Saturday, 25 May 2013

Statement of Financial Position: AKA The Balance Sheet

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. It contains a snap shot of the assets, liabilities and equity position of the entity at a particular point in time

In company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants.
For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by amanagement discussion and analysis:

  1. Statement of financial position: also referred to as a balance sheet, reports on a company's assets, liabilities, andownership equity at a given point in time.
  2. Statement of comprehensive income: also referred to as a profit and loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state.
  3. Statement of changes in equity: explains the changes of the company's equity throughout the reporting period
  4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

Classification of assets and liabilities into significant groups in the  balance sheet is governed by the end uses of the financial statement. 

Items such as freehold premises, machinery (capital), Fixtures, Trademarks. Note assets may be tangible or intangible.

Australian Accounting Standards Board (AASB Framework, para. 49a) Defines assets as: A resource controlled by the entity as a result of past events & from which future economic benefits are expected to flow to the entity.
  • Classified primarily according to degree of liquidity 
  • Divided into current and non-current 
Future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events. Examples include overdraft, bills payable, and debentures.

AASB Framework (para. 49b): A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
  • Shown in order of repayment or maturity date 
  • Divided into current and non-current
[Assets – Liabilities = Equity]

Owners Equity: 
    The residual interest in the assets of the entity after deduction of its liabilities (AASB framework para. 49c)

  • Residual interest in the Assets after deducting Liability
Major aspects of equity are:

1. That it ranks after payment of all other liabilities in the event of winding up.
2. It is not separately identifiable like other liabilities - net position of residual.
The Vertical Layout of a Balance Sheet

The Horizontal Layout of a Balance Sheet

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