Chapter 9:
Financial statements
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Statement of financial position
There are two types of assets
Statement of
financial position:
A statement which
shows the assets &
liabilities of a
business at a certain
date.
Non current assets:
Assets which are obtained for
use & not resale, which help
the business earn revenue.
i.e machinery, building.
Liquidity refers to the
ease with which as
asset can be
converted to cash
without affecting its
market price.
Statement of financial
position is also known
as ‘balance sheet’
Current assets:
Short term assets whose
amount keep on changing.
They are either in the form of
cash or can be turned into
cash relatively easy.
i.e trade receivables, bank.
Both current & non current
assets are shown in their
increasing order of liquidity in
the statement of financial
position.
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Non current assets
There are two types of non current assets
Tangible non current assets
Long term non current assets not
bought for use rather than resale
& have a material substance (can
be seen & touched)
i.e lorry, machinery, building etc
Intangible non current assets
Long term non current assets not
bought for use rather than resale &
does not have a material substance
(cannot be seen & touched)
i.e brand image, reputation, good will
etc
In Statement of financial position, intangible non current
assets are shown before the tangible non current
assets.
Amount by the which the
value of a business as a
whole exceeds the value of its
assets & liabilities is called the
good will of that business
Good will = purchase price of a business – difference
between market value of assets & liabilities.
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liabilities
There are three types of liabilities.
Non current liabilities
Amounts owed which are not due for
repayment within the next 12 months.
i.e mortgage, bank loans.
Current liabilities
Amounts owed which are not due for
repayment within the next 12 months.
i.e trade payables, bank overdraft.
Capital: Represents the owner’s investment in the
business and is the amount which the business owes to
the owner.
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Statement of financial position.
Same like statement of comprehensive income, statement of financial position also need to
have a heading which includes the following:
A date to which it relates
Name under which the business trades
Same like statement of comprehensive income
Statement of financial position can also be prepared in
two formats.
Horizontal & vertical
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Statement of financial position.
Hozirontal format
Trial balance is used to prepare Statement of financial
position.
Once the items are used/ transferred in the financial
statement they should be ticked in the trial balance to avoid
repetition.
All account in trial
balance are used once
in the preparation of
financial statements
however the notes to
the trial balance are
used twice.
A horizontal statement of financial position
is prepared in a two sided format.
Assets of the debit and liabilities on the
credit.
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Statement of financial position.
Hozirontal format example
Trial balance
Balance sheet
Balance on capital account increases when
a business has made profit during the year.
Drawings by the owner decreases the
capital amount.
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Statement of financial position.
Vertical format example
Prepared using the
same trial balance as
above.
Vertical format is most commonly used to
prepare financial statements.
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You can start
doing the
practice
questions
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