Companies and financial accounting
Companies and financial accounting

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Companies and financial accounting

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.

Described image
Figure 7 Balance sheet = statement of financial position

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

     
     
ASSETS Note £ £
Non-current assets at net book value (NBV)      
Property and equipment 1 18,000  
Vehicles 1 56,250  
      74,250
Non-current investment     18,000
Total non-current assets at NBV     92,250
Current assets      
Inventory   70,000  
Receivables 2 89,110  
Prepayments   1,000  
Bank   62,490  
      222,600
Total assets     Total 314,850
EQUITY AND LIABILITIES      
Equity      
Share capital: Ordinary shares   80,000  
Reserves: Retained earnings   107,100  
      187,100
Liabilities      
Non-current liabilities      
6% debentures     40,000
Current liabilities      
Trade payables   63,500  
Accruals   5,200  
Corporation tax payable   19,050  
      87,750
Total equity and liabilities     Total 314,850
  1. 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.
  1. Net receivables: receivables are shown net of an allowance for receivables of 5%.

Activity 10 Comparing sole trader and company financial statements, Part 1

Timing: Allow about 15 minutes

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.

Feedback

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.
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