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MOD003319: The owner’s confusion about the placement of their equity in the Statement of Financial Position can be clarified: Business Finance Report, RU, UK
| University | Roehampton University (RU) |
| Subject | MOD003319: Business Finance |
The owner’s confusion about the placement of their equity in the Statement of Financial Position can be clarified by understanding the accounting equation, which states that assets equal liabilities plus equity (Kieso et al., 2021). In a Statement of Financial Position, assets are listed first, followed by liabilities and equity. The owner’s equity is not considered an asset but is instead part of the equation that balances the statement (Kieso et al., 2021). Therefore, it is important to understand the accounting equation and its impact on how assets, liabilities, and equity are classified in the Statement of Financial Position.
The owner of a business may question why their equity is listed alongside liabilities on the Statement of Financial Position. They may argue that their equity is an asset and should be listed as such. However, according to the International Financial Reporting Standards (IFRS), equity is categorized separately on the balance sheet and is listed beneath liabilities (Deloitte, 2022). This is because equity represents the residual interest in a company’s assets after subtracting liabilities (Kieso et al., 2021). Therefore, it is not considered a tangible resource and cannot be presented as a separate asset on the balance sheet.
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The accounting equation is a fundamental principle in financial accounting, which states that assets are equal to liabilities plus equity (Spiceland et al., 2021). The placement of equity next to liabilities in the statement of financial position follows standard accounting practice and provides a clear representation of the company’s financial position (Kieso et al., 2021). However, if the owner wants to determine the value of their equity, they can calculate it by subtracting the liabilities from the total assets. This can help the owner understand the amount of ownership they have in the company and how it contributes to the overall financial position of the company (Weygandt et al., 2019).
So, it’s been expressed and explained that while the owner’s equity in the company can be considered an asset from their perspective, it represents a claim on the company’s assets rather than a tangible resource. Therefore, it is not shown as a separate asset on the statement of financial position.
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