What is a Statement of Financial Position?
A statement of financial Position (SOFP) is also referred to as a Balance sheet. Among the four major financial statements, SOFP is both very important and critical to the running of any company, especially because of its major role of reporting the financial position of an organization at defined periodic intervals. A Statement of Financial Position (SOFP) basically represents an equation that equates an organization’s or business assets on one side and the sum of its liabilities and equity on the other side. These items are shown on this statement in their nature and amount making a SOFP informative to an organization’s stakeholders.
Purpose and Importance of a Statement of Financial Position
A SOFP has numerous merits to an organization’s stakeholders. The main importance is that it helps calculate financial position of a business. The resulting figures from such calculations are useful to SOFP users in the determination of an organization’s operational efficiency, performance and financial health or soundness. This is especially on aspects encompassing, but not limited to business, credit, financial and liquidity risks. In this regard, the underlying financial trends of an organization are identifiable through the analysis of its multi-period SOFPs. A balance sheet can also be used together with other financial statements and those of other organizations within the same industry to identify potential problems facing an organization and device possible solutions to the same. The future earnings of an entity can also be projected through SOFP analysis. In this regard, it is possible to predict the amount of future earnings together with their timings and volatility.
How the Statement of Financial Position Components are classified
The key elements that form a Statement of Financial Position are as outlined below:
Assets
These are the items that are owned, controlled and used by an organization in the process of generating economic benefits. Assets can either be current or Fixed/non-current. Current assets are those assets that are expected to generate benefits to an organization within one year while fixed assets are those expected to derive economic benefits in the long term.
Liabilities
A liability is defined as an obligation that a business owes to the external parties that it deals with. Ordinarily, liabilities are settled when an organization transfers monetary or non-monetary resources to the organizations or entities it owes. Just like the assets, liabilities can be classified as current or non-current based on time period considerations. While current liabilities should be settled by a business within a twelve-month duration from the date it is incurred, Long term liabilities are those expected to be settled over a long period.
Equity
As opposed to liabilities, equity is defined as a shareholder or owners’ portion of a company. It is basically the difference between an organization’s assets and liabilities. Equity is categorized as share capital, retained earnings, or Revaluation reserve. Share capital is the actual amount injected by shareholders in a business. On the other hand, retained earnings represent the portion of net profits that remains after dividends are distributed to an organization’s owners or shareholders.
The reason why the balances of a SOFP are always equal relates to the concept behind the derivation of the Accounting Equation. In this regard, when the liabilities are added to the equity, the resulting amount should always be the same as the assets’ value. Financing of assets is often undertaken through internal, external, or both financial sources hence the equality of assets to the combination of liabilities and equity. A Statement of Financial Position can also have a variation of formats as portrayed through the numerous accounting homework solver websites.