IGCSE Business Studies - 5.4.1 The main elements of a statement of financial position

Objective: Non-Current Liabilities, e.g. Bank Loans

Introduction

The Statement of Financial Position (also known as the Balance Sheet) provides a snapshot of a business's assets, liabilities, and equity at a specific point in time. It shows what the business owns (assets), what it owes (liabilities), and the owners' stake in the business (equity). Non-current liabilities represent financial obligations that are not expected to be settled within the next 12 months. Bank loans are a common type of non-current liability.

What are Non-Current Liabilities?

Non-current liabilities are debts that a business has to pay back in the future, but these debts are not due within the next year. They represent long-term financial obligations.

Examples of Non-Current Liabilities

• Bank Loans: Money borrowed from a bank that has a repayment term longer than one year.
• Mortgages: Loans taken out to purchase property.
• Debentures: A type of long-term debt issued to investors.
• Deferred Tax Liabilities: Taxes that are owed in the future due to temporary differences between accounting profit and taxable profit.
• Pension Liabilities: Obligations to provide pension benefits to employees in the future.

Bank Loans in Detail

Bank loans are a very common form of non-current liability. They are typically repaid in installments over a set period (e.g., 5 years, 10 years). The interest rate on the loan is agreed upon at the outset, and the business makes regular payments, including both principal (the original amount borrowed) and interest.

How Bank Loans are Shown in the Statement of Financial Position

Bank loans are listed as a separate item within the non-current liabilities section of the Statement of Financial Position. The amount shown is the outstanding balance of the loan at the balance sheet date.

Example Table: Statement of Financial Position - Extract (Non-Current Liabilities Section)

Item	Amount (£)
Bank Loans (5 year term)	$50,000
Mortgage	$100,000
Other Non-Current Liabilities	$10,000

Importance of Showing Non-Current Liabilities

Including non-current liabilities in the Statement of Financial Position is crucial for several reasons:

• Assessing Financial Risk: The level of non-current liabilities indicates the business's financial risk. High levels of debt can make a business vulnerable to economic downturns.
• Evaluating Solvency: Solvency refers to a business's ability to meet its long-term obligations. The amount of non-current liabilities is a key indicator of solvency.
• Attracting Investors and Lenders: A clear and accurate Statement of Financial Position, including non-current liabilities, helps to build confidence among investors and lenders.
• Decision Making: Management uses the information in the Statement of Financial Position to make informed decisions about financing, investment, and operations.

Relationship to Equity and Assets

The Statement of Financial Position follows the basic accounting equation: Assets = Liabilities + Equity. Non-current liabilities are a component of the liabilities side of this equation. The remaining part of the liabilities side is current liabilities (debts due within one year). Equity represents the owners' stake in the business and is the difference between assets and liabilities.

Summary

Non-current liabilities, such as bank loans, are a vital part of a business's financial structure. They represent long-term financial obligations and are accurately reported in the Statement of Financial Position. Understanding these liabilities is essential for assessing a business's financial health and making sound business decisions.