Of the four crucial financial statements used to understand a business’s performance, arguably the most important is the statement of financial position. Also known as the balance sheet, this document helps business owners track the performance of their company and is an important benchmark for external stakeholders and regulators who need insight into a company’s operations and finances.
What is a statement of financial position?
A statement of financial position outlines a glimpse into the financial circ*mstances of a business over a specific time period. Typically, it’s used alongside income statements, cash flow statements and statements of shareholder equity.
The statement lists the assets, liabilities and equity of a company. It records what the business owns, what it owes and the total net worth of the business.
Although balance sheets aren’t highly valuable for businesses to understand financial health and performance, it’s only mandatory for publicly traded companies to create them.
What goes in a statement of financial position?
The formula underpinning the calculation of a business’s financial position is straightforward:Assets = Liabilities + Shareholder Equity.
Let’s break these down some more.
1. Assets
Under the assets column of a financial statement lies anything that the business owns, whether that’s cash in the bank, inventory, property or proprietary equipment. These assets are subsequently categorised as either current or non-current assets.
Current assets
The first listing on the statement, current assets, refers to cash or cash equivalents, which can be easily converted into cash within a year or less.
They consist of:
- Money owed by customers
- Inventory
- Repaid expenses (e.g., insurance, rent)
- Securities that can be traded, bought or sold on the market
Non-current assets
Assets with value that take longer to actualise are considered non-current. Examples include fixed assets (i.e., an office, factory building or equipment), which won’t realise their full value within a financial year.
Since these assets are long-term investments, their depreciation must be accounted for in the statement of financial position.
2. Liabilities
Liabilities record what is owed by the business, such as salaries, taxes and any debts. Payments that a business owes to third parties—supply chain partners, lenders or others—must be noted as liabilities.
These are recorded in the second column beside the assets section, and are also categorised by current and non-current liabilities:
Current liabilities
- Wages
- Accounts payable (repayments owed for credit purchases)
- Taxes
- Utility bills
- Rent
- Loans
- Accounts
Non-current liabilities
Also known as long-term liabilities, these refer to outstanding debts and payments that cannot be settled within a year, such as:
- Long-term interest
- Lease liabilities
- Bonds payable
- Deferred tax and revenue
3. Equity
Finally, under shareholder equity, a business needs to record the amount of money funded by company owners and shareholders in its creation and startup. Equity also accounts for all revenue attributable to owners once liabilities have been paid.
Put more simply, equity equals assets minus liabilities. It’s the proportion of the business that is owned outright. On the statement of financial position, equity is placed underneath liabilities and can include:
- Common stock (ownership shares)
- Preferred stock (this gives stockholders priority over common stockholders)
- Retained earnings (net income left over once the company has paid out shareholder dividends)
- Treasury stock (shares issued and reacquired by the company)
- Additional paid-in capital (amounts shareholders have paid more than the par value of shares)
Why is a statement of financial position important?
Whether it’s for internal review by senior business personnel, shareholders or employers, these statements shed light, ultimately, on a business’s success or failure. It serves to guide stakeholders on what steps to take to correct or maintain performance.
Remember, it’s a temporary snapshot: A statement of financial position reflects a company’s performance over a given time period, such as a month, quarter or year. That means that while it's a good indicator of past and current performance, it is not necessarily a good basis to forecast future performance. This is where the more modern tool comes in.
For external reviews, the statement provides transparency into a business’s use of resources, the origin of its financing and other metrics like debt-to-equity ratio, liquidity, profitability and others. Auditors will also want to use these statements to check that a company is fully compliant with relevant regulations.
What is a consolidated statement of financial position?
Companies that have multiple divisions will use a consolidated statement of financial position to record the assets, liabilities and equity of subsidiaries and the parent company that controls them. They also tend to bring together the income and cash flow statements of each division.
Usually, consolidated statements like this are reserved for public companies. The purpose is to adhere to Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), treating each division holistically as a single entity so that regulators get a transparent view of a corporate group in its entirety.
Tips for filing statements of financial positions
1. Check your formatting
The formatting requirements for reporting vary between different locations. One notable difference, for example, is that for US-based vs. non-US-based companies the statement of financial position format changes.
Since US organisations follow GAAP, their statements list assets, liabilities and equity in order of the least to the most liquid. So, cash-convertible assets that take the longest to convert come first and the ones that convert the quickest come last. However, most companies outside the US follow IFRS guidelines, which typically list asset liquidity the other way around.
2. Ensure balance
The main reason why the statement of financial position is also called the balance sheet is simple: All calculations have to balance out. To work out the value of a company’s assets, you need to make sure they equal liabilities and shareholder equity once it’s been issued. If it doesn’t, it might be for the following reasons:
- Inaccurate transaction recording
- Exchange rate errors
- Inventory errors
- Incorrect equity calculations
- Inaccurate loan depreciation
To make sure the statement is accurate and balances out, always double-check totals and make sure there are no omissions of important data.
3. Streamline the process with automation
Through innovative financial reporting software, accounting teams can reduce the level of manual workload from tedious data entry while also boosting the accuracy of financial position statements.
Reporting company balances often requires drawing from multiple sources, but this process can be made easy with financial statement software from Workiva, which lets you automatically connect several ledgers and source systems within a single spreadsheet.
Using a single platform can also support data transformation and slicing, saving valuable time and supporting analysis that is crucial for making sound business decisions. You can also enable access control so that only the people with the correct permissions can view the data.
Workiva can support your business reporting and give you some much needed time back. To find out more, request a demo today.
