Purpose and importance of the statement of financial position

The statement of financial position (SOP)used to be called the balance sheet. Although the name of this report has changed in the nonprofit world to (SOP), the concept and the equation are essentially the same as any business balance sheet or statement of personal net worth.

  Assets (what you have or what you are owed) minus Liabilities (what you owe to others) equals Net Assets (what’s left over)

The Statement reflects the overall financial soundness of your organization at a given moment in time in terms of liquidity risk, credit and business risk. It is the report that shows the accumulated results of all the individual years of your organization’s operations put together. It is important to learn how to read and understand your organization’s SOP report.

Classification of Components

Also referred to as the Statement of the business net worth, it consists of the following key elements:

Assets

An asset is something that an entity owns or controls in order to derive economic benefits from its use. Assets are classified in the balance sheet as current or non-current depending on the duration over which the reporting entity expects to derive economic benefit from its use. An asset which will deliver economic benefits to the entity over the long term is classified as non-current whereas those assets that are expected to be realized within one year from the reporting date are classified as current assets.

Assets are also classified in the statement of financial position on the basis of their nature:

  • Tangible & intangible: Non-current assets with physical substance are classified as property, plant and equipment whereas assets without any physical substance such as your accounting software are classified as intangible assets.
  • Inventories or stock at hand . This includes goods that are held for sale in the ordinary course of the business. Inventories may include raw materials, finished goods and works in progress.
  • Trade receivables include the amounts that are recoverable from customers upon credit sales.
  • Grant awards promised to your organization but not yet received
  • Loans your organization may have made to others
  • Trade receivables are presented in the balance sheet (SOP) after the deduction of any provisions for bad debts
Cash and cash equivalents include cash in hand and bank along with any short term investments in shares/bonds that are readily convertible into specified amounts of cash

Liabilities

A liability is an obligation that a business owes to someone and its settlement involves the transfer of cash or other resources. Liabilities must be classified in the statement as current or non-current depending on the duration over which the entity intends to settle the liability. A liability which will be settled over the long term is classified as non-current whereas those liabilities that are expected to be settled within one year from the reporting date are classified as current liabilities.

Liabilities are also classified in the statement of financial position on the basis of their nature:

  • Trade and other payables primarily include liabilities due to suppliers and contractors for credit purchases. Sundry payables which are too insignificant to be presented separately on the face of the balance sheet are also classified in this category.
  • Short term borrowings typically include bank overdrafts and short term bank loans with a repayment schedule of less than one year. The current portion of long-term borrowings  that are due within one year of the reporting date will also be reported as part of current borrowings.
  • Long-term borrowings comprise of loans which are to be repaid over a period that exceeds one year.
  • Current Tax Payable is usually presented as a separate line item in the statement of financial position due to the magnitude of the amount usually payable.

Equity

This is what the business owes to its owners. Equity is derived by deducting total liabilities from the total assets. It therefore represents the residual interest in the business that belongs to the owners.

Equity is usually presented in the (S.O.P) under the following categories:

  • Share capital represents the amount invested by the owners in the entity
  • Retained Earnings comprises the total net profit or loss retained in the business after distribution to the owners in the form of dividends.
  • Revaluation Reserve contains the net surplus of any upward revaluation of property, plant and equipment recognized directly in equity.

Return from statement of financial position to bookkeeping