Statement of Financial Position (Balance Sheet)

I. Introduction to the Statement of Financial Position (Balance Sheet)

• Basic Explanation: The Balance Sheet (also known as the Statement of Financial Position) is a financial statement prepared at the end of an accounting period (financial year) to show a business's financial position in terms of its assets, liabilities, and equity.
• Purpose: It reflects the net worth of the company at a specific point in time.

II. Key Concepts

Understanding these core terms is fundamental to mastering the Balance Sheet:

• Assets: Business possessions used to generate profit, classified into Non-current and Current Assets.
  • Non-current Assets: Not for resale, last more than a year (e.g., Land and Buildings, Equipment).
  • Current Assets: Liquid assets easily converted to cash within a year (e.g., cash and cash equivalents, inventories, trade and other receivables).
• Liabilities: Amounts owed by a business, classified into Non-current and Current Liabilities.
  • Non-current Liabilities: Long-term debts repayable beyond one year (e.g., mortgage loan).
  • Current Liabilities: Short-term debts repayable within 12 months (e.g., trade and other payables, current portion of loan).
• Shareholders' Equity: Total amount attributable to shareholders, consisting of Ordinary Share Capital and Retained Income.
  • Ordinary Shares: Entitle owners to dividends varying with profits.
  • Authorised Share Capital: Maximum shares a company may sell.
  • Issued Share Capital: Shares already sold to the public.
  • Retained Income: Profit after tax not paid as dividends but kept for future company growth.
• Income Tax: Tax levied by the government (SARS) on company income.
• SARS: Government department to whom companies pay income tax and VAT.
• Dividends: Profits shared among shareholders.
  • Interim Dividends: Paid during the financial year.
  • Final Dividends: Declared (recommended) at year-end.
• Shareholders for Dividends: Amount owing to shareholders for declared but unpaid dividends.
• Short-term loan: Portion of long-term debt payable within one year.

III. Prior Knowledge (Review from previous Grades)

• General Ledger and Accounting Equation.
• Balance Sheet accounts and Nominal accounts (Trial Balance).
• Understanding of the Income Statement and adjustments.
• Balance Sheet of a sole trader and partnership.

IV. The Accounting Cycle and Financial Statements

• The Balance Sheet is the culmination of the year-end accounting cycle, prepared after the Statement of Comprehensive Income (Income Statement).
• Relationship with Accounting Equation: Assets = Equity + Liabilities.
  • Assets: Debit for increase (+), Credit for decrease (-).
  • Equity and Liabilities: Credit for increase (+), Debit for decrease (-).

V. Structure of the Statement of Financial Position (Balance Sheet)

• ASSETS
  • NON-CURRENT ASSETS
    • Tangible/Fixed assets (e.g., Land and Buildings, Vehicles, Equipment).
    • Financial assets (e.g., Fixed deposits).
  • CURRENT ASSETS
    • Inventories (e.g., Trading stock, Consumable stores on hand).
    • Trade and other receivables (e.g., Debtors Control, Accrued income, Prepaid expenses, SARS-Income Tax - if a debit balance).
    • Cash and cash equivalents (e.g., Bank, Petty cash, Cash float, Fixed deposit receivable within 12 months).
• EQUITY AND LIABILITIES
  • SHAREHOLDERS' EQUITY (or Capital and Reserves)
    • Ordinary share capital.
    • Retained income.