A statement of financial position lists what the business owns and owes on the last day of the year, and shows the owner’s capital that funds the difference. Net assets must equal capital.
This lesson finishes the sequence that began with preparing a trading account and preparing a profit and loss statement. It belongs to financial statements of a sole trader.
How do the two sides connect?
Assets minus liabilities gives net assets. Capital is what the owner has put in, plus profits kept, minus what was taken out as drawings. The two must agree because every transaction has two sides.
If they disagree, look at the lines that carry a year’s movement first: net profit, drawings and closing inventory.
Worked example: Kedai Runcit Hamidah at 31 December
This is the same original business as the earlier lessons, where net profit was RM9 500 and drawings were RM6 000. The remaining balances are:
| Item | RM |
|---|---|
| Equipment at original amount | 25 000 |
| Accumulated depreciation | 7 500 |
| Closing inventory | 11 000 |
| Trade receivables | 6 400 |
| Insurance paid in advance | 300 |
| Cash at bank | 4 200 |
| Cash in hand | 500 |
| Trade payables | 5 800 |
| Electricity owing | 200 |
| Bank loan (repayable after 5 years) | 10 000 |
Step 1: non-current assets. Equipment RM25 000 minus RM7 500 accumulated depreciation leaves a net book value of RM17 500.
Step 2: current assets. Inventory 11 000, receivables 6 400, prepayment 300, bank 4 200 and cash 500 total RM22 400. Total assets are RM39 900.
Step 3: liabilities. Current: payables 5 800 plus electricity 200 is RM6 000. Non-current: the loan of RM10 000. Total liabilities are RM16 000, so net assets are RM23 900.
Step 4: capital. Opening capital RM20 400 plus net profit RM9 500 minus drawings RM6 000 gives RM23 900. The two match.
The mistake that breaks the balance
A student adds drawings to capital because the word “drawings” sounds like something going in. The capital side grows and the statement cannot balance.
| Line | Wrong | Right |
|---|---|---|
| Capital working | 20 400 + 9 500 + 6 000 | 20 400 + 9 500 − 6 000 |
| Closing capital | RM35 900 | RM23 900 |
| Net assets | RM23 900 | RM23 900 |
The gap of RM12 000 is exactly twice the drawings. That pattern is a useful clue: a difference equal to double one figure usually means that figure went the wrong way. The mistake log and paper-error review is a good place to record it.
Check yourself
A business has equipment (net book value) RM12 000, inventory RM4 000, receivables RM3 000 and bank RM2 500. It owes payables RM2 000 and a long-term loan of RM5 000. Opening capital was RM12 000, net profit RM4 500 and drawings RM2 000. Show that the statement balances.
Answer
Total assets: 12 000 + 4 000 + 3 000 + 2 500 = RM21 500.
Total liabilities: 2 000 + 5 000 = RM7 000. Net assets: 21 500 − 7 000 = RM14 500.
Capital: 12 000 + 4 500 − 2 000 = RM14 500.
Both equal RM14 500, so the statement balances.
What to study next
Move on to distinguishing gross and net profit to explain the two profits in words, then test yourself with the chapter practice set.
If you want a teacher to rebuild a statement with you from a trial balance, see online one-to-one Accounting tuition.