How to read a statement of financial position

The statement of financial position is a list of balances at a point in time. Its heading reads: as at, and then one date. It is also called a balance sheet.

Asset

Something the business owns, or is owed.

Liability

Money the business owes to someone else.

Capital

What the business owes its owner: the money the owner put in, plus any profit left in the business.

It is the accounting equation set out as a statement: assets less liabilities equals capital. Everything a business has was paid for by a lender, a supplier or the owner, so the two halves always agree.

Income and expenses are not in it. They build up over a period and go to the statement of profit or loss.

Non-current assets

Assets kept for more than a year, such as equipment, a van or shop fittings.

Current assets

Inventory, trade receivables, bank and cash: assets that turn into cash within a year.

Current liabilities

Amounts due within a year, such as trade payables and accruals.

Non-current liabilities

Amounts due after more than a year, such as a long bank loan.

Non-current assets are shown at carrying amount: cost less accumulated depreciation, which is all the depreciation charged so far.

The year-end adjustments land here too. Prepaid expenses and accrued income are current assets. Accrued expenses and deferred income are current liabilities. VAT owed to HMRC is a current liability.

Inventory is the closing inventory from the year-end count.

Read the statement from the top, one subtotal at a time.

1. Read the heading. It gives the one date the balances were taken.
2. Non-current assets: take accumulated depreciation from cost to find each carrying amount.
3. Current assets: add inventory, trade receivables, prepayments, bank and cash.
4. Current liabilities: add trade payables, accruals and anything else due within a year.
5. Net current assets: current assets less current liabilities.
6. Net assets: non-current assets, plus net current assets, less non-current liabilities.
7. Capital: capital at the start of the year, plus any capital the owner paid in, plus the profit for the year, less drawings.
8. Compare the two. Net assets must equal the closing capital.

A loss does the opposite of a profit in step 7: it reduces capital.

Heron Quay Kayaks hires out and sells kayaks. It is owned by one person. These are its balances at the year end.

The equipment cost £18,000.00 and £6,500.00 of depreciation has been charged so far, so its carrying amount is £11,500.00.

Current assets come to £8,000.00 and current liabilities to £2,400.00, so net current assets are £5,600.00.

Net assets are £11,500.00 plus £5,600.00, less the loan of £5,000.00: £12,100.00.

Capital started the year at £9,600.00. The profit of £14,500.00 is added and the drawings of £12,000.00 are taken off. Closing capital is £12,100.00, the same as the net assets.

• Heading it for the year ended. Assets and liabilities are balances at a point in time, so the heading is as at one date.
• Showing a non-current asset at cost alone. It is shown at cost less accumulated depreciation.
• Using this year's depreciation charge in place of accumulated depreciation. The charge is one year's share. Accumulated depreciation is every year's share so far.
• Listing a long loan with the current liabilities. A loan due after more than a year is non-current.
• Treating drawings as a liability or as an expense. Drawings reduce capital.
• Using opening inventory. The inventory in the trial balance before the adjustments is the figure from the last year end. The statement shows the closing figure.
• Reading the carrying amount as what an asset would sell for. It is the part of the cost not yet charged as an expense.

• Net assets equal closing capital. If the two halves do not agree, something is wrong.
• Every asset, liability, capital and drawings balance in the trial balance appears once. No income or expense balance appears at all.
• The profit added to capital is the last line of the statement of profit or loss.
• Each year-end adjustment shows in both statements. An accrual raises an expense and adds a current liability. Depreciation raises an expense and adds to accumulated depreciation.