Statement of Financial Position: Assets, Capital, and Liabilities Part 2

A Statement of Financial Position is, as its name suggests, a financial statement that shows the financial position of the firm at a particular time.

This statement helps a business understand what it owns, what it owes, and how it is financed. An accurate accountant will always make sure that both sides of the Statement of Financial Position are equal.

How do we set out a Statement of Financial Position? The preparation of a Statement of Financial Position is based upon the accounting equation: Assets = Capital + Liabilities.

Assets are the uses of resources, while Capital and Liabilities are the sources of finance. Remember this rule as an accountant. It is like the core of accounting, and you will use it a lot.

Assets are the items owned by the firm using its sources of finance. For example, the company will use its capital and liabilities to buy assets. That is why the two sides of the Statement of Financial Position should always be equal to each other.

But are all assets the same? As you guessed, no, they are not. To keep this simple, we have two types of assets: Current Assets and Non-current Assets.

Current Assets are assets that are intended to turn into cash within a relatively short period of time, or assets that are already cash. Examples include inventory, trade receivables, other receivables, cash at bank, and cash in hand.

Non-current Assets, or fixed assets, are assets that are held for continuing use in the business with a view of profits being earned from that use. Examples include land and buildings, vans, vehicles, furniture, machinery, and equipment.

Capital is basically the contribution of the owner in financing the firm. If the owner invested 3,000 USD cash to start their own business, then their capital = 3,000. If they introduced additional cash of 2,000, then their capital will be 5,000.

The capital’s way of calculation is different and will be discussed in another lesson. But for now, let us know the term Capital Ending, which is the next capital after calculation at the end of the financial year.

Liabilities consist of money owing for goods supplied to the firm, expenses, and loans made to the firm.

Current Liabilities are amounts falling due within a year. For example, a bank loan repayable within 12 months.

Non-current Liabilities are long-term liabilities that are falling due in more than a year. For instance, long-term loans.

1. 1Start by listing Non-current Assets.
2. 2Then list Current Assets.
3. 3Add them together to find Total Assets.
4. 4List Capital Ending.
5. 5Add Non-current Liabilities and Current Liabilities.
6. 6Add Capital and Liabilities together.
7. 7Make sure Total Assets equals Total Capital and Liabilities.

• Forgetting that Assets must equal Capital plus Liabilities.
• Confusing Current Assets with Non-current Assets.
• Thinking all liabilities are due immediately.
• Forgetting that capital represents the owner's contribution to the business.
• Treating items used in the business, like machinery, as items meant to be sold.

• A Statement of Financial Position shows the financial position of a firm at a particular time.
• The accounting equation is Assets = Capital + Liabilities.
• Assets are the uses of resources.
• Capital and Liabilities are the sources of finance.
• Current Assets are short-term assets, while Non-current Assets are used in the business for a longer period.
• Current Liabilities are due within a year, while Non-current Liabilities are due after more than a year.