Balance Sheet: Key parts of the statement of financial position

The balance sheet, formally known as the statement of financial position, comprises eleven distinct components that provide a comprehensive snapshot of an entity’s financial health at a specific point in time. These parts are systematically categorised into assets, liabilities, and equity to reflect the fundamental accounting equation.

By examining current and non-current classifications, stakeholders can assess liquidity, solvency, and operational efficiency. This article details the specific elements required for a compliant financial statement, ranging from liquid cash assets to long-term shareholder interests.

Understanding these segments allows for better financial analysis and more informed investment decisions within any business structure.

Key Takeaways

• The balance sheet represents a static financial snapshot of a company at a specific calendar date.
• Assets are divided into current and non-current categories based on their liquidity and intended use.
• Liabilities represent the external claims on company resources that must be settled over time.
• Equity accounts for the residual interest of the owners after all business liabilities are deducted.
• Total assets must always equal the combined sum of total liabilities and total shareholder equity.

The Balance Sheet is the next step in the Accounting Cycle after the Income Statement is completed. It is one of 3 financial statements that is prepared by an accountant. The other 2 are Income Statement and Cash Flow Statement.

It reports the assets, liabilities, and capital of a business. The Balance Sheet is also called a Statement of Financial Position. In the vertical presentation, there are 10 important aspects to note for the purpose of answering questions.

Important parts of the Balance Sheet

Non-current assets

The non-current assets in the business are shown at cost in the Balance Sheet. These items are also called fixed assets and remain in the business for more than one year.

• Land and premises
• Buildings
• Fixtures and fittings
• Machinery and equipment
• Motor vehicles
• Office furniture and appliances

Current assets

Current assets are listed separately from fixed assets on the Balance Sheet. They last within a year in a business. These items show the liquidity of the business because they can easily be turned into cash if needed.

• Stock/inventory
• Accounts receivable/debtors
• Prepaid expenses
• Bank
• Cash

Current liabilities

Current liabilities are short-term debts or items paid within one year. These items fund the short-term needs of the business.

• Accounts payable/creditors
• Short-term loans
• Prepaid revenue
• Accrued expenses
• Interest payable
• Bank overdraft

Working capital

Working capital measures liquidity of the business on the Balance Sheet. Having cash and items that can convert to cash easily ensures that the business can pay salaries, utilities and rent every month.

Working capital is current assets minus current liabilities and appears in the first part of the Balance Sheet. It means it looks at inventory, prepaid expenses, debtors, cash in hand and cash in the bank against short-term loans, prepaid revenue, accrued expenses, and creditors.

Capital employed

Capital employed is the investments used to operate the business to generate profits. It shows how the business is investing its money. It is calculated as total assets minus current liabilities and appears in the first part of the Balance Sheet.

By employing capital, companies invest in the long-term future of the company. A high return on capital employed is a great indication that the business is using its investments effectively.

Non-current liabilities

Non-current liabilities are debts that fund long-term investments. These items last more than one year. Long-term investors use non-current liabilities to gauge whether a company is using excessive leverage. The more stable a company’s cash flows, the more debt it can support without increasing its default risk.

• Long-term bank loan
• Investor’s loan
• Debenture loan
• Bonds payable
• Mortgage

Opening capital

Opening capital is the invested money brought forward from a previous period to the beginning of a new period. If it is not given in a question, it is calculated as total opening assets minus total opening liabilities. This is presented in the General Journal. In the second part of the Balance Sheet, it is called Opening balance under the heading Capital.

Net profit

The Net profit is brought forward from the Income Statement. It is added to Opening capital in the Balance Sheet. It is also called Profit for the year. If you made any mistakes in the Income Statement, the wrong Net profit figure will throw off the Balance Sheet. If there is a loss, the figure is subtracted from the Opening capital.

Drawings

Drawings is money or goods withdrawn from the business by the owner for personal use. It appears at the end of the Balance Sheet as a deduction from Capital after Net profit is added.

This activity occurs when the owner pays for personal expenses using the company’s credit card or takes home goods for resale without paying for them. It is important to show the deduction on the Balance Sheet to reflect a realistic figure for the owner’s investment.

Owner’s equity

Equity represents the value of all fixed and current assets in the business if it was to be liquidated. The term covers everything that the business owns and tells stakeholders exactly what the business is worth if it was turned into cash.

This would occur if it sold its goodwill, land, buildings, motor vehicles, machinery and add it to its cash and cash equivalents. It is calculated as total assets minus total liabilities and appears in the second section of the Balance Sheet.

Conclusion

These 10 key aspects make up the Balance Sheet. Practise the format for the Balance Sheet regularly and all the items will fall into place when doing questions. Whether the question presents all the items or some are left out, you will be able to put down the format smoothly and concentrate on balancing your statement.

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The essential components of a Statement of Financial Position

The balance sheet is divided into sections that balance the total resources owned by a company against the claims made by creditors and owners. The eleven parts typically identified include:

Current Assets: These are short-term resources expected to be converted into cash within one year, including inventory and accounts receivable.

Non-Current Assets: Long-term investments and tangible holdings like property, plant, and equipment (PPE) that provide value over multiple years.

Intangible Assets: Non-physical assets such as patents, trademarks, and goodwill that hold significant long-term value.

Current Liabilities: Financial obligations due within the current operating cycle or twelve months, such as accounts payable and short-term loans.

Non-Current Liabilities: Long-term debts including mortgages, bonds payable, and deferred tax liabilities that are not due within the immediate year.

Share Capital: The amount of money invested by shareholders in exchange for stock, representing the initial funding of the corporation.

Retained Earnings: The cumulative amount of net income that a company retains for reinvestment rather than distributing as dividends.

Cash and Cash Equivalents: The most liquid part of the balance sheet, encompassing currency, bank balances, and short-term treasury bills.

Inventory: The raw materials, work-in-progress goods, and finished products held by a business for sale to customers.

Accounts Receivable: Money owed to the business by customers for goods or services delivered on credit.

Accounts Payable: The opposite of receivables, representing the money a company owes to its suppliers for items purchased on credit.

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See also:

Accounting Cycle: Complete basic accounting in 8 steps

Income Statement: 6 key points for reporting profitability 

Trial Balance: 6 important things to know

Journals: Complete 7 Day Books with 4 types of transactions

Ledger accounts: Simple breakdown of Types, Format, Double Entry, Balance

Cash Book: How to record cash, bank and discounts

Assets: Owned fixed and liquid items with a debit balance

Liabilities: Owed long and short-term items with a credit balance

Expenses: Spending that’s direct, indirect, operating and non-operating

Capital: Invested assets and the liquidity of a business

Income Statement: 6 key points for reporting profitability  

ALICE: Assets, Liabilities, Income, Capital, Expenses

Goods for resale: Stock, Purchases, Sales, Carriages and Returns