Statement of Financial PositionDefined with Examples

Lisa Borga
Last Updated: January 11, 2022
Date Published: January 11, 2022

The statement of financial position is another term used to refer to the balance sheet.

This statement provides a snapshot of all of the assets, liabilities, and equity of a given organization on the report date.

This is one of the three core financial statements used to provide information on a business, and the information it provides is critical for many financial analyses.

The statement of financial position, or as it is better known, the balance sheet, is prepared by most businesses on an annual basis in addition to the income statement and statement of cash flows.

statement of financial position

How is the Statement of Financial Position Formatted?

The statement of financial position is formatted in the same way as the basic accounting equation, which means:

Assets = Liabilities + Equity

What this means is that all asset accounts will be listed first, and the total of these accounts will be equivalent to the following two categories, which will be listed next.

Here is a simple example of this financial statement:

When is a Statement of Financial Position Used?

The statement of financial position is prepared by virtually all businesses that utilize a double-entry accounting system.

In small businesses, these may be prepared by the owner, and in slightly larger businesses, they may be crafted by a staff accountant and reviewed by an external accountant.

In larger public companies, these statements face a high degree of scrutiny and must be prepared in accordance with Generally Accepted Accounting Principles, also known as GAAP.

They must then be reviewed by external auditors and filed with the Securities and Exchange Commission.

Sections of the Statement of Financial Position

The statement of financial position includes assets, liabilities, and equity; however, it may help to take a closer look at each of these sections and what makes them up.

Assets

Assets include all resources that a company uses to provide its goods or services and generate revenue.

There are many ways to format assets on the statement of financial position; however, the most common way is to divide assets into two constituent categories, which are current and non-current.

Current assets include assets that will generally be consumed within 12 months, such as cash, accounts receivable, and inventory.

Non-current assets are generally those assets that will have a useful life longer than 12 months.

This includes assets that will provide long-term benefits, such as real estate, manufacturing plants, and equipment.

Liabilities

Liabilities are a companies’ debts and financial obligations that it owes to other entities.

These include loans, mortgages, and other debts which the company may owe.

Typically, this section is divided based upon when the obligation will become due.

Similar to assets, this is divided into current liabilities which will be due within 12 months, and long-term liabilities which will mature more than 12 months in the future.

Current liabilities typically include accounts payable (These are typically unpaid bills to the company’s vendors), accrued expenses, and income taxes payable.

Long-term liabilities are often sources of financing for a company, such as loans and mortgages, and are important for understanding how liquid a company will be into the future.

Equity

Equity refers to the value of a company that belongs to its owners.

This means the amount of money that, if all assets were immediately liquidated, would belong to the company’s sole proprietor, partners, or shareholders.

Depending on what type of entity the organization is, this section will include different line items.

For a corporation, this section will generally include common stock, preferred stock, and retained earnings.

However, a partnership would include the capital account balances of its members.

statement of financial position

Will the Statement of Financial Position Always Balance?

Notably, the statement of financial position, or as it is also known, the balance sheet, will always balance.

As in the accounting equation itself, assets will always be equal to the combined sum of equity and liabilities.

This makes perfect sense if you consider the ways in which a company gains its assets.

A company could use assets such as cash to purchase a new asset, in which case it will sacrifice an equivalent amount of assets to gain a new one.

Alternatively, the company’s owners could provide the money, such as through selling stock to finance the purchase.

Finally, the company could take out a loan to purchase an asset.

In each of these cases, the accounting equation and, as a result, the statement of financial position will always be in balance.

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  1. Harvard Business School "4 Steps to Determine the Financial Health of Your Company" Page 1 . January 11, 2022

  2. OpenLearn "4.3 The balance sheet" Page 1 . January 11, 2022

  3. Columbia University "Chapter 1: Review of Financial Reporting" Chapter 1 . January 11, 2022