Statement of financial position

01

The accounting equation

Assets = liabilities + equity. Assets are controlled economic resources; liabilities are present obligations; equity is the residual interest after liabilities. The statement is a snapshot at a specified date, not a record of all receipts and payments during the year. A balanced equation is essential but does not prove every value is correct.

02

Step 1 · Establish current assets

Reconcile bank cash, mobile-money balances and physical cash separately before combining eligible balances. List receivables invoice by invoice, deducting appropriate loss allowances. Confirm stock quantities, ownership and valuation. Identify prepayments such as insurance paid in advance. Cash restrictions, disputed debts and slow stock deserve explanation; they are not equally available for paying bills.

03

Step 2 · Establish non-current assets

Prepare a register for equipment, furniture, vehicles and other long-lived resources. Show cost, additions, disposals, depreciation and impairment as applicable. Keep purchase evidence and the date each asset became available for use. Net book value is an accounting amount, not necessarily the price obtainable on sale. Separate assets from repairs and consumables using a consistent policy.

04

Step 3 · Identify every obligation

Reconcile supplier balances to invoices and statements. Record expenses incurred but unpaid, outstanding tax, customer advances and loans. Distinguish amounts due within the relevant current-liability criteria from longer-term obligations. The entire loan should not be shown as long term simply because it originally ran for several years; inspect the repayment schedule and contractual terms at the reporting date.

05

Step 4 · Reconcile equity

For the fictional sole-trader example, opening equity of zero plus capital introduced of 10,000 plus profit of 7,500 less drawings of 3,000 gives closing equity of 14,500. A company normally distinguishes share capital, retained earnings and other reserves. Do not call a shareholder’s loan share capital unless its legal and accounting substance supports that classification.

06

Worked example · Closing position

Cash is 3,800, customer receivables 6,000, inventory 8,000 and equipment net of depreciation 10,000: total assets 27,800. Liabilities are suppliers 5,000, tax payable 300 and a loan of 8,000: total 13,300. Equity is 14,500. Therefore 27,800 = 13,300 + 14,500. The example assumes 2,000 of the loan is current and 6,000 non-current.

07

Read liquidity carefully

Current assets of 17,800 divided by current liabilities of 7,300 gives a current ratio of about 2.44. Excluding inventory gives a quick ratio of about 1.34. These are illustrations, not universal targets. A high ratio can still conceal slow collections and unsaleable stock. Check due dates, cash restrictions and the weekly cash forecast before committing to payments.

08

Common errors to catch

Do not omit a liability because the invoice arrived late. Do not include privately owned property unless the business controls the relevant resource. Do not retain sold equipment in the register. Do not offset customer and supplier balances merely because the same party appears in both lists. Investigate any imbalance; never insert an unexplained “other asset” to force agreement.

The statement at a glance

Gweru Trading · fictional first-year sole trader. As at 31 December 2026. All amounts in USD; parentheses indicate deductions or cash outflows.

Read the assumptions and explanations above. This simplified example omits items that may be necessary for your business.