5.4 Statement of Financial Position

2026 📋 Syllabus Objectives

By the end of these notes, you should be able to:

  1. 5.4.1 — Identify and explain the main classifications of assets and liabilities, with examples
  2. 5.4.2 — Read and interpret a simple statement of financial position, and draw conclusions from it — for example, how a business funds its activities, what assets it owns, and how it might raise finance by selling inventories

⚠️ Important note: You will NOT be asked to construct (build from scratch) a statement of financial position in the exam. You only need to read and interpret one.

📖 Main Content

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1. What is a Statement of Financial Position?

A statement of financial position — also called a balance sheet — is a document that shows the financial position of a business at one specific moment in time (usually at the end of the financial year, e.g. 31st December).

Think of it like a photograph of a business's finances. It captures exactly what the business owns, what it owes, and how it is funded — but only at that exact moment. The next day, things could already be different.

It answers three key questions:

  • What does the business own? (its assets)
  • What does the business owe? (its liabilities)
  • How is the business funded? (its equity/capital)

2. The Fundamental Accounting Equation

Everything on the statement of financial position links together through one key equation:

Assets − Liabilities = Shareholder Equity (Net Assets)

Or written another way:

Total Assets − Total Liabilities = Shareholders' Equity

This equation must always balance — that is why the document is also called a "balance sheet." If the two sides don't match, something has been recorded incorrectly.

3. Assets — What the Business Owns

Assets are things of value that are owned by the business. There are three types: non-current assets, current assets, and intangible assets.

🔷 Non-Current Assets (also called Fixed Assets)

These are items the business owns and uses for more than one year. They are not bought to be sold — they are kept to help the business operate.

Examples:

  • Land
  • Buildings
  • Machinery and equipment
  • Vehicles (e.g. delivery trucks)

💡 Important tip: Most non-current assets (except land) lose value over time. This is called depreciation. For example, a machine bought for $50,000 might only be worth $35,000 a few years later because of wear and tear. This means the value shown on the statement of financial position will be lower each year.

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