Business Finance · Construction and features of company accounts and reports

Statement of Financial Position (Balance Sheet) for IAI CB1

Updated 11 October 2026 · Fact-checked

A statement of financial position (balance sheet) lists what a company owns (assets), what it owes (liabilities) and the owners' residual claim (equity) at one date. It always satisfies Assets = Liabilities + Equity. To solve questions, classify each item as current or non-current, then apply the right valuation basis.

Understand Statement of Financial Position (Balance Sheet)

A statement of financial position, also called the balance sheet, is a snapshot. It shows the company's financial position on one date, not over a period. The profit or loss statement covers a period. The balance sheet does not.

It has three parts. Assets are resources the company controls that are expected to bring future economic benefits. Liabilities are present obligations to pay or transfer value to others. Equity is what is left for the owners after liabilities are deducted from assets. This gives the accounting equation: Assets = Liabilities + Equity.

Items are split by time. Current assets are cash, items expected to turn into cash within the normal operating cycle or within 12 months (inventory, trade receivables), or items held for trading. Other assets are non-current (property, plant and equipment, intangibles, long-term investments). Current liabilities are due within 12 months or the operating cycle (trade payables, short-term loans, tax payable). Other liabilities are non-current (long-term loans, debentures).

Each item has a valuation basis. Historical cost records the amount paid when the item was acquired. It is objective and easy to check, but it can be out of date. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. It is more current but needs judgement. Many items use a mix: property, plant and equipment is often at cost less accumulated depreciation, inventory at the lower of cost and net realisable value, receivables net of expected credit losses, and some financial instruments at fair value.

Equity contains share capital, reserves (such as share premium and revaluation surplus) and retained earnings. In India, companies reporting under Schedule III of the Companies Act 2013 follow a prescribed layout, and many follow Ind AS. For the IAI, focus on the principles: the equation, classification, and why each valuation basis is chosen.

Key rules to remember

Accounting equation: Assets = Liabilities + Equity; Must hold at the balance sheet date. Use it to find any missing figure.
Net assets: Net assets = Total assets − Total liabilities = Equity; Equity is the residual claim of the shareholders.
Working capital: Working capital = Current assets − Current liabilities; Positive means short-term obligations are covered by short-term assets.
Carrying amount of a depreciable asset: Carrying amount = Cost − Accumulated depreciation − Impairment; Used when the asset is held at cost, not revalued.
Inventory valuation: Inventory = lower of cost and net realisable value (NRV); NRV = estimated selling price − estimated costs to complete and sell. Apply item by item or by group of similar items.
Closing retained earnings: Closing retained earnings = Opening retained earnings + Profit for the year − Dividends declared; Links the profit statement to the balance sheet. Dividends reduce equity when declared.

How to solve Statement of Financial Position (Balance Sheet) questions

Use this method for both numerical and descriptive balance sheet questions.

1Read the question and note the balance sheet date and the reporting framework named, if any.
2List every item given and tag each as asset, liability or equity.
3Split assets and liabilities into current and non-current using the 12-month or operating cycle test.
4Apply the valuation basis for each item: cost less depreciation, lower of cost and NRV, fair value, or amortised cost, as the question or standard requires.
5Make adjustments first: depreciation, accruals, prepayments, bad debts, closing inventory, tax and proposed or declared dividends.
6Total each section and check that Assets = Liabilities + Equity. If it does not, recheck adjustments and classification.
7For descriptive parts, state the basis used and give one reason for it, with its strength or weakness.

Quickest way: Three-column tick and total

When to use it: Use this for time-pressured numerical questions with a trial balance and a few adjustments.

Draw three columns: Assets, Liabilities, Equity. Place each trial balance item in one column.
Debit balances for assets go to Assets. Credit balances for loans and payables go to Liabilities. Share capital and reserves go to Equity.
Apply each adjustment once, to both sides, so the equation stays in balance.
Add profit for the year to retained earnings and remove dividends declared.
Subtotal current and non-current items, then check Assets = Liabilities + Equity before writing the final layout.

Common mistakes in Statement of Financial Position (Balance Sheet)

Treating the balance sheet as a record of a period rather than a date.
It is confused with the profit statement, which covers a period.
Fix: Write 'as at' the date in every answer and use period language only for profit and cash flow.
Classifying a long-term loan as non-current without checking the repayment due within 12 months.
Students classify by the loan's original term.
Fix: Move the part repayable within 12 months to current liabilities and keep the rest in non-current.
Stating that fair value is always better than historical cost.
Fair value sounds more up to date.
Fix: Give both sides: fair value is relevant but needs estimates and can be volatile; historical cost is reliable and verifiable but can be out of date.
Valuing inventory at selling price or at cost when NRV is lower.
The lower of cost and NRV rule is forgotten.
Fix: Compare cost and NRV for each item and write down to the lower. Never write up above cost.
Deducting depreciation from the asset but forgetting it reduces profit and so equity.
Adjustments are applied to only one side.
Fix: Every adjustment affects two places. Depreciation lowers the asset and lowers retained earnings through profit.
Showing dividends proposed after the year end as a liability.
Students assume every dividend is owed.
Fix: Only dividends declared or approved by the balance sheet date create a liability. Others are disclosed in the notes.

Worked examples

Example 1

At 31 March, a company has: property, plant and equipment at cost ₹80,00,000 with accumulated depreciation ₹20,00,000; inventory at cost ₹10,00,000 with NRV ₹8,50,000; trade receivables ₹6,00,000; cash ₹4,00,000; trade payables ₹5,00,000; a 10-year bank loan of ₹30,00,000; share capital ₹40,00,000. Find retained earnings as the balancing figure, and state working capital.

Show the solution

Value PPE at carrying amount: 80,00,000 − 20,00,000 = ₹60,00,000.
Value inventory at the lower of cost and NRV: lower of ₹10,00,000 and ₹8,50,000 = ₹8,50,000.
Current assets = 8,50,000 + 6,00,000 + 4,00,000 = ₹18,50,000.
Total assets = 60,00,000 + 18,50,000 = ₹78,50,000.
Liabilities = 5,00,000 + 30,00,000 = ₹35,00,000. Of these, current liabilities are ₹5,00,000.
Equity = 78,50,000 − 35,00,000 = ₹43,50,000.
Retained earnings = 43,50,000 − 40,00,000 = ₹3,50,000.
Working capital = 18,50,000 − 5,00,000 = ₹13,50,000.

Answer: Retained earnings are ₹3,50,000 and working capital is ₹13,50,000. Total assets are ₹78,50,000.

Example 2

Explain why a company may report land at historical cost in one balance sheet, and at fair value in another, and state one advantage and one disadvantage of each basis.

Show the solution

State the definitions. Historical cost is the amount paid at acquisition. Fair value is the price obtainable in an orderly sale between market participants at the reporting date.
Explain why the basis may differ: accounting policy and the standard in use allow a cost model or a revaluation model for some assets, and a company may choose or change within what is permitted.
Advantage of historical cost: it is objective and verifiable from past transactions, so it is reliable and cheap to produce.
Disadvantage of historical cost: during rising prices the carrying amount can fall well below current value, so the balance sheet understates resources.
Advantage of fair value: it shows current worth, so users can better judge the company's financial position.
Disadvantage of fair value: it needs estimates, which may be subjective and can make equity volatile.
Note that a revaluation gain on land normally goes to a revaluation reserve in equity, not to profit, under the usual treatment.

Answer: Different bases arise because accounting rules permit a cost or a revaluation choice. Historical cost is reliable but can be out of date. Fair value is relevant but depends on estimates and can be volatile.

Exam tips

In MCQs, check the balance sheet date and whether an item is current or non-current before computing anything.
Always end numerical answers with a check that Assets = Liabilities + Equity. Examiners reward the check.
For 'discuss' parts, give a definition, one advantage and one disadvantage of each basis, and link them to users of accounts.
Show every adjustment on its own line so you can earn method marks even if a figure is wrong.
Use the correct terms: statement of financial position, carrying amount, net realisable value, retained earnings.

Practice questions from Construction and features of company accounts and reports

Statement of Financial Position (Balance Sheet) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Statement of Financial Position (Balance Sheet): frequently asked questions

What is the difference between current and non-current assets?

Current assets are cash and items expected to be turned into cash or used within 12 months or the normal operating cycle, such as inventory and receivables. Non-current assets are held for longer use, such as plant and long-term investments.

What is the difference between fair value and historical cost?

Historical cost is the price paid when the item was acquired. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction at the measurement date. Cost is more reliable. Fair value is more up to date.

How do I prepare a balance sheet from a trial balance?

Sort each balance into assets, liabilities and equity. Apply adjustments such as depreciation, accruals and closing inventory. Add the year's profit to retained earnings. Then classify items as current or non-current and check that the equation balances.

Is equity just share capital?

No. Equity also includes reserves such as share premium and revaluation surplus, and retained earnings. It is the total residual claim of the owners after liabilities are deducted from assets.