Elements of a Statement of Financial
Business: Cambridge International GCSE (2027 Exams), topic 5.4.1
Elements of a Statement of Financial Position
A statement of financial position shows the financial health and stability of a business, and summarises what the business owns and owes.
Purpose of a statement of financial position
- A statement of financial position (balance sheet) gives a snapshot of a business's finances at a specific point in time.
- It shows what a business owns (assets) and what it owes (liabilities).
- The difference between assets and liabilities is called equity (capital/owners’ funds).
- The statement is built around three main parts:
- Assets, Liabilities, and Capital
Assets
- Assets are items of value owned by the business.
- They are categorised based on how long a business expects to keep them.
- Non-current assets (fixed assets)
- Used for long-term operations (more than one year)
- Examples: buildings, machinery, vehicles, land
- Current assets
- Likely to be turned into cash within one year
- Examples: inventories (stock), trade receivables (debtors/money owed to the business), cash at bank
Liabilities
- Liabilities are debts or money owed by the business to others.
- They are categorised based on when the debts must be repaid.
- Non-current liabilities
- Long-term debts that are payable in more than one year
- Examples: bank loans, mortgages
- Current liabilities
- Short-term debts that are payable within one year
- Examples: trade payables (creditors/money owed to suppliers), short-term bank overdrafts
The accounting equation
- Capital (or equity) represents the owners’ claim after all liabilities are paid.
- Examples: owners’ investment, retained profit
- The Statement of Financial Position always balances according to the accounting equation:
- Assets = Capital + Liabilities
- This shows that a business's total value (assets) is always equal to the sum of the owner's investment and the business's debts.
Test yourself on Elements of a Statement of Financial
What does a statement of financial position show?