The elements of a statement of financial position (also known as a balance sheet) are primarily divided into three main categories:
1. Assets
Assets represent resources owned or controlled by the company that have economic value. They are usually classified into:
- Current Assets: These are assets expected to be converted into cash or used up within one year. Examples include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses.
- Non-Current (or Fixed) Assets: These are long-term assets that provide value over more than one year. Examples include property, plant, and equipment (PPE), long-term investments, and intangible assets such as patents, trademarks, and goodwill
2. Liabilities
Liabilities are the company’s financial obligations or debts owed to others. They are categorized as:
- Current Liabilities: Obligations due within one year, such as accounts payable, short-term loans, accrued expenses, and business taxes.
- Non-Current Liabilities: Long-term debts or obligations due beyond one year, such as bonds payable, long-term loans, mortgages, and lease obligations
3. Equity
Equity represents the residual interest in the assets of the company after deducting liabilities. It includes:
- Share Capital: The amount invested by shareholders through shares.
- Additional Paid-in Capital: Such as share premiums.
- Retained Earnings: Accumulated profits reinvested in the business, including the current year's profit or loss.
- Other equity components depending on the company’s structure
Summary
The statement of financial position follows the fundamental accounting equation:
Assets=Liabilities+Equity\text{Assets}=\text{Liabilities}+\text{Equity}Assets=Liabilities+Equity
This equation ensures that the total resources owned by the company are balanced by claims from creditors (liabilities) and owners (equity)
Additional Notes
- Assets and liabilities are often further detailed by liquidity and maturity.
- Intangible assets are included only if acquired externally.
- The equity section may include common stock, retained earnings, and other equity accounts.
- The statement provides a snapshot of the company’s financial health at a specific point in time
This structure helps stakeholders assess the company’s financial position, liquidity, and capital structure.
