Statement of Financial Position: Definition and All You Need To Know

Statement of Financial Position
Statement of Financial Position

Accounting often takes a back seat as small business owners juggle multiple responsibilities. Even if your bank balance appears to be fine, there could be deteriorating fundamentals that aren’t apparent until it’s too late. In this article, we will define a statement of financial position, its report form, and the difference between a nonprofit statement of financial position vs. a balance sheet.

Knowing your company’s numbers is the quickest way to peace of mind if you’re a business owner, investor, or member of management. Whether you hire in-house accounting staff, outsource your accounting needs, or do it yourself, knowing where you stand financially is critical.

A statement of financial position, also known as a balance sheet, is one of the best ways to keep track of your finances. It is the most common type of basic financial statement.

What is a Statement of Financial Position?

The balance sheet is also known as the statement of financial position. The statement lists an organization’s assets, liabilities, and equity as of the report date. As such, it provides a snapshot of a company’s financial situation as of a specific date. Because it is a financial statement, it is frequently presented alongside the income statement and statement of cash flows.

Understanding Financial Statements

Investors and financial analysts use financial data to analyze a company’s performance and forecast the future direction of its stock price. The annual report, which contains the firm’s financial statements, is one of the most important sources of reliable and audited financial data.

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Investors, market analysts, and creditors use financial statements to assess a company’s financial health and earnings potential. The balance sheet, income statement, and statement of cash flows are the three major financial statement reports.

Components of a Statement of Financial Position

A statement of financial position highlights three sections to depict how a company acquires resources to run its operations: assets, liabilities, and equity. Assets must always equal liabilities plus owners’ equity at any given time.

Assets = Liabilities + Equity

Furthermore, assets are shown on the left side of the financial position statement, while liabilities and equity are shown on the right. Current and non-current (or long-term) assets and liabilities are further classified based on the ease with which assets can be converted into cash and liabilities can be settled.

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  • Current assets: Resources that can be converted into cash within the next year. Cash equivalents and accounts receivable are two examples.
  • Current liabilities: Debts that must be repaid within a year. One example is money owed to creditors by your company (accounts payable).
  • Non-current assets: Also known as long-term or fixed assets, these resources are used to run the business and cannot be converted into cash within a year. Furniture and patents are two examples of tangible assets (intangible assets).
  • Non-current liabilities: Obligations or debt (or portions thereof) that take more than a year to repay. Consider your employees’ pensions.
  • Shareholders equity: The amount an investor or shareholder will receive if your company is liquidated after all debt obligations have been satisfied.

Statement of Financial Position Report Form 

A statement of financial position can be presented in account or report form, but first, it is necessary to understand the different types of financial statements and why they are important.

Statements of Financial Position Report Form

A company’s accountant prepares four types of a statement of financial position report form, each of which covers a critical aspect of the company’s financial health. Statements of financial position report form give a snapshot of a company’s performance, overall financial position, and cash flows. To evaluate a company, investors, lenders, creditors, and management review these documents.

Because each document is dependent on data from other statements, they are usually prepared in a specific order.

#1. Profit and loss statement

The income statement is the most important of the financial statements because it reveals fundamental truths about a company’s financial performance for a given reporting period. Beginning with sales, it subtracts expenses to arrive at a net profit or loss, as well as an earnings-per-share figure for investors in the case of publicly-traded companies.

#2. Retained earnings statement

If the income statement is a snapshot of a company’s financial health at any given time, this document — also known as a statement of owner’s equity, an equity statement, or a statement of shareholders’ equity — provides data over time. Management and investors want to know whether they are making or losing money, so the statement reconciles the beginning and ending retained earnings for the period (for example, over a year or so) using information from other financial statements such as net income.

#3. Balance sheet. 

This report form depicts a company’s statement of financial position as of the report date. Like the income statement, it is a snapshot of financial performance at a specific point in time because it can change daily or hourly depending on circumstances. The data is organized into broad categories of assets, liabilities, and equity. The total value of the company’s assets is usually equal to the total value of its liabilities plus the owners’ equity in the company. This equation must always have the same amount on both sides of the sheet.

#4. Cash flow statement

This report details a company’s cash inflows and outflows during a reporting period. These cash flows are classified as follows: operating activities, investing activities, and financing activities.

Nonprofit Statement of Financial Position

The nonprofit statement of financial position (also known as a balance sheet) is essentially a report that depicts the financial health of your organization. In a single document, it calculates your nonprofit’s assets, liabilities, and net assets.

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Keep in mind that if your company uses the accrual method of accounting rather than the cash method, this report will be more accurate and useful. Accrual accounting allows nonprofits to record revenue and expenses when they are earned rather than when the money enters or leaves the account (which is how cash accounting works). It creates a more precise report by providing a more accurate statement about when financial changes occurred.

What Makes Up your Nonprofit Statement of Financial Position?

The numbers for your nonprofit statement of financial position are derived entirely from your organization’s chart of accounts, which lists all of your accounts and ledgers in order to keep your finances in order. The numbers are then organized into the report’s three sections (assets, liabilities, and net assets).

Assets

What your nonprofit owns is defined in the assets section of your nonprofit statement of financial position. Cash assets, accounts receivable, property and equipment investments, long-term receivables, prepaid expenses, and other items are included.

Liabilities

In a nutshell, the liabilities section of your nonprofit statement of financial position summarizes what your organization owes. Accounts payable, debt, and other expenses will be included. For example, you’ll enter any expenses owed to your employees, vendors, and contractors here, as well as any debt your organization may have as an entity.

Net Assets

The net asset section is the third and final section of your statement of financial position. This section of the report displays your organization’s equity (your total assets minus your total liabilities).

Net Assets = Total Assets – Total Liabilities

These net assets are then divided and organized in accordance with the restrictions imposed on them. Donors, grant-makers, and government entities all reserve the right to limit the use of contributions made to nonprofits to specific activities or programs. That is why it is critical to carefully manage grants and other restricted contributions in your accounting system.

Statement of Financial Position vs. Balance Sheet

The difference between a statement of financial position vs. a balance sheet is significant when evaluating a company’s fiscal performance. Understanding the distinctions between a statement of financial position and a balance sheet can assist you in learning how businesses organize and track their financial progress. This knowledge is critical for finance professionals and other employees who review and evaluate these documents. In this article, we define financial statements and balance sheets, as well as explain the differences between these critical financial documents.

Statement of Financial Position vs. Balance Sheet: Key Differences

The primary distinction between a statement of financial position vs. a balance sheet is their scope. A balance sheet has a more limited scope because it is only one component of a financial statement. While a balance sheet can assist businesses in evaluating their assets, details from the entire statement of financial position are required to contextualize this information. Other distinctions between a statement of financial position and a balance sheet include:

Objective

A balance sheet summarizes a company’s assets and liabilities. A financial statement’s overarching goal is to reveal the company’s overall fiscal health. A balance sheet provides raw data, whereas a financial statement provides context for the data.

Inclusions

A financial statement contains more details than a balance sheet.

A balance sheet includes the following data:

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  • Assets: Any assets owned by the company, such as cash and cash equivalents, investments, inventory, accounts receivable, and prepaid expenses.
  • Liabilities: The means by which a company finances its assets, such as loans and debts, income taxes, and accrued expenses.
  • Shareholder equity: The amount of money left over for shareholders after the company has paid off all of its debts. This data is typically divided into two categories: equity capital and retained earnings.

A balance sheet is included in a financial statement, but it also includes the following information:

  • Income statement: A statement that shows the revenue, costs, and expenses incurred during the financial period.
  • Cash flow statement: Displays the amount of cash and cash equivalents that enter and leave the company.

Length

This document is much shorter because a balance sheet is only one part of a financial statement. It has fewer details and thus takes less time to prepare and evaluate. However, the length of a statement of financial position vs. balance sheet can vary.

Creation stage

The final stage in the financial reporting process is the creation of a financial statement, which includes all of the company’s fiscal information for the time period being assessed. A balance sheet can be created at any point in the reporting process, such as before or after the income statement and cash flow statement. A balance sheet can be made without a financial statement, but a financial statement is incomplete without one.

Conclusion

A company’s financial performance is determined by numbers. However, it ultimately conveys an impression of the company and its soundness. A financial analysis of a company’s financial statements, as summarized in annual reports and Form K-10s, is required for any serious investor seeking to properly understand and value a company.

However, it is also critical to understand that financial performance reflects the past and is never an exact predictor of the future. It also does not exist in a vacuum. Those assessing a company’s financial performance should always consider it in relation to other, comparable businesses, the industry as a whole, and the company’s history.

Frequently Asked Questions

What must be included in statement of financial position?

A balance sheet (also known as a statement of financial position) is a summary of all your company’s assets and liabilities (what your business owes). It shows you how much money you would have left over if you sold all of your assets and paid off all of your debts at any point in time.

What are the 3 elements of statement of financial position?

A financial position statement consists of three major components: assets, liabilities, and equity.

  • Assets. These are the resources owned by the company and acquired or generated through equity funds or external borrowings.
  • Liabilities.
  • Equity.

What is the main purpose of a statement of financial position?

A statement of financial position is commonly used to assess a position’s financial stability and potential risk. A typical statement will most likely include a snapshot of a company’s assets and liabilities (such as loans, VAT, and Corporation Tax).

What type of account affects the statement of financial position?

The five main elements of accounting—assets, liabilities, owner’s equity, revenue, and expenses—each have a different impact on a financial statement. However, how each element affects a financial statement is determined by whether the accounting system is cash or accrual basis.

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