What is a company’s statement of financial position?

A statement of financial position is commonly known as a ‘balance sheet’. It shows a company’s assets, liabilities, and equity on any given date, providing a snapshot of its overall value at that point in time.

Below, we provide a brief overview of the statement of financial position, including the information it should contain and when you need to prepare one.

The statement of financial position

The purpose of the statement of financial position is to summarise a company’s assets (what it owns), liabilities (what it owes), and equity (assets less liabilities) on a particular date—usually at the end of a financial month, quarter, or year.

Showing the economic position of a limited company on a specific date, the statement is an essential tool for: 

• understanding the financial health of your business
• making financially sound decisions to sustain and grow your company
• securing capital from investors and lenders

The statement also plays an important role when preparing your company’s annual accounts. It is one of three financial reports you must include. The other two are the income statement (also known as a profit and loss statement) and the cash flow statement.

What’s included in a statement of financial position?

The three main components of the statement of financial position are assets, liabilities, and equity, broken down into various categories.

However, the way in which the statement is presented varies from company to company, depending on the types of assets, liabilities, and equity they have.

Broadly, the statement of financial position should show the following items, where applicable:

Assets

• Current assets (e.g. cash at bank, cash in hand, inventory)
• Trade receivables (debtors; money that clients or customers owe the business)
• Fixed assets (e.g. property, vehicles, machinery, equipment)
• Intangible assets (e.g. trademarks, patents, licences, copyrights)

Liabilities

• Trade payables (money that the company owes to its suppliers and service providers)
• Business tax (VAT, Corporation Tax, PAYE payments due)
• Bank loans and mortgages
• Directors’ loans

Equity

• Share capital (the amount of money the shareholders have invested in shares)
• Additional paid-in capital (e.g. share premiums)
• Retained profit brought forward
• Current year’s profit/loss

The statement of financial position follows the basic accounting equation of Assets = Liabilities + Equity. Therefore, the resulting figure shown at the end of the statement will be the difference between the company’s assets and liabilities. This is the company’s overall value or net worth on the date the statement is produced.

When do I need to prepare a statement of financial position?

As a company director, you are legally obligated to generate a statement of financial position when preparing annual accounts for shareholders, Companies House, and HMRC.

You must prepare a statement at least once a year on the accounting reference date (ARD). The ARD is the end of your company’s financial year. All statements and reports in the accounts must be made up to that date.

However, it is worthwhile producing a statement of financial position regularly—for example, at the end of each financial month and quarter. This will provide valuable insight, helping you keep track of your company’s finances and growth over time and informing future decision-making.

Additionally, suppose you’re considering issuing dividend payments to shareholders. In that case, the statement will help you determine how much distributable profit the company has and whether paying dividends is the right decision at that time. Upon issuing dividends, the retained earnings on the statement will reduce.

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A statement of financial position is also an effective way to show prospective investors, creditors, and suppliers that your business has a good financial standing. This will enable them to make informed decisions about their likely return on investment or the level of risk involved in lending or supplying to your company.

You can prepare these statements yourself. However, an accountant is best placed to handle your company’s accounting needs. Double-entry bookkeeping—the key principle in producing an accurate balance sheet—can be complex if you don’t have experience in this area.

Wrapping up

Aside from being one of the three financial reports you need to include in your annual accounts, the statement of financial position is an essential tool for assessing your company’s financial health at any given time.

Whether you want to compare the company’s performance against previous months or years, secure funding from lenders or new investors, or determine the future viability of the business, the statement will provide valuable insight and help you make informed decisions.

If you have any questions about this post, please comment below. Explore the Quality Company Formations Blog for more limited company guidance and small business advice.