Step-by-step guide
How to prepare a statement of financial position
The statement of financial position sets out the accounting equation at one date: assets on one side, capital and liabilities on the other.
Step by step
- List non-current assets. Show each non-current asset (one kept for more than a year) at cost, less accumulated depreciation, to give the carrying amount.
- List current assets. Add inventory, trade receivables (less any provision) and cash and bank.
- Total the assets. Add non-current and current assets to get total assets.
- Show capital. Start with opening capital, add profit for the year and subtract drawings. This gives closing capital.
- List liabilities. Add non-current liabilities (for example a long-term loan) and current liabilities (for example trade payables and accruals).
- Check it balances. Total assets must equal capital plus liabilities.
Worked example
Total assets RM55,000 = capital RM40,000 + non-current liabilities RM10,000 + current liabilities RM5,000.
Understanding the method
The statement rests on the accounting equation: assets = capital + liabilities. Everything the business owns was paid for by the owner or by outsiders. Assets show where the money is used.
Capital and liabilities show where it came from. If the statement does not balance, there is an error.
Classification depends on time. Non-current assets are kept for long-term use, such as premises, machinery and vehicles. They are shown at carrying amount, which is cost less accumulated depreciation.
Current assets are expected to turn into cash within a year. They are listed from least to most liquid: inventory, then trade receivables, then cash.
Liabilities are split the same way. Current liabilities are due within a year, such as trade payables and a bank overdraft.
Non-current liabilities, such as a long-term loan, are due later. The capital section is opening capital plus profit for the year, less drawings, because profit adds to the owner's investment and drawings take from it.
Here is an example. Equipment costs RM30,000 with accumulated depreciation of RM12,000, so its carrying amount is RM18,000.
Current assets are inventory RM9,000, trade receivables RM6,000 and cash RM2,000, a total of RM17,000. Total assets are RM35,000.
On the other side, opening capital is RM25,000, profit for the year is RM10,000 and drawings are RM7,000. Closing capital is 25,000 + 10,000 − 7,000 = RM28,000.
Trade payables are RM4,000 and a long-term loan is RM3,000. Capital plus liabilities is 28,000 + 4,000 + 3,000 = RM35,000, which equals total assets.
A trial balance never lists items in statement order, so classify each figure yourself. A bank balance is a current asset when positive and a current liability when overdrawn. A prepayment is a current asset and an accrual is a current liability.
Balancing is necessary but not enough. A long-term loan shown as current, or inventory shown as non-current, can still balance while giving the wrong picture. Common mistakes: showing drawings as a liability, forgetting to subtract drawings, subtracting them twice, and showing an asset at cost instead of carrying amount.
If your statement of financial position will not balance, one of our teachers can check your classification and capital workings with you in a one-to-one lesson. Book a trial class
Related skills
The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.
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