Balance Sheet vs Statement of Financial Position
The balance sheet and statement of financial position are confused by many to be the same thing, but there are, however, a number of differences between balance sheet and statement of financial position. Both, balance sheet and statement of financial position, are financial statements that offer an overview of the manner in which the organization’s assets, liabilities, capital, income and expenses have been managed. Companies prepare financial statements at the end of the accounting period to obtain a clear understanding of the way resources have been utilized to improve profitability over the financial year. The balance sheet in particular is an important financial statement as it shows changes in the company’s assets, liabilities and capital. The following article clearly explains both financial statements and explains the similarities and differences between a balance sheet and statement of financial position.
What is a Balance Sheet?
The balance sheet of a company offers an overview of the changes that occur in the company’s long term and short term assets and liabilities and capital. The balance sheet includes vital information regarding the company’s fixed and current assets (such as equipment, cash and accounts receivable), short term and long term liabilities (accounts payable and bank loans) and capital (shareholder’s equity). Balance sheets are generally created by businesses that operate on a profit. An important point to note in the balance sheet is that the total assets should be equal to the total of the liabilities and capital, and the capital should represent the difference between the assets and liabilities. The formula used is Assets – Liabilities = Capital. The balance sheet is prepared, on a specific date, hence the words ‘as at’ appear at the top of the sheet. For example, if I am writing up a balance sheet for the 30th of October 2011, I would write ‘as at 30th October 2011′ on the heading of the statement, to show that the information represented in the balance sheet is a snapshot of the firm’s financial situation at that date.
What is a Statement of Financial Position?
Statements of financial position are also prepared at the year end and offer an overview of the company’s assets and liabilities as well as financial health and liquidity. Statements of financial position are generally created by not for profit organizations. A statement of financial position created by not for profits are mostly used to obtain an overview of the total assets held and liabilities owed. Unlike businesses that operate on a profit, not for profits do not have shareholder’s equity as they do not sell shares to the public. As not for profits do not have equity they substitute net assets for equity and use the formula, Assets – Liabilities = Net Assets.
What is the difference between Balance Sheet and Statement of Financial Position?
Balance sheets and statements of financial position are quite similar to one another in that they both offer an overview of an organization’s financial position at the year-end. There are, however, a number of important differences between balance sheet and statement of financial position. Balance sheets are created by businesses that operate on a profit while statements of financial position are created by not for profit organizations. Unlike for profits, not for profits do not have owners and therefore do not record shareholder’s equity. Instead, not for profit organizations record net assets. Assets reporting in the statement of financial position are also quite different to a balance sheet. A statement of financial position divides net assets into three further categories that include: unrestricted, temporarily restricted and permanently restricted. These separate assets on which spending is temporarily restricted is where spending is restricted for certain projects. Permanently restricted is where the donor specifies what the funds can be spent on. Such segregation among assets is not done on balance sheets. However, balance sheets also divide their assets into current assets, fixed assets, intangible assets, etc.
Summary:
Statement of Financial Position vs Balance Sheet
• The balance sheet of a company offers an overview of the changes that occur in the company’s long term and short term assets and liabilities and capital.
• Balance sheets are generally created by businesses that operate on a profit.
• In the balance sheet, total assets should equal the total of the liabilities and capital, and the capital should represent the difference between the assets and liabilities. The formula used is Assets – Liabilities = Capital.
• Statements of financial position are also prepared at the year end and offer an overview of the company’s assets and liabilities as well as financial health and liquidity.
• Statements of financial position are generally created by not for profit organizations.
• Unlike businesses that operate on a profit, not for profits do not have shareholder’s equity as they do not sell shares to the public. Therefore, they substitute net assets for equity and use the formula Assets – Liabilities = Net Assets.
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