Statement of financial position — common mistakes

In exam questions, you may be asked to calculate a missing figure. Always start with the accounting equation (Assets = Liabilities + Equity). Remember that 'Total Assets' must equal 'Total Equity and Liabilities'.

When analysing a SoFP, pay close attention to the relationship between current assets and current liabilities. This is known as working capital and is a key indicator of a firm's ability to pay its short-term debts.

When a question gives net assets, that equals equity. Do not double-count liabilities.

Not necessarily. A company can be profitable (as shown on the Statement of Comprehensive Income) but have poor liquidity. For example, if it makes many credit sales that customers are slow to pay (high trade receivables) and has large short-term debts, it could face a cash flow crisis despite being profitable. The SoFP reveals this liquidity position.

It is called a Balance Sheet because it is based on the accounting equation (Assets = Liabilities + Equity), which must always balance. The total value of all assets must equal the total value of all claims on those assets from both creditors (liabilities) and owners (equity).

Yes. This occurs when total liabilities are greater than total assets. This is a very serious financial situation, sometimes referred to as insolvency. It means that even if the business sold all its assets, it could not pay off all its debts, leaving nothing for the owners. Such a business is at a very high risk of failure.