Statement of Financial Position (Cambridge International A-Level Business)

The purpose of the statement of financial position

• The statement of financial position provides a snapshot of a business’s financial position at a given point in time

  • It is often called the balance sheet

• It shows what the business owns (assets), what it owes (liabilities), and how it is funded (capital and reserves)

• It contains the financial information required to draw conclusions about the liquidity of the business

The structure of the statement of financial position

• The statement of financial position details the following elements at a specific point in time

A statement of financial position showing key elements

The statement of financial position (balance sheet) shows a business's assets, liabilities and capital structure at a point in time

• In this example, drawings refers to the money (capital) removed from the business by its owner(s)

Amending the statement of financial position

• A change to one section of the statement of financial position has an impact on other sections

Worked Example Pershore Plumbers Ltd's accountant has sent the interim statement of financial position to Helen, the business owner. She has been asked to check the statement before it is sent to Companies House

Pershore Plumbers Ltd - Statement of financial position at 31st March 2025

Helen identifies three errors

• Depreciation was £24,100
• An inventory check on 31st March 2025 valued stock at £26,400
• Long-term borrowing increased to £25,000 as the business took out a further small loan

Recalculate the statement of financial position to reflect these changes.

(6)

Step 1: Update non-current liabilities given the change to depreciation

Non minus current space assets space equals space Asset space value space minus space Depreciation

equals space £ 142 comma 700 space minus space £ 24 comma 100

equals space £ 118 comma 600 (1)

Step 2: Update current assets given the change in stock valuation

Current space assets space equals space Cash space plus space Debtors plus space Stock

equals space £ 30 comma 260 space plus space £ 26 comma 630 space plus space £ 26 comma 400

equals space £ 83 comma 290 (1)

Step 3: Update total assets given these changes

Total space assets space equals space Non minus current space assets space plus space Current space assets

equals space £ 118 comma 600 space plus space £ 83 comma 290

equals space £ 201 comma 890 (1)

Step 4: Update non-current liabilities given the increase in long-term borrowing

equals space £ 20 comma 000 space plus space £ 5 comma 000

equals space £ 25 comma 000

Step 5: Update total liabilities

Total space liabilities space equals space Current space liabilities space plus space Non space current space liabilities

equals space £ 20 comma 150 plus space £ 25 comma 000

equals space £ 45 comma 150 (1)

Step 6: Update net assets given these changes

Net space assets space equals space Total space assets space minus space Total space liabilities

equals space £ 201 comma 890 space minus space £ 45 comma 150

equals space £ 156 comma 740 (1)

Step 7: Update share capital to balance equity with net assets

equals space £ 156 comma 740 space minus space £ 101 comma 290

equals space £ 55 comma 450 (1)

Pershore Plumbers Ltd - Updated statement of financial position at 31st March 2025

The relationship between the statement of profit and loss and the statement of financial position

• The statement of profit and loss and the statement of financial position are closely linked, and several items appear in both or affect each other

  • E.g. Profit identified in the statement of profit and loss is transferred to the equity section of the statement of financial position under retained earnings (profit)

• Profit or loss made in one period directly affects equity in the statement of financial position.

  • Items like depreciation, taxation and sales don’t just affect profit, they also change the values of assets and liabilities

Relationships between items