Definition of Statement of Financial Position

The statement of financial position, also known as the balance sheet, is one of the fundamental financial statements that shows the financial position of an entity at a specific date. This comprehensive financial statement displays all assets owned by the entity, its liabilities, and shareholders' equity. This basic statement is like a financial snapshot at a specific moment in time and is based on the fundamental accounting equation:

Assets = Liabilities + Equity

The statement of financial position helps evaluate the entity's financial strength, its ability to meet financial obligations, and the sources of asset financing. It also enables stakeholders to understand how financial resources and liabilities are distributed within the entity, showing them the true current financial position of the company.

Difference Between Statement of Financial Position and Balance Sheet

In reality, there is no fundamental difference between the two terms, as both refer to the same financial statement that reflects the company's financial position. The name was changed from balance sheet to statement of financial position in the amendments to International Accounting Standard No. 1 in 2007. The only difference might be in timing, where the statement of financial position can be prepared at any accounting period, while the balance sheet is usually prepared at the end of the accounting period to show the final financial position. The modern statement of financial position also provides greater flexibility in presenting financial data and clarifying the financial position in more detail.

Basic Components of Statement of Financial Position

The statement of financial position consists of three interrelated basic components that reflect the complete financial position of the entity:

1. Assets

Assets represent all economic resources owned by the entity that have value and are expected to generate future economic benefits. They are divided into:

• Current Assets: Include cash and cash equivalents, short-term investments, trade receivables, inventory, and prepaid expenses. These assets improve the company's short-term financial position
• Non-Current Assets: Include fixed assets (land, buildings, equipment), long-term investments, and intangible assets (patents, trademarks, goodwill). These assets form the basis of the entity's long-term financial position

2. Liabilities

Include all obligations and debts owed by the entity to third parties, divided into:

• Current Liabilities: Include trade payables, short-term loans, accrued expenses, and taxes payable. These liabilities directly affect the short-term financial position
• Non-Current Liabilities: Include long-term loans, bonds, long-term provisions, and pension plans. These liabilities affect the stability of the long-term financial position

3. Equity

Represents the owners' share in the entity's net assets, including:

• Paid-in Capital: The amount invested by owners in the entity, an important element in forming the basic financial position
• Retained Earnings: Profits not distributed to owners and retained by the entity to strengthen the financial position
• Various Reserves: Such as legal reserve and revaluation reserve, which work to strengthen the company's financial position
• Treasury Shares: Shares repurchased by the entity from the market, affecting the financial position by reducing equity

These components are linked by the basic equation: Assets = Liabilities + Equity, which ensures the balance of the statement of financial position.

Accounts Not Appearing in Statement of Financial Position

There are many accounts and financial elements that do not appear in the statement of financial position despite their importance in the entity's business operations. Understanding these accounts is necessary to get a complete picture of the entity's financial performance and to distinguish between what is included in the statement of financial position and what is included in other financial statements. These accounts excluded from the statement of financial position include the following main items:

• Revenues: Sales of goods, service revenues, other revenues - these items appear in the income statement, not in the statement of financial position
• Cost of Goods Sold: Direct cost of goods sold
• Operating Expenses: Selling and distribution expenses, administrative and general expenses
• Financial Expenses: Loan interest, bank fees, foreign exchange losses
• Financial Revenues: Deposit interest, investment profits, foreign exchange gains
• Income Summary Account: Used to close revenue and expense accounts
• Contingent Liabilities: Bank guarantees and letters of credit (disclosed in statement of financial position notes)
• Future Commitments: Long-term contracts and operating lease obligations

It's important to understand that excluding these items from the statement of financial position doesn't mean they're unimportant, but reflects the nature of this financial statement that focuses on financial position at a specific point in time.

Importance of Statement of Financial Position

The statement of financial position is considered one of the most important financial reports that provide a comprehensive picture of the company's financial position at a specific point in time. This basic financial statement, also known as the balance sheet, works alongside the income statement and cash flow statement to form an integrated financial reporting system, playing a pivotal role in financial and investment decision-making for companies and investors.

The importance of the statement of financial position is reflected in the following points:

• Evaluating Financial Performance and Stability - Provides a clear view of the company's ability to meet short-term and long-term financial obligations, helping assess the degree of financial risk and overall financial position
• Supporting Investment Decisions - Enables investors to analyze capital structure and evaluate the company's attractiveness as an investment opportunity through understanding the distribution of financial assets and liabilities
• Facilitating Access to Financing - Used by banks and financial institutions to assess the company's creditworthiness before granting loans or banking facilities based on the presented financial position
• Measuring Liquidity and Operating Efficiency - Helps calculate important financial ratios such as liquidity ratio and debt-to-capital ratio, reflecting the efficiency of financial resource management
• Compliance with Legal and Regulatory Requirements - Meets regulatory and tax authority requirements and ensures transparency in financial reporting for shareholders and related parties
• Strategic Financial Planning - Provides a basic database for developing future financial plans and determining financing and financial investment needs

Steps for Preparing Statement of Financial Position

The process of preparing a statement of financial position requires following a specific and precise methodology to ensure the accuracy and reliability of financial data. This process depends on collecting and classifying all assets, liabilities, and equity in the company according to approved accounting standards, considering that this financial statement reflects the financial position at the end of a specific accounting period (usually at the end of the fiscal year or quarter).

The following are the basic steps for preparing a statement of financial position correctly and in compliance with standards:

1. Determining the Accounting Period and Financial Statement Date

The specific date that the statement of financial position will reflect is determined, which is usually the last day of the accounting period. This date is very important because the statement of financial position reflects the financial position at one point in time, not over a period of time, requiring all financial operations to be cut off at this specific date to ensure accuracy of the financial position presented in the statement.

2. Collecting and Analyzing Financial Data

At this stage, all accounting records and supporting financial documents from the general ledger are collected, including account balances and accounting entries. It also requires a comprehensive review of financial operations that took place during the accounting period and ensuring their correct recording and documentation to serve the accuracy of the final financial position.

3. Preparing Trial Balance

A trial balance is prepared to ensure the balance of debit and credit accounts, which is a basic step to verify the accuracy of accounting entries. This balance helps discover any arithmetic errors or missing accounting entries before proceeding with preparing the final financial statements and ensuring the integrity of the presented financial position.

4. Making Adjusting Entries

This step includes making all necessary adjustments such as depreciation, accrued expenses, deferred revenues, and inventory. These adjustments are necessary to apply the accrual accounting principle and ensure reflection of the company's true financial position on the financial statement preparation date and clarify the correct financial position.

5. Classification and Categorization of Items

All items are classified into their main categories: assets (current and non-current), liabilities (short-term and long-term), and equity. Each category is arranged according to liquidity or maturity degree according to applied accounting standards, helping present the financial position in a logical and understandable way.

6. Verifying the Basic Accounting Equation

It must be ensured that the basic accounting equation is satisfied: Assets = Liabilities + Equity. This balance confirms the accuracy of financial data and precision of the accounting recording and classification process, ensuring the integrity of the financial position presented in the final financial statement.

7. Final Review and Audit of Financial Statement

This stage includes a comprehensive review of all statement of financial position items and figures and ensuring consistent application of accounting policies. It also involves verifying appropriate disclosure and compliance with accounting standards and legal requirements before approving the final financial statement and ensuring quality of the presented financial position.

Methods of Analyzing Statement of Financial Position

Analyzing the statement of financial position is one of the most important tools used by financial analysts, investors, and stakeholders to evaluate financial performance and economic condition of companies. This analysis goes beyond merely reading absolute figures in the statement to include a deep understanding of relationships between different elements of the statement of financial position and what they reveal about the company's financial health and ability to grow and continue. Statement of financial position analysis helps evaluate financial position stability and its strength compared to competing companies.

The following are the basic methods for analyzing statement of financial position:

1. Horizontal Analysis (Trend Analysis)

Statement of financial position items are compared across several time periods to identify trends and changes in assets, liabilities, and equity. This analysis reveals growth or contraction rates in different elements of the financial statement and helps determine whether the company is improving or declining financially over time. Horizontal analysis of the statement of financial position shows the development of financial position across different years.

2. Vertical Analysis (Common-Size Analysis)

Involves converting all statement of financial position items to percentages of total assets or a specific base item, making it easier to understand the company's financial structure. This analysis shows the relative weight of each element in the statement and helps determine optimal distribution of financial resources and analyze the company's financial position structure.

3. Financial Ratio Analysis

Includes calculating key financial ratios such as liquidity ratios (current ratio and quick ratio), leverage ratios (debt-to-equity ratio), and activity ratios (asset turnover ratio). These ratios provide strong indicators of financial performance and allow comparison with competing companies or industry averages, helping evaluate financial position strength compared to the market.

4. Benchmarking and Industry Comparison

Involves comparing financial ratios and indicators extracted from the statement of financial position with industry averages or leading competing companies to determine the company's competitive position. This comparison helps identify areas needing improvement and determine best practices in the industry, showing strengths and weaknesses in the company's financial position compared to competitors.

Financial Ratios Derived from Statement of Financial Position

The statement of financial position is used to calculate important financial ratios that help analyze the company's financial position and evaluate its financial performance. The most important of these financial ratios include:

• Quick Ratio: (Current Assets - Inventory) ÷ Current Liabilities
• Current Ratio: Current Assets ÷ Current Liabilities
• Debt-to-Equity Ratio: Total Liabilities ÷ Equity
• Debt-to-Assets Ratio: Total Liabilities ÷ Total Assets
• Return on Assets: Net Profit ÷ Average Total Assets
• Return on Equity: Net Profit ÷ Average Equity

These financial ratios provide clear indicators of financial position and help make informed financial decisions.

Example of Statement of Financial Position

A practical example helps understand how to apply theoretical concepts of statement of financial position in real practice. This illustrative example of statement of financial position shows the actual distribution of assets, liabilities, and equity, enabling the reader to understand the company's financial position at a specific point in time.

Statement of Financial Position as of December 31, 2024

Amount (SAR)	Assets	Amount (SAR)	Liabilities and Equity
	Current Assets		Current Liabilities
25,000	Cash and cash equivalents	12,000	Accounts payable
18,000	Accounts receivable	8,000	Short-term loans
22,000	Inventory	5,000	Accrued expenses
3,000	Prepaid expenses	25,000	Total Current Liabilities
68,000	Total Current Assets
			Long-term Liabilities
	Fixed Assets	30,000	Long-term loans
85,000	Property, plant and equipment	30,000	Total Long-term Liabilities
(15,000)	Less: Accumulated depreciation	55,000	Total Liabilities
70,000	Net Fixed Assets
			Equity
	Other Assets	50,000	Share capital
12,000	Intangible assets	45,000	Retained earnings
12,000	Total Other Assets	95,000	Total Equity
150,000	Total Assets	150,000	Total Liabilities and Equity

This example of statement of financial position shows perfect balance where assets equal the sum of liabilities and equity, confirming the integrity of the presented financial position. It's also noted that the company's financial position in this example shows good diversification in assets with appropriate cash liquidity.

Frequently Asked Questions About Statement of Financial Position

What is the difference between statement of financial position and income statement?

The statement of financial position shows the company's financial position at a specific date (like a photograph), while the income statement shows financial performance over a specific period (like a movie). The basic statement of financial position includes assets, liabilities, and equity, while the income statement shows revenues, expenses, and profits. The purpose of the statement of financial position is to show financial position at a specific moment, while the income statement focuses on operating performance.

Why must the statement of financial position be balanced?

The statement of financial position must be balanced according to the basic accounting equation: Assets = Liabilities + Equity. This balance in the statement of financial position ensures correct accounting recording and reflects the reality that every asset in the company is either financed through debt or through owner investment. Imbalance in the statement of financial position indicates accounting errors that need correction before final statement approval.

How often should the statement of financial position be prepared?

The statement of financial position is usually prepared at the end of each accounting period, which may be monthly, quarterly, or annually. Public companies are required to prepare quarterly and annual financial statements including the statement of financial position, while other companies may prepare their statements monthly for internal administrative purposes. The frequency of preparing statement of financial position depends on management needs and regulatory requirements.

How do international accounting standards affect statement of financial position preparation?

International accounting standards determine classification, measurement, and disclosure methods in the statement of financial position. For example, International Accounting Standard No. 1 determines the minimum items for financial statements and their presentation methods, while other standards determine how to measure specific items such as fixed assets and financial instruments. Applying these standards ensures consistency of the statement of financial position with international standards and facilitates comparison between different companies.

What are common errors in preparing statement of financial position?

Common errors in preparing statement of financial position include: imbalance between both sides, incorrect classification of items (such as classifying long-term liability as short-term), failure to make necessary adjustments, failure to disclose contingent liabilities, and inconsistent application of accounting policies. These errors affect the accuracy of the statement of financial position and mislead statement users about the company's true financial position.

Why might a company's market value differ from its book value in the statement of financial position?

Book value in the statement of financial position depends on historical cost of assets less depreciation, while market value reflects market expectations for future profits and company growth. Some assets such as trademarks and expertise may not appear at their true value in the statement of financial position. This difference is natural and doesn't reflect an error in financial statement preparation, but shows the difference between accounting financial position and the company's market value.

Conclusion

After exploring all aspects of the statement of financial position from definition to practical application, it becomes clear that this financial statement is not just numbers and data, but a story that tells the company's financial reality and reveals its strengths and weaknesses. Every number in this accounting statement carries meaning and significance that helps draw a clear picture of the institution's financial health and shows the reality of the current financial position with all its details.

Now that you have the necessary tools to read and analyze statement of financial position, it's time to apply this knowledge practically. Start by analyzing statements of companies that interest you, calculate basic financial ratios extracted from statement of financial position, and compare performance across different years to understand financial position development. Remember that practice and practical application of statement of financial position analysis are the real keys to mastering this important financial art.

Always remember that the statement of financial position reflects the past and present, but its intelligent reading and correct financial position analysis can enable you to predict the future and make successful investment decisions. The more experience you gain in analyzing these financial statements and understanding the details of the presented financial position, the more capable you become of discovering golden opportunities and avoiding potential financial risks through reading statement of financial position with precision and expertise.