Statement of Financial Position (Balance Sheet)

The second key financial report generated by your software is the Statement of Financial Position, formerly known as the Balance Sheet.

While the Statement of Financial Performance shows how much profit or loss has been made over a selected period, the Statement of Financial Position provides a snapshot of your business’s financial position on a specific date. In simple terms, it shows how much you own as a shareholder in the business.

How it works

The Statement of Financial Position is based on the other three accounting categories:

• Assets – what the business owns
• Liabilities – what the business owes
• Equity – the difference between the two (your ownership in the business)

At its core, the formula is:

EQUITY = ASSETS − LIABILITIES

This equation shows your net ownership in the business. Ideally, equity should be positive, indicating that the business owns more than it owes.

Understanding Equity and Profit

If the business is performing well, your equity should increase over time. Within the Statement of Financial Position, Current Year Earnings represents the portion of equity linked directly to the business’s current trading performance.

This is also known as retained profit for the current period. It is an automatic figure within the system and cannot be manually adjusted, as it is derived from:

Income − Expenses (from the Statement of Financial Performance)

Current Year Earnings therefore acts as a link between the two reports, appearing in both the Statement of Financial Performance and the Statement of Financial Position.

Important note on solvency

If equity is negative (i.e. liabilities exceed assets), the business is technically insolvent. In such cases, it is important to seek advice immediately, as trading while insolvent can create legal and financial risk, including restrictions on taking on further credit or debt.