account is a temporary equity account that reduces the ownership interest of the proprietor in the business. This represents the withdrawal of business resources by the owner who wishes to convert them for personal use. It is usually deducted or closed at the end of the accounting period to the owner’s capital account.
Equity Accounts of a Partnership
The term, Partners’ Equity, is used to report the equity accounts of the partners who are the owners in a partnership form of business. The equity items in a partnership are the same as that of a sole proprietorship where capital and withdrawal accounts are also used. However, separate capital and drawing accounts are maintained for each partner to clearly represent each of their financial interests in the partnership.
Partner’s Capital
Each individual Partner’s Capital account represents the ownership interest of each partner in the business. It is also affected by the partner’s initial and subsequent asset investments in the business. Any net income or net loss at the end of the reporting period is distributed among the partners according to the profit and loss allocation set in the partnership agreement.
Partner’s Drawing
Any withdrawal of resources by a partner from the business for the partner’s personal use is accounted in a temporary equity account known as the Partner’s Drawing account. This is deducted from the partner’s capital account at the end of the accounting period.
Equity Accounts of a Corporation
The equity section in the statement of financial position of a corporation is called Shareholders’ Equity or Stockholders’ Equity. The Shareholders’ Equity involves more accounts than those used by a sole proprietorship or a partnership.
The following are the main equity accounts of a corporation:
Share Capital
The Share Capital account, also known as Capital Stock, represents the investments made by the shareholders in a corporation. When a corporation raises funds, it gives investors ownership interests in the company by issuing shares.
Shares can either be Ordinary Shares (also called Common Stocks or Common Shares) or Preference Shares (also called Preferred Stocks or Preferred Shares).
Share Premium
The Share Premium account, also known as Additional Paid-In Capital (APIC), refers to the additional amount paid by the shareholders in excess of the par value or stated value of the shares issued to them by the corporation. The par value or stated value is the amount outlined in the articles of incorporation or corporate charter and can also be seen on the stock certificate.
If a corporation issues shares with a purchase price that exceeds the par value or stated value of the shares, the excess amount will be reported in the share premium account. For example, if Macrohard Corp. issues 1,000,000 shares with a par value of $1 per share for a purchase price of $5 per share, then the difference between the purchase price and the par value would be reported as share premium. In this case, the share capital account will increase by $1,000,000 while the share premium account will increase by $ 4,000,000.
Retained Earnings
The Retained Earnings account, also called the Accumulated Profits account, represents the sum of all cumulative net income over a corporation’s lifetime that is not distributed as dividends to shareholders. The main purposes of the retained account are for reinvestment, debt repayment and appropriation for specific uses.
Any accumulated losses and dividend distributions are deducted from the retained earnings account balance. Dividends are distributions of company earnings to its shareholders in the form of cash or property that are in proportion to their shareholdings. Other factors that affect the retained earnings account are prior period errors, changes in accounting policies and other capital adjustments.
Treasury Shares
Treasury Shares or Treasury Stocks are the corporation’s own shares that have been previously issued and subsequently reacquired or repurchased from its shareholders. These shares are not cancelled or retired yet and are kept in the company’s treasury. Treasury shares are deducted from the total amount of shareholders’ equity.
Presentation of Statement of Financial Position Items
There are two formats that you can use to present items in the statement of financial position:
- Account Form
- Report Form
Account Form
The Account Form follows the format of the basic accounting equation, Assets = Liabilities + Equity, where assets are listed on the left-hand column of the statement of financial position while the liabilities and equity accounts are listed on the right-hand column.
Below is an example of a statement of financial position that is presented in the account form.
Report Form
The Report Form shows all line items in one straight column where assets are presented at the top with liabilities and equity listed below the assets section. The report form is the most commonly used format by companies.
Below is an example of a statement of financial position presented in report form.
Information Presented in the Statement of Financial Position
According to IAS 1, as a minimum, the statement of financial position shall present the following line items:
- Cash and cash equivalents
- Trade and other receivables
- Investments accounted for using the equity method
- Financial assets (excluding items in numbers 1, 2 and 3)
- Inventories
- Biological assets
- Property, plant and equipment
- Investment property
- Intangible assets
- Total of assets classified as held for sale and assets included in disposal groups classified as held for sale
- Trade and other payables
- Provisions
- Financial liabilities (excluding items in numbers 11 and 12)
- Current tax liabilities
- Deferred tax liabilities and deferred tax assets
- Liabilities included in disposal groups classified as held for sale
- Minority interest presented in equity
- Issued capital and reserves
Any additional line items other than those listed above can be presented when such presentation is necessary and relevant to an overall understanding of your company’s financial position. Each line item should be presented only in its total amount in the statement of financial position with a separate schedule prepared enumerating the details of each line item.
For example, if your company owns a warehouse, an office, machinery, and several delivery vehicles, instead of presenting each item separately in the statement of financial position, you may collapse them into a single line item called Property, Plant and Equipment while the details for each item can be enumerated in a separate schedule. Doing so will make the statement of financial position less overwhelming for the reader.
However, if there are only a few items to be presented such as in the case of a small business with simple operations, it is acceptable to make a more detailed presentation of the items in the face of the statement of financial position.
IAS 1 does not prescribe the order or format in which an entity presents items in the statement of financial position. The list above simply mentions items that are sufficiently different in nature or function to warrant separate presentation in the financial statement.
Current and Noncurrent Classification of Assets and Liabilities
A company shall present current and noncurrent assets, and current and noncurrent liabilities, as separate classifications in its statement of financial position.
However, for some companies, assets and liabilities may be presented broadly in the order of increasing or decreasing liquidity, rather than a current/ noncurrent presentation, when such presentation provides information that is reliable and more relevant. For example, cash and cash equivalents usually show up in the statement of financial position first (or last depending in the order of liquidity being presented) because it is the most liquid asset.
Review Questions
- What is a statement of financial position and why is it important?
- What is a company’s financial position and what affects it?
- What is the difference between a current and noncurrent asset?
- Is it required for assets and liabilities to be classified as current and noncurrent?
- What are the requirements for an obligation to qualify as a liability?
