Financial Statements: Statements of Financial Position

The statement of financial position (formerly called the balance sheet) is the second key financial statement in GCSE Business Studies. It provides a snapshot of what a business owns, what it owes, and the value of the owner's investment at a specific point in time.

---

What Is a Statement of Financial Position?

A statement of financial position (also called a balance sheet) is a financial document that shows:

• What the business owns (assets)
• What the business owes (liabilities)
• The value of the owner's investment (equity/capital)

It is a snapshot of the business's financial position at a single point in time (unlike an income statement, which covers a period).

---

Key Terms

Term	Definition
Assets	Items of value owned by the business
Non-current assets	Long-term assets the business intends to keep for more than one year
Current assets	Short-term assets that change regularly (within one year)
Liabilities	Debts the business owes to others
Non-current liabilities	Long-term debts due after more than one year
Current liabilities	Short-term debts due within one year
Net assets	Total assets minus total liabilities
Equity / Capital	The owner's investment in the business (plus retained profit)

---

Structure of a Statement of Financial Position

Section	Items	Example
Non-current assets	Land, buildings, machinery, vehicles, equipment	Factory valued at £200,000
Current assets	Cash, inventory (stock), trade receivables (debtors)	£10,000 cash, £15,000 stock
Total assets	Non-current assets + Current assets	£225,000
Current liabilities	Trade payables (creditors), bank overdraft, short-term loans	£20,000 owed to suppliers
Non-current liabilities	Long-term bank loans, mortgages	£80,000 mortgage
Total liabilities	Current liabilities + Non-current liabilities	£100,000
Net assets	Total assets − Total liabilities	£125,000
Equity	Share capital + Retained profit	£125,000 (must equal net assets)

The Accounting Equation

The statement of financial position always balances:

Assets = Liabilities + Equity

Or equivalently:

Net Assets (Assets − Liabilities) = Equity

flowchart TD
    A[Statement of Financial Position] --> B[Assets - what the business owns]
    A --> C[Liabilities - what the business owes]
    A --> D[Equity - owner's investment]
    B --> B1["Non-current assets<br/>Property, equipment, vehicles"]
    B --> B2["Current assets<br/>Cash, inventory, receivables"]
    C --> C1["Non-current liabilities<br/>Long-term loans, mortgages"]
    C --> C2["Current liabilities<br/>Trade payables, overdrafts"]
    D --> D1[Share capital]
    D --> D2[Retained profit]
    B1 --> E[Total Assets]
    B2 --> E
    C1 --> F[Total Liabilities]
    C2 --> F
    E --> G[Net Assets = Assets − Liabilities]
    F --> G
    D1 --> H[Total Equity]
    D2 --> H
    G -.must equal.-> H

---

Example Statement of Financial Position

Item	Amount (£)
Non-current assets
Property	150,000
Equipment	30,000
Vehicles	20,000
Total non-current assets	200,000
Current assets
Inventory (stock)	12,000
Trade receivables (debtors)	8,000
Cash	5,000
Total current assets	25,000
Total assets	225,000
Current liabilities
Trade payables (creditors)	15,000
Bank overdraft	5,000
Total current liabilities	20,000
Non-current liabilities
Bank loan	80,000
Total non-current liabilities	80,000
Total liabilities	100,000
Net assets	125,000
Equity
Share capital	50,000
Retained profit	75,000
Total equity	125,000

Exam Tip: Net assets must ALWAYS equal total equity. If they do not balance, there is an error somewhere. In the exam, use this as a check.

---

Working Capital

Working capital (also called net current assets) measures whether a business has enough short-term assets to pay its short-term debts.

Working Capital = Current Assets − Current Liabilities

Using the example above: £25,000 − £20,000 = £5,000

Positive working capital means the business can pay its short-term debts. Negative working capital means it may struggle to pay bills as they fall due.

---

Using the Statement of Financial Position

Stakeholder	Use
Owners/managers	Assess the financial strength of the business; plan investment decisions
Banks/lenders	Evaluate whether the business has enough assets to secure a loan
Investors	Judge whether the business is a good investment
Suppliers	Assess whether the business is likely to pay its bills
HMRC	Verify the value of business assets for tax purposes

---

Comparing the Two Financial Statements

Feature	Income Statement	Statement of Financial Position
What it shows	Revenue, costs, and profit	Assets, liabilities, and equity
Time period	Over a period (e.g. one year)	At a single point in time (a snapshot)
Key question	Did the business make a profit?	What is the business worth?
Key figures	Gross profit, net profit, profit margins	Net assets, working capital, equity

---

Summary

• A statement of financial position shows what a business owns (assets), owes (liabilities), and the owner's equity at a point in time.
• Assets are classified as non-current (long-term) or current (short-term).
• Liabilities are classified as non-current or current.
• Net assets = Total assets − Total liabilities = Equity (the accounting equation).
• Working capital = Current assets − Current liabilities (measures short-term financial health).
• Stakeholders use the statement to assess financial strength, creditworthiness, and investment potential.

---

UK case study: Marks & Spencer's balance sheet rebuild

Marks & Spencer (M&S) is one of the UK's best-known high street retailers, with roots going back to 1884. In the late 2010s and early 2020s, M&S went through a period of significant financial restructuring that provides an excellent real-world illustration of how a statement of financial position evolves.