Fundamentals of Accountancy, Business and Management 2

Statement of financial position

Statement of financial position (Balance Sheet)
The statement of financial position also known as a Balance Sheet represents the
Assets, Liabilities and Equity of a business at a point in time.
For example:
Assets include cash, stock, property, plant or equipment - anything the business
owns. Liabilities are what the business owes to outside parties, suppliers, bank or
business loans. Equity is the remaining proportion of the owner's financial interest
in the business after deducting any liabilities from the total assets in the business.
Reading your Financial Position (Balance Sheet)
When reading your balance sheet, it represents what your business owns and
controls (the Assets), what it owes (the Liabilities) and the investment that the
owner has contributed (the Equity) at a particular point in time.
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The accounting equation is:

Case Study
Paul has created his statement of financial position at startup. It shows that Paul
has $9,438 in the bank, he has various property, plant and equipment totalling
$3,000 and furniture & fixtures of $400. He has no liabilities and his investment in
the business by way of capital is $12,838. You can see that Paul’s total assets
equals the total of the liabilities and equity for his business. It is displayed below.
Fundamentals of Accountancy, Business and Management 2

Definition of Statement of Financial Position

The statement of financial position is another name for the balance sheet. It is
one of the main financial statements.
The statement of financial position reports an entity's assets, liabilities, and the
difference in their totals as of the final moment of an accounting period.
The structure of the statement of financial position is similar to the basic
accounting equation. For a corporation the format will be: Assets = Liabilities
+  Stockholders' Equity. A non profit organization's format will be: Assets =
Liabilities + Net Assets.
The statement of financial position must reflect the basic accounting principles
and guidelines such as the cost, matching, and full disclosure principle to name a
few. Accordingly, the statement of financial position is more meaningful when it is
prepared under the accrual method of accounting.

The statement of owner's equity portrays changes in the capital balance of a

business over a reporting period. The concept is usually applied to a sole
proprietorship, where income earned during the period is added to the
beginning capital balance and owner draws are subtracted. The result is the
ending balance in the capital account.

The amount of owner's equity is increased by income and owner

contributions. The balance is decreased by losses and owner draws. Thus, the
format of the statement of owner's equity may include the following line
items:

Beginning capital balance

+ Income earned during the period
- Losses incurred during the period
+ Owner contributions during the period
- Owner draws during the period

= Ending capital balance 

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For example, a business has $100,000 of capital at the beginning of a reporting

period. The entity earns $15,000 of income, and the owner withdraws $5,000
from the capital account. The resulting statement of owner's equity reveals
the following information:

  $100,000 Beginning capital balance

    +15,000 Income
   -   5,000 Draw

= $110,000 Ending capital balance 

The report may also be described as the statement of changes in owner's

equity.

Statement of Owner's Equity Example

Here is a sample Statement of Owner's Equity of a service type sole
proprietorship business, Strauss Printing Services. All amounts are assumed and
simplified for illustration purposes.
Assume that the company started the year 2019 with $100,000 capital. During the
year, the owner made $10,000 additional contributions and $20,000 total
withdrawals. The Statement of Owner's Equity would look like this:
Strauss Printing Services
Statement of Owner's Equity
For the Year Ended December 31, 2019
       
Strauss, Capital – beginning $   100,000
Add
Additional Contributions   10,000
:
  Net Income   57,100
Total $   167,100
Less: Strauss, Drawings   20,000
Strauss, Capital – ending $   147,100
Explanation and Pointers
Fundamentals of Accountancy, Business and Management 2

1. A Statement of Owner's Equity (SOE) shows the owner's capital at the start
of the period, the changes that affect capital, and the resulting capital at the
end of the period. It is also known as "Statement of Changes in Owner's
Equity".
2. A typical SOE starts with a heading which consists of three lines. The first
line shows the name of the company; second the title of the report; and third
the period covered.
3. The title of the report is Statement of Owner's Equity. This is used for sole
proprietorships. For partnerships, the title used is "Statement of Partners'
Equity" and for corporations, "Statement of Stockholders' Equity".
4. Notice that the third line is worded "For the Year Ended..." This means that
the SOE presents information for a specific span of time. In the above example,
the period covers 1 year that ends on December 31, 2019. Hence, the amounts
presented pertain to changes to owner's equity from January 1, 2019 to
December 31, 2019.
5. The capital account used in the illustration is Strauss, Capital. The capital
account used would vary from company to company.
6. Income increases capital. Expenses decrease it. Net income is equal to
income minus expenses. Hence, net income would increase the capital
account. If expenses exceed income, there is a net loss. In such case, net loss
will decrease the capital account.
7. Notice that the net income above, $ 57,100, is the bottom-line amount in
the company's Income Statement.
8. Strauss, Drawings represents the total withdrawals made by the owner
during the period. The owner made $ 20,000 total drawings. This amount is
deducted to get the capital balance.
9. The Statement of Owner's Equity example above shows that the company
has $147,100 in capital as a result of the following: $100,000 balance at the
beginning of the year, plus $10,000 owner's contributions during the year, plus
$57,100 net income, and minus $20,000 withdrawals.
10. Good accounting form suggests that a single line is drawn every time an
amount is computed (it signifies that a mathematical operation has been
completed). The bottom-line amount is double-ruled, i.e. $ 147,100.
Fundamentals of Accountancy, Business and Management 2

Statement of Comprehensive Income

The statement of comprehensive income should be presented immediately after
the income statement. (However, it could be combined with the income
statement.)
The term comprehensive income consists of 1) a corporation's net income (which
is detailed on the corporation's income statement), and 2) a few additional items
which make up what is known as other comprehensive income.
The items which make up other comprehensive income include:
 Unrealized gains or losses on derivatives used in hedging
 Unrealized gains or losses on pension and postretirement liabilities
 Foreign currency translation adjustments
The amounts of these other comprehensive income adjustments (positive or
negative) are not included in the corporation's net income, income statement, or
retained earnings. Instead the adjustments are reported as other comprehensive
income on the statement of comprehensive income and will be included
in accumulated other comprehensive income (which is a separate item within
stockholders' equity).
The following shows the format of the statement of comprehensive income:
Fundamentals of Accountancy, Business and Management 2

*Every financial statement should inform the reader that the notes are an integral
part of the financial statements and should be read for important information.
The adjustments for the items defined as other comprehensive income will be
included in the amount of accumulated other comprehensive income, which is
reported in the stockholders' equity section of the balance sheet:

Cash flow is the money that is moving (flowing) in and out of your business in a
month. Although it does seem sometimes that cash flow only goes one way - out
of the business - it does flow both ways.1
 Cash is coming in from customers or clients who are buying your products
or services. If customers don't pay at the time of purchase, some of your
cash flow is coming from collections of accounts receivable.
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 Cash is going out of your business in the form of payments for expenses,
like rent or a mortgage, in monthly loan payments, and in payments for
taxes and other accounts payable.

Cash vs. Real Cash

For some businesses, like restaurants and some retailers, cash is really
cash – currency and paper money. The business takes cash from
customers and sometimes pays its bills in cash. Cash businesses have a
special issue with keeping track of cash flow, especially since they may not
track income unless there are invoices or other paperwork.

Think of 'cash flow' as a picture of your business checking account over

time. If more money is coming in than is going out, you are in a "positive
cash flow" situation and you have enough to pay your bills. If more cash is
going out than coming in, you are in danger of being overdrawn, and you
will need to find money to cover your overdrafts.