5.2.1 Statement of financial position
Although many people use the terms ‘balance sheet’ and ‘income statement’, the International Accounting Standards Board (IASB) which sets the accounting standards that listed companies in many countries have to follow, uses the terms ‘statement of financial position’ and ‘statement of financial performance’. In this course we follow the IASB’s terminology.
Below is an example of the statement of financial position for an imaginary company called Cleopatra Ltd.
Cleopatra Ltd Statement of financial position as at 28 February 20X9
|Non-current assets at net book value (NBV)|
|Property and equipment||1||18,000|
|Total non-current assets at NBV||92,250|
|Total assets||Total 314,850|
|EQUITY AND LIABILITIES|
|Share capital: Ordinary shares||80,000|
|Reserves: Retained earnings||107,100|
|Corporation tax payable||19,050|
|Total equity and liabilities||Total 314,850|
- Depreciation policy: Cleopatra Ltd depreciates non-current assets as follows:
- property and equipment – straight-line method over 20 years
- motor vehicles – reducing balance method 25% per annum.
- Net receivables: receivables are shown net of an allowance for receivables of 5%.
Activity 10 Comparing sole trader and company financial statements, Part 1
The purpose of this activity is to compare the balance sheet of a sole trader with the statement of financial position of a company in order to identify the differences.
Refer back to the balance sheet for Ian Hodgins.
Identify how the statement of financial position for Cleopatra Ltd is different from the balance sheet for Ian Hodgins.
The main differences in the balance sheet format for a sole trader and the format for the statement of financial position for a company caused by the difference in type of legal entity are as follows:
- In the capital section of the sole trader, the only accounts are the capital and drawings accounts. The profit for the period is transferred from the income and expense account that makes up the income statement. The sole trader pays personal income tax, but this is not shown in the financial statements of the business as there is no difference between the sole trader as a business and as a person.
- In the capital section of the company, the three accounts are the share capital account, the share premium account and the retained earnings account. There is no drawings account or a dividend account. This is because dividends must be paid out of profit and therefore reduce the retained earnings account.
- The non-current assets in the statement of financial position are simply shown at net book value (NBV). Usually, detailed information about the costs and depreciation of different non-current assets will be given in a separate schedule in the notes to the financial statements.
- The current liabilities section in the statement of financial position shows corporate income tax payable. A company pays corporation tax. The five shareholders pay tax over their dividends, but this has nothing to do with the company’s financial position or financial performance.