Statement of financial position definition
/What is the Statement of Financial Position?
The statement of financial position is another term for the balance sheet. The statement lists the assets, liabilities, and equity of an organization as of the report date. As such, it provides a snapshot of the financial condition of a business as of a specific date. It is one of the financial statements, and so is commonly presented alongside the income statement and statement of cash flows.
How to Use the Statement of Financial Position
The information on the statement of financial position can be used for a number of financial analyses, such as comparing debt to equity or comparing current assets to current liabilities. Or, information on the balance sheet can be compared to information on the income statement, such as a comparison of sales to total assets. These analyses are typically presented on a trend line, so that you can detect any changes in the financial position of the reporting entity over time.
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Format of the Statement of Financial Position
The format of the statement of financial position follows the basic accounting equation, which states that assets equal the sum of all liabilities and equity. The formula is as follows:
Assets = Liabilities + Equity
This means that all asset line items are presented first, with a total that matches the totals for liabilities and equity, which are presented next.
Contents of the Statement of Financial Position
Common line items in the report are noted below. This layout is known as a vertical format, where all asset, liability, and equity items are contained within a single column. Under the horizontal layout, assets are listed in the first column, while liabilities and equity items are listed to the right, in a second column. The most common line items in either format are noted next.
Assets
Cash
Accounts receivable
Inventory
Fixed assets
Other assets
Liabilities
Accounts payable
Accrued expenses
Sales tax liability
Income taxes payable
Debt
Equity
Common stock
Additional paid-in capital
Retained earnings
When the Statement of Financial Position is Used
The statement of financial position is most commonly issued when a business is operating under a double entry accounting system, since this approach provides for ongoing updates to asset, liability, and equity accounts. If an entity is instead using a single entry accounting system, there is no easy way to construct the statement, which is usually compiled manually. In addition, the statement provides more meaningful information when it is prepared using the basic accounting principles mandated by the accounting frameworks, such as generally accepted accounting principles or international financial reporting standards.