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LALL POA LESSONS

Syllabus SESSION 14 9. Construct Balance Sheets

Objective
10. Determine which items in a Balance Sheet will
change as a result of various transactions.

4. *prepare classified balance sheet in vertical style;

5. explain the significance of the working capital for the

operation of a business;

• As previously learnt, A statement of financial position, also called a balance sheet, is a

financial statement setting out the book values of assets, liabilities and capital at a
particular point in time.
• Having completed the Income Statement, several accounts (ledgers) were closed off.
The remaining accounts in The Trial Balance is what would be used to create the
Statement of Financial Position; i.e. Assets, Liabilities, Capital.
• Review what items affects the Capital Account.

Format of the Statement of Financial Position

Statement of Financial Position can be drawn up in two (2) formats, i.e.
(i) Horizontal Style (Older method)
(ii) Vertical Style (this will mainly be used)

In drawing up the statement of financial position, Assets and Liabilities can be stated either in
order of Liquidity or Permanence. We will look at this after examining the basic format.

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Components of the Statement of Financial Position

1. Net Current Assets (Working Capital) = Current Asset – Current Liabilities.

2. Net Assets = Non-Current Assets + Working Capital – Non-Current Liabilities.

Referring back to Section 12 and the items that affect the Capital Account, we can now display
this account in a vertical format as seen below:

Statement of Financial Position (Order of Permanence)

As stated earlier, Order of Permanence is one method of stating the Assets and Liabilities.
Order of permanency is where the assets and liabilities are shown as per their permanency in
the business, in other words, the assets and liabilities which cannot be converted into cash
easily and quickly. These assets and liabilities are listed from the most permanent to the least
permanent.
The Statement of Financial Position above is drawn up when this method. Let’s examine it.
Order of Permanence is the inverse of Order of Liquidity.

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Statement of Financial Position (Order of Liquidity)

Order of liquidity is the presentation of assets and liabilities in the balance sheet in the order of
the amount of time it would usually take to convert them into cash. The easiest to convert into
cash are listed first.
A Statement of Financial Position in Order of Liquidity would be as follows:

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Exercise:
1. Refer to Session 11 – Question for R. Cairns and complete the Statement of Financial
Position.

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2.

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