The statement of financial position for a company is often referred to as the balance sheet. It is used to report the assets, liabilities, and equity of a business on a given date – a summary, or snapshot, of its overall value at a certain point in time.
Below, we provide a brief overview of the statement of financial position, including the information it should contain and when you need to prepare one.
The statement of financial position
A statement of financial position is a financial statement that summarises a company’s assets (what it owns), liabilities (what it owes), and equity (assets less liabilities) on a particular date – usually at the end of a financial month or financial year.
It shows the economic position of a company on the date of the statement. So, it is an essential tool for understanding the financial health of your business, making financially sound decisions to sustain and grow your company, and securing capital from investors and lenders.
The statement of financial position also plays an important role when preparing your company’s annual accounts. It is one of three financial reports you must include, the other two being an income statement (also known as a profit and loss statement) and a cash flow statement.
What is included in a statement of financial position?
The three main components of the statement of financial position are assets, liabilities, and equity, which are broken down into various categories.
However, the way in which the statement is presented varies from company to company, depending on the types of assets, liabilities, and equity they have.
Broadly, the statement of financial position should show the following items, where applicable:
- Current assets (e.g. cash at bank, cash in hand, inventory)
- Trade receivables (debtors; money that clients or customers owe the business)
- Fixed assets (e.g. property, vehicles, machinery, equipment)
- Intangible assets (e.g. trademarks, patents, licences, copyrights)
- Trade payables (money that the company owes to its suppliers and service providers)
- Business tax (VAT, Corporation Tax, PAYE payments due)
- Bank loans and mortgages
- Directors’ loans
- Share capital (the amount of money the shareholders have invested in shares)
- Additional paid-in capital (e.g. share premiums)
- Retained profit brought forward
- Current year’s profit/loss
The statement of financial position follows the basic accounting equation of Assets = Liabilities + Equity. Therefore, the resulting figure shown at the end of the statement will be the difference between the company’s assets and liabilities. This is the overall value or net worth of the company on the date the statement is produced.
When do I need to prepare a statement of financial position?
Companies are legally required to generate a statement of financial position when preparing their annual accounts for shareholders, Companies House, and HMRC.
Therefore, you will need to prepare a statement at least once a year on the accounting reference date (ARD). The ARD is the end of your company’s financial year, so all statements and reports in your accounts must be made up to that date.
However, it is worthwhile producing a statement of financial position on a regular basis, for example, at the end of each financial month and quarter. This will provide valuable insights, helping you to keep track of your company’s finances and growth over time, and informing future decision-making.
Additionally, if you are considering issuing dividends to shareholders, the statement will help you to determine how much, if any, distributable profit the company has available, and whether paying dividends is the right decision at that time. Upon issuing dividends, the retained earnings on the statement will reduce.
A statement of financial position is also an easy way to show prospective investors, creditors, and suppliers the financial standing of your business. This information will enable them to make informed decisions about their likely return on investment or the level of risk involved in lending capital or supplying goods to your company.
You can prepare these statements yourself, but it is best to appoint an accountant to take care of your accounting needs. Double-entry bookkeeping, which is the key principle in producing an accurate balance sheet, can be complex if you do not have experience in this area.
Aside from being one of the three financial reports that you must include in your company’s annual accounts, the statement of financial position is an important tool that you can use to assess the financial health of your business at a particular point in time.
Whether you simply want to compare the company’s performance against previous months or years, secure funding from lenders or new investors, or determine the future viability of the business, the statement will provide valuable insight and help you in your decision-making.
If you have any questions about this post, or need advice on any other aspect of running a company, please leave a comment below or contact our company formation team.