Lecture on Statement of Financial Position

Introduction

• This is the second lecture on Chapter 2, focusing on the statement of profit or loss.
• Assumes prior knowledge from the first lecture.
• Focus on sole traders, later lectures will cover limited companies.

Statement of Financial Position

Overview

• Shows what a business owns and owes.
• Required by law to be produced once a year.
• The business can choose its financial year-end.

Layout

• Assets: Listed first, followed by what the business owes.
• Non-current Assets: Assets intended to be kept for more than a year.
  • Examples: land, buildings, machinery, furniture, vehicles.
• Current Assets: Assets that change frequently.
  • Examples: inventories, receivables, cash, prepayments.

Liabilities

• Capital: Money owed to the owner.
• Drawings (Withdrawals): Amounts taken by the owner, reducing the capital owed.
  • Includes cash and any goods taken.
  • Owner's withdrawals, regardless of what they call it, are considered drawings.
• Non-current Liabilities: Debts payable in more than a year.
• Current Liabilities: Debts payable within a year.
  • Examples: trade payables, bank overdrafts, accruals.

Detailed Points

Prepayments and Accruals

• Prepayments: Payments for expenses that cover future periods (e.g., insurance).
• Accruals: Expenses incurred but not yet billed (e.g., electricity).

Sole Trader Considerations

• The statement for sole traders shows:
  • Amount owed to the owner at the start of the year.
  • Profit made during the year.
  • Drawings made by the owner.
• For next year, start with the amount owed at the end of this year.

Non-current vs. Current Liabilities

• Non-current: Owed in more than a year.
• Current: Owed in less than a year.
• Example: A loan where part is payable in the next year is partly a current liability and partly a non-current liability.

Additional Notes

• The statement of financial position is a key financial statement produced at the end of the financial year.
• The next lecture will cover the statement of profit or loss.

Terminology

• Important to understand the terminology used in financial statements, detailed summaries are available in lecture notes.

Summary

• This lecture covers the fundamental elements and layout of the statement of financial position for sole traders, with emphasis on asset and liability classification.