Statement of Financial Position

Balance sheet (Statement of financial position) perspective of accounting starts with stating balance equation (Assets = Liabilities + Equities/”Net Assets”). This always does not means change in balance in one side (i.e. Assets) always affect other side (i.e. Liabilities or Equity). A very simple example to justify the statement is cash purchase of machine. Here, both elements of double entry transaction are covered under assets heading where, decrease in cash results in increase in value of machinery.

As the name suggest the statement discloses the financial position of an institution on the date as at mentioned in the statement of financial position. Financial position preceding and succeeding the date addressed on statement varies. Most statements we work after reflect the past position of an institution. It tells how successful an institution was and its position for particular time period in history. Analyzing the trend for a range of period prediction on future periods can be made. Statement of financial can be forecasted for some upcoming periods (1-3 years) or can be projected for unforeseen future (5-many years). There is no certainty that forecasted or projected financial statements do reflect true future position. However, while preparing forecast statements are prepared considering information available which reflect all possible economic changes for the period forecast is drawn.

A statement of financial position is prepared form “trial balance after year end adjustment”. The statement has two parts. Assets and Liabilities + Equity. Assets reflects company’s holding of all short and long term investments in machinery, land, building, bond and equity of other institution valued at cost or market price. Short term investments are called current assets which includes inventories, receivables and cash at bank. Liabilities show how much a company owes at the particular point of time. Long term liabilities includes debts that are repayable in more than 1 year time period, where loan are payable within a year they are included in current liabilities. Current liabilities includes other accounts like payables, GST payable, income tax payable, employees’ benefit payable, overdraft etc. The residual of assets over liabilities is called Equity (the owner’s interest).