Statement of Financial Position

The statement of financial position is a financial statement that shows an entity’s assets, liabilities, and owners’ equity at a specific date. It is based on the accounting equation: Assets = Liabilities + Equity.

Through this statement, management can answer important questions: How much cash and inventory does the company hold? How much is owed to it by customers? How much debt does it owe? And does it rely on owners’ funds or liabilities to finance its assets?

That is why, at AamalSoft, we do not view the statement of financial position merely as a report required at year-end; it is a tool that helps management assess the entity’s financial position, monitor liquidity, debt, and capital, and make more accurate decisions.

An integrated accounting system can organize accounts, sales, purchases, inventory, customers, and suppliers, bringing together the accounting data used in financial statements and reports within a single system.

What Is the Statement of Financial Position?

The statement of financial position is a financial report that presents assets, liabilities, and equity at a specific point in time, such as December 31 of the financial year.

It is based on the equation:

Assets = Liabilities + Equity

If a company owns assets worth one million riyals and has liabilities of 400 thousand riyals, its equity is:

1,000,000 - 400,000 = 600,000 riyals

That is:

The statement is therefore balanced.

What Are the Components of the Statement of Financial Position?

The statement consists of three main sections:

1. Assets
2. Liabilities
3. Equity

The value of assets must equal the sum of liabilities and equity.

First: Assets

Assets are resources controlled by the entity from which it expects to obtain economic benefits.

They are often divided into:

Current Assets

These are assets expected to be converted into cash or used during the operating cycle or in the short term, depending on their nature.

Examples include:

• Cash.
• Bank balances.
• Customer balances and accounts receivable.
• Inventory.
• Prepaid expenses.
• Other current assets.

In trading businesses, inventory represents an important portion of assets, so errors in quantities or inventory valuation may affect the accuracy of financial data.

You can consult the Warehouse Management and Inventory Organization guide to understand the importance of linking item movements to sales, purchases, and accounts.

Non-Current Assets

These are assets that the entity uses over a longer period, such as:

• Real estate.
• Buildings.
• Machinery.
• Equipment.
• Vehicles.
• Certain long-term investments.
• Intangible assets, depending on their nature.

These assets are presented according to the applicable accounting treatment after accounting for related items such as depreciation or impairment, where applicable.

Second: Liabilities

Liabilities are amounts or financial obligations that the entity must pay to other parties.

They are usually divided into:

Current Liabilities

These are liabilities due in the short term or during the operating cycle. Examples include:

• Accounts payable to suppliers.
• Accrued expenses.
• Short-term liabilities.
• Upcoming loan installments.
• Taxes and obligations due, as applicable.

Non-Current Liabilities

These are long-term liabilities, such as:

• Long-term loans.
• Certain financing obligations.
• Other liabilities due after more than one year, according to their classification.

High liabilities are not always negative; what matters is whether the entity can service and repay them using its resources and cash flows.

Third: Equity

Equity represents the residual value belonging to the entity’s owners after deducting liabilities from assets.

The equation:

Equity = Assets - Liabilities

Depending on the type of entity, it may include:

• Capital.
• Reserves.
• Retained earnings.
• The net result for the period carried forward according to the accounting cycle.
• Other equity-related items.

Example:

Assets = 800,000 riyals
Liabilities = 300,000 riyals

Therefore:

Equity = 800,000 - 300,000 = 500,000 riyals

Example of a Statement of Financial Position

Suppose a company has the following data at the end of the period:

Assets

Liabilities

Equity

Verification:

1,000,000 = 400,000 + 600,000

The statement is therefore balanced.

How Is the Statement of Financial Position Prepared?

Preparing the statement begins long before the end of the period, because every invoice, journal entry, expense, and inventory movement affects the accounts that will appear later.

The steps can be summarized as follows:

1. Review Account Balances

Review the balances in the trial balance and ensure that transactions relating to the period have been recorded.

2. Reconcile Cash and Bank Balances

Bank balances in the system must be compared with bank statements, and the necessary reconciliations must be made.

3. Review Customer Accounts

Check:

• Unpaid invoices.
• Collections.
• Returns.
• Abnormal balances.

4. Review Supplier Accounts

Ensure that the following are recorded:

• Purchase invoices.
• Payments.
• Returns.
• Supplier balances.

5. Review Inventory

The quantities and values in the system should reasonably reflect the actual position after conducting stock counts and making the necessary adjustments.

6. Review Assets and Liabilities

Ensure that new assets, depreciation and adjustments, loans, and amounts due are recorded according to the correct accounting treatment.

7. Prepare the Trial Balance and Financial Statements

After reviewing the accounts, the classified balances are used to prepare the statement of financial position and the other statements.

How Do You Know Whether the Statement of Financial Position Is Correct?

The first test is:

Total Assets = Total Liabilities + Total Equity

However, equality between the two sides alone does not mean that all the accounts are correct.

A journal entry may be balanced but posted to the wrong account.

Therefore, you should also review:

• Bank balances.
• Customer accounts.
• Supplier accounts.
• Inventory.
• Assets.
• Loans.
• Unusual accounts.
• Opening and closing balances for the period.

This highlights the importance of linking transactions to their original documents within the system rather than relying on manual adjustments at year-end.

How Do You Read the Statement of Financial Position?

Do not look only at total assets.

Ask:

Where are these assets held?

A company with assets worth one million riyals, mostly in cash, may have a different liquidity position from a company with the same million, mostly held in slow-moving inventory or overdue customer balances.

You should also ask:

• What proportion is cash?
• What proportion is accounts receivable?
• How much inventory is there?
• How much debt is there?
• What is the value of short-term liabilities?
• Has equity increased or decreased?

What Are the Key Indicators That Can Be Derived from the Statement of Financial Position?

Working Capital

It measures the difference between current assets and current liabilities:

Working Capital = Current Assets - Current Liabilities

Example:

Current Assets = 600,000 riyals
Current Liabilities = 300,000 riyals

Working Capital = 300,000 riyals

Current Ratio

It is used as an indicator of the entity’s ability to cover its current liabilities with its current assets:

Current Ratio = Current Assets ÷ Current Liabilities

In the previous example:

600,000 ÷ 300,000 = 2

This means that current assets are twice the current liabilities.

However, there is no single ideal ratio for all businesses; the assessment depends on the sector and the nature and quality of the assets.

Liabilities-to-Assets Ratio

Liabilities-to-Assets Ratio = Total Liabilities ÷ Total Assets × 100

If:

Liabilities = 400,000
Assets = 1,000,000

Then:

400,000 ÷ 1,000,000 × 100 = 40%

This means that 40% of the assets are financed through liabilities in this example.

What Is the Difference Between the Statement of Financial Position and the Income Statement?

This is one of the most frequently asked questions.

Example:

Statement of Financial Position as of December 31

It shows what the company owns and owes on that day.

Whereas:

Income Statement for the Year Ended December 31

It shows revenue, expenses, and profit or loss for the entire year.

What Is the Difference Between the Statement of Financial Position and Cash Flows?

Having profits does not necessarily mean having sufficient cash.

The statement of financial position may show customer balances, inventory, and cash, while the cash flow statement explains how cash flowed in and out during the period.

This is why management needs to read the statements together rather than rely on a single report.

A company may be profitable, but a large portion of its profits may not have been converted into cash because customer payments have not yet been collected.

Is the Balance Sheet the Same as the Statement of Financial Position?

The two terms are often used to refer to the report that presents assets, liabilities, and equity at a specific date.

The term “statement of financial position” more clearly reflects the report’s purpose, as it presents the entity’s financial position at a particular point in time.

Therefore, when you search for Balance Sheet or Statement of Financial Position, you will find that the accounting context is similar, although the terminology used in references or systems may differ.

How Does an Accounting System Help Prepare the Statement of Financial Position?

The statement is not a report created from scratch at year-end.

If transactions are recorded correctly, the data accumulates throughout the year:

Sales → Customers → Cash and Banks

Purchases → Suppliers → Inventory

Expenses → Expense Accounts

Assets → Depreciation and Balances

Loans → Liabilities

These accounts are then used to prepare reports and statements.

An integrated accounting system from AamalSoft enables the management of accounts, sales, purchases, customers, suppliers, and inventory within an interconnected system, reducing the need to re-enter data across systems.

If management needs to monitor indicators more quickly, it can also use the Smart Reporting Portal to monitor the data and reports generated by the system.

Common Errors in the Statement of Financial Position

Errors we recommend avoiding include:

• Relying solely on the statement being balanced.
• Failing to reconcile bank accounts.
• Leaving old customer balances unreviewed.
• Failing to reconcile supplier accounts.
• Ignoring stock counts.
• Recording an asset as an expense or vice versa.
• Failing to update assets.
• Having incorrect opening balances.
• Recording transactions in incorrect accounting periods.
• Preparing the statement manually from separate files despite having an accounting system.

Frequently Asked Questions About the Statement of Financial Position

What Is the Statement of Financial Position?

It is a financial statement that presents an entity’s assets, liabilities, and equity at a specific date, according to the equation: Assets = Liabilities + Equity.

What Are the Elements of the Statement of Financial Position?

It primarily consists of current and non-current assets, current and non-current liabilities, and equity.

What Is the Difference Between the Statement of Financial Position and the Income Statement?

The statement of financial position presents the financial position at a specific date, while the income statement presents revenue, expenses, and profit or loss over a period of time.

Where Does Inventory Appear in the Statement of Financial Position?

Inventory usually appears under current assets when this classification applies.

Where Do Supplier Balances Appear?

Amounts owed to suppliers usually appear under liabilities, and their classification as current or non-current is determined by the due date and the nature of the obligation.

Where Does the Customer Account Appear?

Customer receivables usually appear under assets when they represent amounts owed to the entity.

Why Must the Statement of Financial Position Balance?

Because it is based on the accounting equation Assets = Liabilities + Equity, and the double-entry system maintains this balance when transactions are recorded correctly.

In Conclusion:

The statement of financial position does not merely tell you the size of the company; it explains the composition of its resources and how they were financed.

Reading it correctly begins with:

Assets → What do we own?

Liabilities → What do we owe?

Equity → What is the residual value for the owners?

Then comes the most important step: analyzing the quality of these figures, such as the amount of cash, customer balances, inventory, and short-term debt, rather than considering total assets alone.

This is why the accuracy of the statement of financial position starts with the accuracy of daily transactions recorded in the system. DigitalPro for Accounting and Point of Sale from AamalSoft connects sales, purchases, inventory, customers, suppliers, and accounts so that financial data is based on the entity’s actual transactions.

You can also explore all AamalSoft solutions, then request a trial and try recording sales, purchases, inventory, and supplier transactions, then review their impact on accounts and reports.