In simple terms
A friendly intro before the formal notes — no formulas yet.
Statement of financial position
7115 O-Level — assets, liabilities, equity, accounting equation, and financial position analysis.
- 1
Provides a financial 'snapshot' on a specific date (e.g., 'as at 31 December 2023').
- 2
Formally lists a company's assets, liabilities, and equity.
- 3
Also known as the Balance Sheet, as it must always balance.
- 4
Essential for analysis by both internal (management) and external (investors, banks) stakeholders.
Explore the concept
Use the live diagram and synced steps — play it or tap a step card to walk through.
Key formulas
Tap any symbol to reveal exactly what it means and its units.
Tap a symbol — great for exam definitions
At a glance — side by side
Compare key properties side by side — ideal for exam contrasts.
Comparison of Non-Current Assets and Current Assets
| Feature | Non-Current Assets | Current Assets |
|---|---|---|
| Time Horizon | Held for more than one year. | Expected to be converted to cash within one year. |
| Purpose | Used in operations to generate income. | Part of the day-to-day trading cycle. |
| Liquidity | Generally illiquid (difficult to convert to cash quickly). | Highly liquid (easily converted to cash). |
| Examples | Property, Plant, Equipment (PPE), Vehicles, Intangible Assets (e.g., patents). | Inventories, Trade Receivables, Cash and Cash Equivalents. |
| Valuation on SoFP | Shown at cost less accumulated depreciation (net book value). | Shown at or close to their cash value. |
Time Horizon
Non-Current Assets
Current Assets
Purpose
Non-Current Assets
Current Assets
Liquidity
Non-Current Assets
Current Assets
Examples
Non-Current Assets
Current Assets
Valuation on SoFP
Non-Current Assets
Current Assets
Full topic notes
Formal explanation with the rigour you need for the exam.
Introduction to the Statement of Financial Position (SoFP)
The Statement of Financial Position, often referred to by its traditional name, the Balance Sheet, provides a snapshot of a business's financial health at a single point in time. It is not a record of performance over a period, but rather a static picture of what a business owns (assets) and what it owes (liabilities) on a specific day. The difference between these two is the owners' stake, known as equity. This statement is a cornerstone of financial reporting, used by a wide range of stakeholders. Investors use it to assess the value and risk of their investment, lenders use it to evaluate creditworthiness, and managers use it for strategic decision-making, such as managing debt levels and asset allocation.
Provides a financial 'snapshot' on a specific date (e.g., 'as at 31 December 2023').
Formally lists a company's assets, liabilities, and equity.
Also known as the Balance Sheet, as it must always balance.
Essential for analysis by both internal (management) and external (investors, banks) stakeholders.
The Fundamental Accounting Equation
The entire structure of the Statement of Financial Position is built upon the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always hold true. 'Assets' are the economic resources owned by the business. 'Liabilities' are the financial obligations owed to third parties (creditors). 'Equity' represents the owners' claim on the business's assets, also known as the net assets. Every financial transaction has a dual effect that maintains this balance. For instance, if a business buys a £50,000 machine (an asset) using a bank loan (a liability), assets increase by £50,000 and liabilities also increase by £50,000, keeping the equation perfectly balanced. This principle ensures the statement is a self-checking and reliable document.
The core formula is: Assets = Liabilities + Equity.
It can be rearranged to define equity: Equity = Assets - Liabilities.
Every transaction has a dual impact, ensuring the equation remains balanced.
This equation represents the two sides of the SoFP: what the business owns and who has a claim on those resources.
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'.
Assets: Non-Current and Current
Assets are categorised based on their liquidity, which is how easily they can be converted into cash. Non-Current Assets (NCAs) are long-term resources, held for over a year, that are used to operate the business and generate income. Examples include property, plant, and equipment (PPE), vehicles, and intangible assets like patents or brand value. They are not intended for resale. In contrast, Current Assets (CAs) are short-term resources expected to be converted into cash, sold, or consumed within one year. They are central to the business's trading cycle and include inventory (stock), trade receivables (money owed by customers), and cash in the bank. The composition of assets reveals much about a company's operational strategy and liquidity.
Non-Current Assets (NCAs) are long-term (>1 year) and used for operations (e.g., machinery, buildings).
Current Assets (CAs) are short-term (<1 year) and part of the trading cycle (e.g., inventory, trade receivables).
Assets are resources controlled by the business from which future economic benefits are expected.
Intangible assets, such as goodwill and patents, are a specific type of non-current asset.
Liabilities and Equity: The Claims on Assets
The right-hand side of the accounting equation shows who has a claim on the company's assets. These claims are divided into liabilities and equity. Liabilities are obligations to external parties. They are split into Non-Current Liabilities (NCLs), which are debts due for repayment in more than one year (e.g., long-term bank loans, debentures), and Current Liabilities (CLs), which are debts due within one year (e.g., trade payables, bank overdrafts). Equity, also called Shareholders' Funds, is the residual claim of the owners. It comprises Share Capital, the funds directly invested by shareholders in exchange for shares, and Retained Earnings, which are the accumulated profits that the business has kept rather than distributing as dividends.
Non-Current Liabilities (NCLs) are debts payable after one year.
Current Liabilities (CLs) are debts payable within one year.
Equity represents the owners' investment and stake in the net assets.
Equity is calculated as Share Capital plus Retained Earnings.
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.
Layout and classification
Assets (ordered by liquidity within each section):
- Non-current assets — held for more than one year.
- Current assets — cash, inventory, receivables within one year.
Liabilities and equity:
- Current liabilities — due within one year.
- Non-current liabilities — long-term borrowings.
- Equity — owners' stake.
Assets = Liabilities + Equity
Working capital = Current assets − Current liabilities
Capital employed ≈ Equity + Non-current liabilities
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
Total assets $500 000; current liabilities $80 000; non-current liabilities
Calculate equity and working capital.
- 1
Equity = Assets − Total liabilities = 500 000 − (80 000 + 150 000) = **
GreenTech Solutions has the following financial data as at 31 December 2023:
- Property, Plant, and Equipment:
- Inventory:
- Trade Receivables:
- Cash at Bank:
- Long-term Bank Loan:
- Trade Payables:
- Share Capital:
Calculate Total Assets, Total Liabilities, and the value of Retained Earnings needed to balance the statement.
- 1
Step 1: Calculate Total Assets
- Non-Current Assets = Property, Plant, and Equipment =
- Current Assets = Inventory + Trade Receivables + Cash at Bank
- = 45,000 + 140,000
- Total Assets = Non-Current Assets + Current Assets
- = 140,000 = **
How it all connects
The big idea sits in the middle — tap a linked idea to explore the link.
Tap a linked idea to see how it connects back to the main topic — that connection is what examiners reward.
Glossary
Try to recall each definition before you reveal it.
Quick check
Answer in your head first — then tap to check. No pressure.
Revision flashcards
Flip the card. Test yourself before the exam.
Accounting equation?
Assets = Liabilities + Equity.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
- ✓
Provides a financial 'snapshot' on a specific date (e.g., 'as at 31 December 2023').
- ✓
Formally lists a company's assets, liabilities, and equity.
- ✓
Also known as the Balance Sheet, as it must always balance.
- ✓
Essential for analysis by both internal (management) and external (investors, banks) stakeholders.
Practice — then mark it
The whole point: a real Cambridge question, marked mark-by-mark.
Mark a financial position question
Mark a financial position question
Extra simulations & links
PhET, GeoGebra and other curated tools — open in a new tab.
Frequently asked
Checkpoint
One marked question is worth ten re-reads — close the loop before you move on.
Reading it isn’t knowing it — prove it.
Before you move on: do Mark a financial position question on paper, snap a photo, and get examiner-style feedback on exactly where you win and lose marks.