Statement of Financial Position
By Colin Nicholson
Anyone who has ever invested in a stock on the Australian Securities Exchange, or directly in a private company, should have come across an important accounting document called a Statement of Financial Position. If you are not so new to the game of investing, you might know it by its old name of Balance Sheet. They are the same thing; it is just that the powers that be change the terminology from time to time.
While it can be quite complex for an accountant to draw up a Statement of Financial Position, the basic underlying idea is very simple. In accounting jargon the basic underlying equation is:
Assets minus Liabilities = Equity
Equity used to be also known as Shareholders Funds.
In plain language, this equation means: what the business owns less what the business owes equals what is owned by the shareholders.
Sometimes a bank or other lender might ask any one of us for a Statement of Financial Position. For an individual it is the same idea: what you own less what you owe is what you are worth if you sold everything up and paid all your debts.
Once you see it like this in really simple terms, the idea of a Statement of Financial Position becomes less daunting and we can see its main purpose. This is to tell us how sound the business (or person) is in financial terms.
Colin Nicholson's books: Building Wealth in the Stock Market and The Psychology of Investing may be purchased from Colin's website www.bwts.com.au and good bookstores). Contact Colin at firstname.lastname@example.org or through his web site where you may join the list to receive his free email newsletter.