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  The Statement of Financial Position

Introduction to the Statement of Financial Position

At a specific moment in time this sets out the financial position of a business. We describe a little before in the chapter that the statement depicts the forms where the wealth of the business is held and how much wealth is held in each form. Though, we can be more particular about the nature of this statement through saying that it sets out the assets of the business, at one side and alternatively the claims against the business. Before looking at the statement of financial position in extra detail, we required to be clear about what is the meaning of these terms. 

ASSETS

An asset is fundamentally a resource held through the business. For a specific item to be termed as an asset for accounting purposes it must have the following characteristics:

  • A probable future benefit must exist.
  • The business must have the right to control the resource.
  • The benefit must arise from some past transaction or event.
  • The asset must be capable of measurement in monetary terms.

CLAIMS

An obligation of the business to offer cash, or some other type of advantage, to an outside party is termed as claim.

  • Equity

Liabilities

ASSETS

An asset is fundamentally a resource held through the business. For a specific item to be termed as an asset for accounting purposes it must have the following characteristics:

  • A probable future benefit must exist.

The meaning of this is just the item must be supposed to contain some future monetary value. This value can occur through its use in the business or by its hire or sale. So, an obsolete piece of tool which could be sold for scrap would still be referred an asset, while an obsolete piece of tool that could not be sold for scrap would not be considered as one.

  • The business must have the right to control the resource.

Except the business controls the resource, it cannot be considered as an asset for accounting purposes. So, for a business that are offering holidays on barges, the canal system might be extremely valuable resource, but because the business will not be capable to manage the access of others to the canal system, it cannot be considered like an asset of the business. (Though, the barges owned through the business would be considered as assets.)

  • The benefit must arise from some past transaction or event.

The meaning of this is the transaction (or other event) providing rise to the business's right to the advantage must have already happened, not be one that will occur at some future date. So an agreement through a business to buy a piece of equipment on some future date would not mean that the item is at present an asset of the business.

  • The asset must be capable of measurement in monetary terms.

Except the item can be considered in monetary terms, along with a reasonable degree of reliability, it will not be considered like an asset for inclusion on the statement of financial position. So, the title of a magazine (for instance Hello! or Vogue) that was produced through its publisher might be very useful to that publishing business, but this value is generally hard to quantify. So it will not be considered as an asset.

Note: all the four conditions must apply. If one of them is missing, the item will not be considered as an asset for accounting purposes and that is why not appear on the statement of financial position.

We can observe that these conditions will strictly limit the type of items that may be termed to as 'assets' in the statement of financial position. Specifically not all resources exploited through a business will be assets of the business for accounting purposes. A number of them such as the canal system or the magazine title Hello!, might well be assets in a broader sense, but not for accounting purposes. One time an asset has been obtained by a business, it will carry on to be treated an asset until the advantages are exhausted or the business disposes of it in some way.                                   

The types of items that frequently appear as assets in the statement of financial position of a business involve:

  • Property
  • Plant and equipment
  • Fixtures and fittings
  • Patents and trademarks
  • Trade receivables (debtors)
  • Investments outside the business      

Note: an asset does not contain to be a physical item - it might be a non-physical item which provides a right to specific benefits. Assets (like inventories) which have a physical substance and can be touched are considered as tangible assets. Assets (like patents) that have no physical substance but that however give expected future benefits are considered as intangible assets.

CLAIMS

An obligation of the business to offer cash, or some other type of advantage, to an outside party is termed as claim. It will generally take place as a result of the outside party giving assets for use through the business.

Against a business there are basically two types of claim:

  • Equity

This demonstrates the claim of the owner(s) against the business. This claim is occasionally considered as the capital of owner. Some discover it difficult to understand how the owner can have a claim against the business, specifically when we think on the instance of a sole-proprietor-type business in which the owner is effectively, the business. Though, for the purposes of accounting, a clear difference is made among the business (anything its size and form) and the owner(s). The business is looked like a being quite separate from the owner and this is uniformly true for a sole proprietor. It is seen like a separate entity along with its own separate presence and while financial statements are ready they relate to the business rather than to the owner(s). The meaning of this is the statement of financial position will imitate the position of the business like a separate entity. Observed from this perspective, any funds contributed through the owner will be seen like coming from outside the business and will come out as a claim against the business in its statement of financial position. Like we have just explained that the business and the owner are separate for accounting purposes, irrespective of the kind of business concerned. It is also right that the statement's equity section of financial position is generally similar irrespective of the kind of business concerned.

For instance, companies must make a difference among that part of it which occurs from retained profits and that part that occur from the owners putting in cash to start up the business, generally through buying shares in the company.

  • Liabilities

Liabilities stand for the claims of all organisations and individuals, separately from the owner(s). They take place from past transactions or events like supplying goods or lending money to the business. While a liability is settled it can only be by an outflow of assets (generally cash).

One time a claim from the owners or outsiders has been acquired through a business, it will stay like an obligation until it is settled. Now the meaning of the words assets, equity and liabilities has been established, we can continue and discuss the relationship among them. This relationship is relatively simple. If a business wants to obtain assets, it will have to increase the essential funds from somewhere. It may increase the funds from the owner(s) or from other outside parties or from both.

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