Chapter 4 Statement of Financial Position

4.1 Introduction
1. After completing the Income Statement in Chapter 3, the accounts left behind are the assets,
liabilities, and owner’s equity balances. These accounts that are not included in the Income
Statement, are listed in a statement called Statement of Financial Position.
2. Statement Of Financial Position is a financial statement showing the financial position of a company
in terms of assets, liabilities, and owner’s equity at a particular date, normally at the end of an
accounting period.
In other words, Statement Of Financial Position shows what a business owns and owes at a particular
date.
3. Statement Of Financial Position is a statement that reflects and shows the balances of real and
personal accounts in a systematic order.
4.2 Format of Statement Of Financial Position
1. Assets, liabilities and owner’s equity of a business entity can be presented Statement of Financial
Position in T format or vertical format as follows:
a. T / Horizontal format:
Chapter 4 Statement of Financial Position
b. Vertical / Statement format:

2. Statement Of Financial Position can be expressed as the accounting equation:

What a business owns = what a business owes
↓
Assets = Equity / Owner’s Equity + Liabilities
3. On a statement Of Financial Position, the total value of all assets must equal the combined
value of owner’s equity and all liabilities.
e.g. Swiss Garden Company has RM 20,000 in assets and Rm 13,000 in liabilities, thus, the
owner’s equity is Rm 7,000 (i.e. Assets Rm 20,000 – Liabilities Rm 13,000).
Chapter 4 Statement of Financial Position
4. The components of Statement Of Financial Position are as follows:
a. Assets : Resources that are owned by a business, which are divided into two
categories:
Assets
i. Non-current Assets
1. E.g.
Lands and buildings, Plant and
machinery, Furniture and
Fixtures, Office equipment,
Motor vehicles, etc.
2. They are held for usage
(i.e. They are used in the
business to generate revenue
either directly of indirectly)
3. They can be used for more than
12 months from the end of the
reporting period.
ii. Current Assets
1. e.g.
inventory, accounts receivable,
cash at bank, cash in hand, etc.
2. They have direct contribution
to the business and are more
related to the trading activities.
3. They are likely to change their
forms within 12 months from
the end of the reporting period
e.g. Inventory is converted into
cash

b. Liabilities: Debts that a business owes to outsiders, other than its owner. They are
dividend into two categories:
Liabilities
i. Non- current Liabilities ii. Current liabilities
1. E.g 1. e.g.
Mortgage loan, bank loan, etc. Accounts payable, Bank
Overdraft, etc.
2. Debts which are payable after 2. Debts which are payable within
or more than 12 months the end the next 12 months from the end
of the reporting period of the reporting period

c. Equity / Owner’s equity : Debts that a business owes to its owner / proprietor. It
represents the total resources invested in a business by its owner.
The elements which affect the increase or decrease of equity are illustrated below
Chapter 4 Statement of Financial Position

4.3 Relationship and differences between Income Statement and Statement Of Financial Position
1. The differences between the two financial statements are summarised as follows:

Income Statement Statement of financial Position

a. It is usually prepared for a financial
period
b. It shows the financial year’s net profit,
deriving from sales, other income, cost
of sales and expenses of a business over
a period of time, usually 1 year
c. It is not part of the double-entry system.
The information presented is the income
and expense accounts which have closed
off to Trading account and Profit And
Loss account
- It is prepared for a specific date usually
on the last day of a financial year
- It summaries the financial position of a
business at a particular date, showing
the assets owned and debts owed to
outsiders and owner.
- It is not part of the double-entry system .
The information presented is the
balances of real and personal accounts
which have been brought down.

4.4 Personal and impersonal accounts

All the ledger accounts are classified as follows: