The Statement of Financial Position – A Level Business CAIE Revision

The Statement of Financial Position, also commonly known as a balance sheet, is a snapshot of a business’s financial status at a specific point in time.
Its purpose is to show what a business possesses and owes, or in accounting terms, a business’s assets and liabilities.
The Statement of Financial Position also shows the ‘residual’ interest in the assets of an entity after deducting liabilities, often referred to as equity or net assets.
This statement is crucial in providing information to the shareholders and stakeholders about how well the business is performing, its strength, its liquidity, and its solvency.
It is one of the three main financial statements used for financial analysis and decision making, the other two being the income statement and cash flow statement.

Assets: These are resources owned by a business as a result of past transactions, which are expected to provide future economic benefits. They are classified into current assets (cash, inventory, receivables) and non-current assets (property, plant, equipment).
Liabilities: Obligations a business needs to fulfil in the future due to past transactions or events, including bank loans, accounts payable and accrued expenses. They can be sorted into current liabilities (due within a year) and non-current liabilities (due beyond a year).
Equity: This is also referred to as ‘shareholders’ equity’ or ‘net assets’. It is the residual interest in the assets of the entity after deducting liabilities. It consists of share capital, retained earnings, and reserves.

The Statement of Financial Position is essential in assessing the liquidity of a business, whether the business has enough short-term assets to cover its short-term liabilities.
It aids in analysing the capital structure and determining the financial stability of a company by assessing its solvency, revealing if the business has enough resources to pay off its long-term debts.
By providing detailed information on assets, liabilities, and equity, the statement gives potential investors insights into a company’s financial health and future earning potential.
The Statement of Financial Position also forms the basis for computing key financial ratios used for performance analysis and comparison.
Internally, the statement assists in strategic planning, financial modelling, and risk management.