The Accounting Student

The Basic elements of the Statement of Financial Position

As earlier said in the previous post, the SFP is a snapshot of the business at a point in time showing its ASSETS, LIABILITIES and CAPITAL.

In today’s post, we will be breaking down these various terms, explaining what they all mean and how they come about.

*Take note, this are basic explanations as we are still at the start of learning accounting.

So first of we will deal with ASSETS

ASSETS

An asset is a resource an entity controls as a result of past events (past transactions) which future economic benefits (like revenue $$) are expected to flow to the entity.

There exist 2 types of assets namely NON CURRENT ASSETS AND CURRENT ASSETS.

Non-Current Assets:

These are any intangible asset acquired on a long-term basis to be used in providing service to the business.
In other words, a non-current asset is any purchase used to generate revenue for the business.

Please take note of the key terms(italic) used above, in the definition.

Current Assets:

These are assets which are expected to be use in the business’ day to day transactions

In the SFP this are listed in order of liquidity¹ starting with the least liquid item , inventory.

¹Liquidity : is the ease with which the item can be converted into cash.

Assets	Examples
Non-current	Plant, machinery ,equipment ,motor vehicle etc.
Current	Inventory, cash in hand, cash at bank, receivables.

LIABILITIES

Like assets, there exist two types of liabilities too. Namely NON CURRENT LIABILITY and CURRENT LIABILITY. When looking at these two, the main thing to look at is the time, this greatly helps in differentiating which one is a non-current or current.

Non-current Liabilities:

In simple words, these are the all the things owed by the company to 3^rd parties which they can repay after 12 months.

More technically, non-current liabilities are long term liabilities (debts) payable in more than 12 months (the accounting period)

Current Liabilities:

Unfortunately with these ones, the business has less than 12 months to meet the payments.

Current liabilities are those liabilities which are payable within 12 months of incurring it.

Examples

Liabilities	Examples
Non-current	Loans(long-term)
Current	Payables, bank overdraft, loan(short-term)

CAPITAL

Capital is a type of liability as it is money owed to the Business owner.

So there you go! You now know all the basic elements of the statement of financial position.

 

 

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