5.4.1 Main Elements of a Statement of Financial Position
The Statement of Financial Position (balance sheet) is a snapshot of a business’s financial position at a single point in time (the reporting date). It is divided into three sections that the Cambridge IGCSE syllabus refers to as:
Assets – resources owned or controlled by the business.
Liabilities – obligations the business must settle.
Owners’ Funds (equity) – the residual interest of the owners after all liabilities have been deducted.
Classification of Assets and Liabilities
Both assets and liabilities are split into current and non‑current categories. The key criterion is the expected time of realization or settlement:
Current – expected to be realised/settled **within 12 months** of the reporting date.
Non‑current – expected to be realised/settled **after more than 12 months**.
Category
Current (≤ 12 months)
Non‑current (> 12 months)
Assets
Cash and cash equivalents, inventory (stock), trade receivables, prepaid expenses, short‑term investments, pre‑payments, tax refunds due within 12 months
Land and buildings, plant & equipment, intangible assets (patents, goodwill), long‑term investments, deferred tax assets, long‑term receivables, deposits (security)
Liabilities
Trade payables, tax payable, short‑term bank overdraft, accrued expenses, current portion of long‑term borrowings, provisions due within 12 months
Owners’ Funds represent the owners’ claim on the business after all liabilities have been deducted. Typical components examined in the IGCSE exam are:
Share capital – amount invested by shareholders for ordinary or preference shares.
Retained earnings – accumulated profits not distributed as dividends.
Reserves – amounts set aside for specific purposes (e.g., revaluation reserve, legal reserve).
Example: A small limited company might show “Share capital £50,000” and “Retained earnings £15,000” under Owners’ Funds.
Non‑Current Liabilities – Focus on Bank Loans
Definition
A non‑current liability is an obligation that will be settled after more than one year from the reporting date. A bank loan repayable over several years is a classic example.
Key Features of a Bank Loan
Principal amount borrowed.
Fixed or variable interest rate.
Repayment period (commonly 3–10 years).
Scheduled instalments – interest‑only or principal + interest.
Security or collateral may be required.
Accounting Treatment
Initial receipt – Debit Cash/Bank and credit Bank loan (liability) for the amount borrowed.
Interest expense each period – Calculate
$$\text{Interest Expense}= \text{Outstanding Principal} \times \text{Interest Rate}$$
Debit Interest expense and credit Interest payable (or Cash if paid immediately).
Repayment instalment – Split between principal and interest.
Debit Bank loan for the principal portion, debit Interest expense for the interest portion, and credit Cash.
Year‑end presentation – The balance of the loan that is due after more than 12 months is shown under Non‑Current Liabilities.
The portion that must be repaid within the next 12 months is re‑classified as a Current Liability (often labelled “Portion of long‑term loan due within 12 months”).
Example: Presentation in a Statement of Financial Position
ABC Ltd – Statement of Financial Position (31 December 2025)
Non‑Current Liabilities
Bank loan (5‑year term, 6 % p.a.)
£120,000
Long‑term lease liability
£30,000
Current Liabilities
Portion of bank loan due within 12 months
£24,000
Trade payables
£45,000
Accrued expenses
£10,000
Calculating the Annual Interest Expense
If the outstanding principal at the start of the year is £120,000 and the loan carries a 6 % annual rate, the interest expense for the year is:
Debt‑to‑Equity Ratio – measures the proportion of financing that comes from creditors versus owners.
$$\text{Debt‑to‑Equity}= \frac{\text{Total Liabilities}}{\text{Owners’ Funds}}$$
Interest Coverage Ratio – shows the ability to meet interest payments.
$$\text{Interest Coverage}= \frac{\text{Profit Before Interest and Tax (EBIT)}}{\text{Interest Expense}}$$
Interpretation Checklist (What Candidates Should Look For)
What proportion of total assets is financed by debt? (Use the debt‑to‑equity ratio.)
Which liabilities are due within the next 12 months? (Identify current liabilities, especially the current portion of long‑term loans.)
Does the business generate enough operating profit to meet interest payments? (Consider the interest coverage ratio.)
What does the split between current and non‑current liabilities reveal about the firm’s financing strategy?
Are there any red flags, such as a large current portion of a long‑term loan that could threaten short‑term liquidity?
Teacher Tip
When asking candidates to interpret a statement of financial position, prompt them to justify each conclusion. For example:
“Explain why a high proportion of current liabilities might indicate a liquidity problem.”
“Discuss how a large non‑current loan affects the business’s long‑term solvency.”
This encourages analytical thinking and links the data to real‑world business decisions.
Suggested diagram: A flowchart that first splits Liabilities into Current and Non‑current. Under Non‑current highlight “Bank loan (non‑current)”. An arrow then points to “Portion due within 12 months” placed under Current.
Summary
Non‑current liabilities, such as bank loans, represent long‑term financing and appear under the “Non‑Current Liabilities” section of the Statement of Financial Position. Correct classification (current vs. non‑current), accurate measurement of interest expense, and the re‑classification of the portion due within the next year are essential for reliable reporting. Understanding how these items affect ratios and what they reveal about a business’s financing mix and liquidity equips students to answer IGCSE Business Studies exam questions with confidence.
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