The statement of financial position reflects a company's assets, liabilities, and equity. Assets are what the company owns, liabilities are what it owes, and equity is the owners' residual interest. They are connected by the equation Assets = Liabilities + Equity, illustrating the sources of funding for assets.
The statement of financial position, also known as the balance sheet, is a fundamental financial statement that reports a company's assets, liabilities, and equity at a specific point in time. An asset is something of value that the company owns, which can produce future benefits, such as cash, inventory, or equipment. A liability represents obligations that the company owes to outsiders and must settle in the future, like loans or accounts payable. Lastly, equity, also known as shareholders' equity or net worth, is the residual interest in the assets of the company after deducting liabilities. It includes funds contributed by the owners and retained earnings.
The relationship between these three terms is captured in the fundamental accounting equation: Assets = Liabilities + Equity. This equation shows that a company funds the acquisition of its assets either through borrowing (incurring liabilities) or through the owners' investments (equity). At any point, the total value of assets must be equal to the combined value of liabilities and equity.
For banks, the concept is similar but with specific classifications. Bank assets include cash, reserves held at the central bank, loans to customers, and securities. Bank liabilities are primarily customer deposits and money owed to other institutions. The difference between a bank's assets and liabilities is known as bank capital or net worth, which offers a buffer against losses and a measure of the bank's financial health.