5.4.1 The Main Elements of a Statement of Financial Position

The Statement of Financial Position (also known as the Balance Sheet) provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the owners' stake in the company (equity).

Assets

Assets are resources controlled by the business that are expected to provide future economic benefits.

Assets are typically classified into two main categories: Current Assets and Non-Current Assets.

Current Assets

Current assets are assets that are expected to be converted into cash or used up within one year.

• Cash and Bank Balances: Money held in the company's bank accounts and on hand.
• Trade Receivables: Amounts owed to the company by its customers for goods or services sold on credit.
• Inventory (Stock): The value of goods held for sale.
• Prepaid Expenses: Expenses paid in advance, such as rent or insurance.

Non-Current Assets

Non-current assets are assets that are not expected to be converted into cash or used up within one year. They are typically used in the business's operations for a longer period.

• Property, Plant, and Equipment (PP&E): Includes land, buildings, machinery, and vehicles.
• Intangible Assets: Assets that have no physical form, such as patents, trademarks, and goodwill.

Liabilities

Liabilities are amounts owed by the business to external parties (creditors).

Liabilities are also classified into two main categories: Current Liabilities and Non-Current Liabilities.

Current Liabilities

Current liabilities are obligations that are expected to be settled within one year.

Trade Payables: Amounts owed to the company's suppliers for goods or services purchased on credit. This represents the money the business owes to its suppliers for purchases made on credit.

Overdraft: A short-term loan provided by a bank, allowing the company to spend more money than it has in its account. It's a type of current liability because it's expected to be repaid within a year.

Salaries and Wages Payable: Amounts owed to employees for work already performed but not yet paid.

Income Tax Payable: Taxes owed to the government.

Other Current Liabilities: Any other short-term obligations.

Non-Current Liabilities

Non-current liabilities are obligations that are not expected to be settled within one year.

• Long-Term Loans: Loans from banks or other lenders with a repayment period of more than one year.
• Debentures: Formal loans issued to the public.
• Deferred Tax Liabilities: Taxes that will be paid in the future.

Equity

Equity represents the owners' stake in the company. It's the residual interest in the assets of the business after deducting liabilities.

• Share Capital: The amount of money invested by shareholders in exchange for shares in the company.
• Retained Earnings: The accumulated profits of the company that have not been distributed to shareholders as dividends.

Element	Classification	Description
Cash and Bank Balances	Current Asset	Money held in the company's bank accounts and on hand.
Trade Receivables	Current Asset	Amounts owed to the company by customers.
Inventory (Stock)	Current Asset	Value of goods held for sale.
Prepaid Expenses	Current Asset	Expenses paid in advance.
Property, Plant, and Equipment (PP&E)	Non-Current Asset	Land, buildings, machinery, and vehicles.
Intangible Assets	Non-Current Asset	Patents, trademarks, and goodwill.
Trade Payables	Current Liability	Amounts owed to suppliers for purchases.
Overdraft	Current Liability	Short-term loan from a bank.
Salaries and Wages Payable	Current Liability	Amounts owed to employees.
Income Tax Payable	Current Liability	Taxes owed to the government.
Long-Term Loans	Non-Current Liability	Loans with a repayment period longer than one year.
Debentures	Non-Current Liability	Formal loans issued to the public.

Understanding the components of a Statement of Financial Position is crucial for assessing a company's financial health and stability. It helps stakeholders, such as investors, creditors, and management, make informed decisions.