2.2 Statements of financial position PDF

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2.2

Statements of financial position       

define a statement of financial position understand that a statement of financial position is prepared from the remaining balances in the trial balance after preparation of the trading and profit and loss accounts explain why a statement of financial position isn’t part of the double entry system explain the meaning of the terms of non-current assets, current assets, current liability and long-term liability prepare a statement of financial position using the vertical method of presentation understand the importance of the term net current assets / working capital know which items appear in the owner’s capital account

Definition    

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statement of financial position – a financial statement setting out the book values of assets, liabilities and capital ‘as at’ a particular point in time shows what a business owns at a specific date details of the assets, liabilities and capital have to be found in the records of the business, and then written out in the statement of financial position these details are readily available since they consist of all the balances remaining in the records once the trading and profit and loss account and statement of profit or loss for the period have been completed all balances remaining have to be assets, liabilities or capital since the other balances should’ve been closed off when the trading and profit and loss account was completed

Preparing the statement of financial position 

below shows the trial balance of B Swift as on 31 Dec 2018 after the trading and profit and loss account and statement of profit or loss had been prepared (used in 2.1 --> the balances remaining in the books of account): B Swif Trial balance as at 31 December 2018 (after Trading and Profit and Loss Accounts completed) Cr Dr £ £ Fixtures and fittings 5,000 Accounts receivable 6,800 Accounts payable 9,100 Inventory 3,000 Bank 15,100 Cash 0 Capital 200 21,00 0 ______

30,100

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30,10 0

we can now draw up a statement of financial position as at 31 Dec 2018: B Swif Statement of Financial Position as at 31 December 2018 £ Non-current assets Fixtures and fittings Current assets Inventory Accounts receivable Cash at bank Cash in hand Less Current liabilities Accounts payable

£ 5,000

3,000 6,800 15,100 200 25,100 9,100

Net current assets/working capital

16,000

Non-current liabilities Long-term loan Net assets

21,000

Financed by: Capital account Cash introduced Add net profit for the year

Less Drawings

20,000 8,000 28,000 7,000 21,000

No double entry in statements of financial position  

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statements of financial position are NOT part of the double entry system if accounts are drawn (cash, rent, sales, trading and profit and loss accounts), we are writing up part of the double entry system; we make entries on the debit and credit sides of these accounts in preparing a statement of financial position, we don’t enter anything in the various accounts we don’t actually transfer the fixtures balances or the motor vehicles balance etc. to the statement of financial position all we do is list the balances for assets, capitals and liabilities to form the statement

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so none of these accounts have been closed off nothing is entered in the accounts when the next accounting period starts, these accounts are still open containing balances as a result of business transactions, entries are then made in these accounts to add to, or deduct from, the amounts shown in the accounts using normal double entry account = part of the double entry system, and includes debit/credit entries: trial balance: statement of profit or loss:

statement of financial position:

a list of debit and credit balances in the accounting records a list of revenues received and expenses incurred during a specific period of time, the results of which show the business’ gross and net profits for the period a list of balances arranged according to whether they’re assets, capitals or liabilities

Layout of the statement of financial position      

the statement of financial position is one of the most important financial statements so it’s important for the reader to find it easy to follow and understand the current format of the statement is shown above (see preparing the statement of financial position) it starts by listing all the assets which the business ‘owns’ these assets are split into 2 categories: non-current and current assets this is followed by details of the funds acquired to finance the business

Assets Non-current assets

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non-current assets are assets that:  are to be used in the business  are expected to be of use to the business for a long time  weren’t bought only for the purposes of resale non-current assets are listed first in the statement of financial position, starting with those that the business will keep the longest, down to assets with the shortest life expectancy: 1. land and buildings 2. fixtures and fittings 3. machinery 4. motor vehicles

current assets

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current assets are assets that are likely to change in the near future, and usually within 12mths of the date of the statement of financial position

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they are listed starting with the asset that is least likely to be turned into cash, finishing with cash itself: 1. inventory 2. accounts receivable 3. cash at bank 4. cash in hand

Liabilities Current liabilities

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current liabilities are due for repayment in the short-term, usually within 1 year e.g. bank overdrafts, accounts payable for the supply of goods bought on credit and for resale current liabilities are deducted from the current assets to give the net current assets or working capital this figure is very important in accounting as it shows the amount of resources the business has in the form of readily available cash to meet everyday running expenses

Non-current liabilities

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non-current liabilities are liabilities not due for repayment in the near future e.g. bank loans, loans from others such as friends or relatives, and mortgages they’re deducted from the total figure of assets plus the net current assets

Capital account  

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this is the proprietors’ or partners’ account with the business it will start with the balance brought forward from the previous accounting period  any personal cash introduced into the business and the net profit made by the business in this accounting period is added to this  amounts drawn from the business and any loss made in the business is deducted from this the final balance on the capital account = the net assets or net liabilities figure, so the statement of financial position balances below is the standard format of the capital account: Capital Account £ Balance b/d Add Cash introduced Net profit for the period Less Drawings Net loss for the period

£ X X X X

X X X X

it’s important to note that the statement of financial position shows the position of the business at one point in time: the statement of financial position date (i.e. ‘as at 31 Dec 2018’)  it’s like taking a snapshot of the business at one moment in time  however the statement of profit or loss shows the profit/loss of that business for a period of time – normally a year (i.e. ‘for the year ended 31 Dec 2018) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 

Summary 

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the statement of financial position is a financial statement which lists the book values of assets, liabilities and capital ‘as at’ a specific date; it shows what a business ‘owns’ and ‘owes’ at a particular point in time the statement of financial position is prepared from the remaining balances in the trial balance after the trading and profit and loss account and statement of profit or loss has been completed the statement of financial position is NOT part of the double entry system the term ‘non-current assets’ means assets of a more permanent nature (e.g. land and buildings, equipment and cars owned by the business) – these are listed in the statement of financial position in descending order, with the most permanent asset shown first the term ‘current assets’ refers to assets that are likely to change within 1 year (e.g. inventory, accounts receivable, cash at bank and cash in hand) – these are listed in order of liquidity, with the least liquid of the assets shown first (inventory) and the most liquid asset shown at the bottom (cash in hand) the term net current assets or working capital is an important figure in accounting as it represents the amount of resources readily available for paying everyday running expenses the capital account contains money invested by the owner of the business plus the net profit for the period minus amounts taken out by the owner in the form of ‘drawings’; if there is no net profit then a net loss will have been incurred...