How to prepare the Statement of Financial Position

Financial Statements of a Sole Proprietorship without Adjustments

What you need

• An adjusted Trial Balance listing the balances of all asset, liability and owner's equity accounts.
• The net profit or net loss from the Income Statement for the period.
• Adjustment information such as accumulated depreciation, closing inventory, prepaid expenses and accrued expenses.
• The business name and the statement date, for example 'as at 31 December 2024'.

Step by step

1. 1

   Gather and classify the information

   Take the adjusted Trial Balance of Perniagaan Setia Maju as at 31 December 2024 and the Income Statement showing a net profit of RM18,000. Sort each balance into four groups: non-current assets, current assets, liabilities and owner's equity. The balances identified include Premises RM80,000, Vehicles (cost) RM40,000, Fittings (cost) RM12,000, Closing inventory RM15,000, Trade receivables RM8,000, Bank RM6,000, Cash RM1,000, Trade payables RM10,000, Bank loan RM40,000, Opening capital RM90,000 and Drawings RM8,000.

2. 2

   List non-current assets at net book value

   List non-current assets in order of permanence, most permanent first. Deduct accumulated depreciation from the cost of each asset to obtain net book value. Vehicles: cost RM40,000 less accumulated depreciation RM10,000 = RM30,000. Fittings: cost RM12,000 less accumulated depreciation RM2,000 = RM10,000. Premises RM80,000 has no depreciation. Total Non-current Assets = RM80,000 + RM30,000 + RM10,000 = RM120,000.

3. 3

   List current assets in order of liquidity

   List current assets from the least liquid to the most liquid: Closing inventory RM15,000, Trade receivables RM8,000, Bank RM6,000 and Cash RM1,000. Add them up: Total Current Assets = RM15,000 + RM8,000 + RM6,000 + RM1,000 = RM30,000. Any prepaid expenses are also placed here as current assets.

4. 4

   Calculate Total Assets

   Add the totals of the two asset groups: Total Assets = Non-current Assets RM120,000 + Current Assets RM30,000 = RM150,000. This figure must later equal the total of Owner's Equity and Liabilities at the foot of the statement.

5. 5

   Calculate Owner's Equity (closing capital)

   Start with opening capital RM90,000, add net profit RM18,000, then deduct drawings RM8,000. Closing Capital = RM90,000 + RM18,000 − RM8,000 = RM100,000. Remember: net profit is added while drawings are always deducted from owner's equity.

6. 6

   List non-current and current liabilities

   Non-current Liabilities are debts payable in more than one year: Bank loan RM40,000. Current Liabilities are debts payable within one year: Trade payables RM10,000. Total Equity and Liabilities = Owner's Equity RM100,000 + Bank loan RM40,000 + Trade payables RM10,000 = RM150,000.

7. 7

   Check that the statement balances

   Compare Total Assets with Total Equity and Liabilities. Both show RM150,000, so the statement balances and satisfies the accounting equation Assets = Owner's Equity + Liabilities. Make sure the full heading is written: 'Perniagaan Setia Maju, Statement of Financial Position as at 31 December 2024'.

Second example

Now take Kedai Harmoni, which makes a net loss of RM5,000 for the year ended 31 December 2024. Opening capital is RM60,000 and drawings RM4,000. Owner's equity is worked out as: opening capital RM60,000 less net loss RM5,000 less drawings RM4,000 = closing capital RM51,000. Note that the net loss is deducted, unlike the net profit of Perniagaan Setia Maju which is added.

Kedai Harmoni also has two adjustments: a prepaid expense (insurance paid in advance) of RM600 is placed under current assets, while an accrued expense (unpaid wages) of RM900 is placed under current liabilities. If non-current assets are RM70,000 and current assets including the prepaid expense total RM20,000, then total assets are RM90,000; equity RM51,000 plus a long-term loan RM30,000 plus current liabilities including the accrued expense RM9,000 also total RM90,000, so the statement still balances.

Common mistakes

Related chapter: Financial Statements of a Sole Proprietorship without Adjustments →

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