A sole trader’s statement of financial position is a private document. A company’s is not. A company is regulated, its owners hold shares, and its statements are read by shareholders, lenders, the tax authority and the public.
The preparation process is the same, but the layout is stricter, the capital section is different. There are items such as share capital, reserves, loan notes and tax payable that a sole trader never has.
This topic covers the components of a company’s financial statements under International Accounting Standard (IAS) 1, how to classify current and non-current items, what is shown on the face of the statement, and the standard layout. It builds on the sole trader statements, and the next two topics cover the statement of profit or loss with income tax, and share capital.
A company statement of financial position is a 6 to 14 mark requirement in the company final accounts questions of the past diets.
In 30 seconds
Assets equal equity plus liabilities. Show Non-current assets (property, plant and equipment, intangibles, investments) then Current assets (inventories, receivables, prepayments, cash). An asset is current if it will be sold, used or collected in the normal operating cycle, or within 12 months, or if it is cash.
Show Equity as share capital, share premium, retained earnings and other reserves, then Non-current liabilities (loan notes, long-term loans), then Current liabilities (payables, overdraft, current portion of loans, tax payable). The part of a loan due within 12 months is current. A bank overdraft is a current liability, not a negative asset. Redeemable preference shares are a liability, and a proposed dividend is not a liability until declared.
The complete set of financial statements
IAS 1 sets out what published general-purpose statements contain. The objective is to give information about the financial position, performance and cash flows that is useful to a wide range of users. A complete set has:
- a statement of financial position at the end of the period;
- a statement of profit or loss and other comprehensive income (one statement, or two);
- a statement of changes in equity;
- a statement of cash flows; and
- notes, with a summary of the accounting policies and other explanations.
The statements must present fairly. Comparative figures for the previous period are normally shown, though you are not asked to provide them. Each statement must display the name of the entity, the date or period covered, the currency and the level of rounding, such as thousands or millions of naira. IAS 1 does not fix the names, so “balance sheet” and “income statement” are acceptable older terms.
Only the statement of profit or loss part of comprehensive income is examined at this level, because other comprehensive income is outside the syllabus.
What differs from a sole trader is the capital: a company has share capital and reserves, not a single capital account, and it owes tax on its profits, which a sole trader’s business does not record.
Current and non-current items
Current and non-current assets are shown separately, and so are current and non-current liabilities. As a general rule, an amount is current if it is expected to be recovered or settled no more than 12 months after the reporting date.
| Current assets: any one of | Current liabilities: any one of |
|---|---|
| Expected to be realised, sold or consumed in the normal operating cycle | Expected to be settled in the normal operating cycle |
| Held for trading | Held primarily for trading, so all trade payables are current |
| Expected to be realised within 12 months of the reporting date | Due to be settled within 12 months of the reporting date |
| Cash or a cash equivalent, unless restricted for at least 12 months | The entity has no unconditional right to defer settlement for at least 12 months |
Everything else is non-current. Inventory and receivables are current even if they will take longer than 12 months to realise, as long as they are realised in the normal operating cycle. When the cycle is not clear it is taken as 12 months, which is almost always the case. Cash is money in a current account, and a cash equivalent is money in a term deposit account.
A loan repaid in instalments. An entity borrows ₦100,000,000 on 1 January 2022, repayable in ten equal annual instalments starting in December 2022. On 1 January the current liability is ₦10,000,000 and the non-current liability ₦90,000,000. At 31 December 2022, after the first instalment is paid, the next instalment of ₦10,000,000 is current and the remaining ₦80,000,000 is non-current.
What appears on the face of the statement
IAS 1 requires at least these line items: property, plant and equipment, intangible assets, inventories, trade and other receivables, cash and cash equivalents, trade and other payables, financial liabilities such as bank loans, current tax, and issued capital and reserves. More lines are added when they help understanding.
Some items are broken down on the face or in a note: property, plant and equipment into classes, receivables into trade receivables, prepayments and other amounts, and inventories into merchandise, materials, work-in-progress and finished goods.
The standard layout
IAS 1 gives an illustrative layout in its guidance. It is not mandatory, but you should learn it and use it. Here it is with illustrative figures for ABCD Entity.
| ABCD Entity: statement of financial position | ₦m |
|---|---|
| Property, plant and equipment | 205.1 |
| Intangible assets | 10.7 |
| Investments | 6.8 |
| Total non-current assets | 222.6 |
| Inventories | 17.8 |
| Trade and other receivables | 13.3 |
| Other current assets | 2.0 |
| Cash and cash equivalents | 0.7 |
| Total current assets | 33.8 |
| Total assets | 256.4 |
| Share capital | 50.0 |
| Retained earnings | 60.6 |
| Other components of equity | 31.9 |
| Total equity | 142.5 |
| Long-term borrowings | 30.0 |
| Deferred tax | 4.5 |
| Total non-current liabilities | 34.5 |
| Trade and other payables | 67.1 |
| Short-term borrowings (bank overdraft) | 3.2 |
| Current portion of long-term borrowing | 5.0 |
| Current tax payable | 4.1 |
| Total current liabilities | 79.4 |
| Total equity and liabilities | 256.4 |
Equity, loan notes and preference shares
Equity is share capital, share premium, retained earnings and other reserves. Loan notes are not equity. Loan notes are debt: the principal is a non-current liability, the interest is a finance cost in profit or loss, and unpaid interest is a current liability. Redeemable preference shares are repayable and are classified as liabilities, and their dividend is a finance cost.
Under section 147 of Companies and Allied Matters Act 2020 (CAMA 2020), Nigerian companies may issue only redeemable preference shares. A Proposed dividend is not a liability until it is declared. It is disclosed in the notes. The next topics cover the entries for shares and the profit-and-loss side.
The ideas in more depth
A common mistake. A practice question on XYZ Ltd gives a bank overdraft of ₦500,000 and the solution shows it as negative cash within current assets, which makes total assets ₦14,800,000. An overdraft is a current liability (the illustrative layout lists “short-term borrowings (bank overdraft)” among current liabilities). The correct statement has property, plant and equipment 10,000, inventories 2,000 and trade receivables 3,300, so total assets are ₦15,300,000.
Equity is 5,000 + 7,500 = 12,500, and current liabilities are trade payables 2,300 plus overdraft 500 = 2,800. Total equity and liabilities are ₦15,300,000.
Background. International Financial Reporting Standard (IFRS) 18, issued in 2024, replaces IAS 1 from 1 January 2027, although early adoption is allowed. It is covered in a later topic. Until then, the IAS 1 layout above is the one to use. A statement of financial position is always drawn at a date, not for a period. In an exam, if the question says “ignore taxation”, leave out tax payable. If it gives tax, include it as a current liability.
Worked example: Lokoja Industries Ltd
Scenario. At 31 December Lokoja Industries Ltd has these balances (₦000): land and buildings at cost 600,000 with accumulated depreciation 120,000; plant at cost 300,000 with accumulated depreciation 90,000; inventories 85,000; trade receivables 140,000 with an allowance for doubtful debts of 7,000; prepayments 6,000; cash 12,000; bank overdraft 20,000; trade payables 96,000; accrued expenses 14,000; income tax payable 25,000; a bank loan of 180,000, repayable in six equal annual instalments with the first due next year; share capital 400,000; and share premium 100,000.
Required: the statement of financial position, with retained earnings as the balancing figure.
- Non-current assets.
Land and buildings 600,000 − 120,000 = 480,000.
Plant 300,000 − 90,000 = 210,000.
Total 690,000. - Current assets.
Inventories 85,000; receivables 140,000 − 7,000 = 133,000; prepayments 6,000; cash 12,000.
Total 236,000.
Total assets 926,000. - Loan.
Each instalment is 180,000 ÷ 6 = 30,000.
The current portion is 30,000 and the non-current portion is 150,000. - Current liabilities. Trade payables 96,000, accruals 14,000, overdraft 20,000, current portion of the loan 30,000, tax payable 25,000. Total 185,000.
Total liabilities 150,000 + 185,000 = 335,000. - Equity.
926,000 − 335,000 = 591,000.
Share capital 400,000 + share premium 100,000 + retained earnings 91,000.
Common mistakes in the exam
- Netting the bank overdraft against cash instead of showing it as a current liability.
- Showing the whole of a loan as non-current when part is due within 12 months.
- Treating loan notes or redeemable preference shares as equity.
- Including a proposed dividend as a liability.
- Forgetting to deduct the allowance for doubtful debts from receivables.
- Showing the statement in an unbalanced way, because the profit for the year was not added to retained earnings.
- Leaving out the name, date, currency and rounding, which the standard requires.
- Including prepayments and accrued income as non-current assets.
Quick revision
- Assets = equity + liabilities. Order: non-current assets, current assets, equity, non-current liabilities, current liabilities.
- Current means the operating cycle, 12 months, trading or cash.
- Overdraft and the current portion of a loan are current liabilities. Loan notes are non-current liabilities.
- Redeemable preference shares are liabilities. Proposed dividends are not liabilities.
- Equity: share capital, share premium, retained earnings, other reserves.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. Which of these is NOT a component of equity?
- Share capital
- Share premium
- Retained earnings
- Loan notes
Show the answer
D. Loan notes are a liability.
Question 2. Trade payables are expected to be settled within the normal operating cycle. They are:
- Non-current liabilities
- Current liabilities
- Equity
- A deduction from current assets
Show the answer
B. A liability settled in the operating cycle, or held for trading, is current.
Question 3. A loan of ₦120,000,000 is repayable in four equal annual instalments starting next year. The current portion at the reporting date is:
- ₦30,000,000
- ₦120,000,000
- ₦90,000,000
- ₦60,000,000
Show the answer
A. 120,000,000 ÷ 4 = 30,000,000 is due within 12 months. The other 90,000,000 is non-current.
Question 4. A bank overdraft is shown in the statement of financial position as:
- A deduction from cash in current assets
- A non-current liability
- A current liability
- Part of equity
Show the answer
C. It is short-term borrowing and is repayable on demand.
Question 5. A company issues 500,000 shares of ₦1 at ₦3 each. The share premium is:
- ₦500,000
- ₦1,500,000
- ₦3,000,000
- ₦1,000,000
Show the answer
D. Premium per share is 2, so 500,000 × 2 = 1,000,000. The share capital is 500,000 and the cash received is 1,500,000.
Question 6. Redeemable preference shares are classified as:
- Equity
- A liability
- A reserve
- Revenue
Show the answer
B. They must be repaid, so they are a liability, and their dividend is a finance cost.
Question 7. A dividend has been proposed but not declared at the year end. It is:
- A current liability
- Deducted from retained earnings
- Disclosed in the notes and not recognised as a liability
- Added to share capital
Show the answer
C. A proposed dividend is not a liability until declared.
Question 8. Inventories are ₦17.8m, trade and other receivables ₦13.3m, other current assets ₦2.0m and cash ₦0.7m. Total current assets are:
- ₦33.8m
- ₦31.8m
- ₦35.8m
- ₦30.0m
Show the answer
A. 17.8 + 13.3 + 2.0 + 0.7 = 33.8.
Question 9. Which of these is NOT part of a complete set of financial statements under IAS 1?
- A statement of changes in equity
- A budget for the next year
- A statement of cash flows
- Notes to the statements
Show the answer
B. A budget is management information, not a financial statement.
Question 10. Money held in a term deposit account is classified as:
- A non-current asset
- An investment in equity
- An intangible asset
- A cash equivalent, within current assets
Show the answer
D. It can be turned into cash quickly, so it is a cash equivalent.
Section B style: written questions
Question 11 (10 marks). (a) State the circumstances in which an asset is classified as current under IAS 1. (4 marks) (b) State the circumstances in which a liability is classified as current. (4 marks) (c) A company borrows ₦100,000,000 repayable in ten equal annual instalments starting next year. State how the loan is shown at the reporting date. (2 marks)
Question 12 (20 marks). Gombe Plastics Ltd has these balances at 31 December (₦000): land and buildings at cost 500,000, accumulated depreciation 100,000; plant at cost 260,000, accumulated depreciation 80,000; inventories 70,000; trade receivables 120,000, allowance for doubtful debts 6,000; prepaid expenses 5,000; cash at bank 14,000; trade payables 80,000; accrued expenses 12,000; income tax payable 18,000; 8% loan notes repayable in 2032, 100,000; share capital 300,000; share premium 80,000; retained earnings to be found.
(a) Prepare the statement of financial position. (14 marks) (b) Explain why the loan notes are non-current and how that changes in 2031. (3 marks) (c) Distinguish share capital from share premium. (3 marks)
A further written question
Question 13 (10 marks). A trainee has prepared the statement of financial position of XYZ Ltd with property, plant and equipment ₦10,000,000, inventories ₦2,000,000, trade receivables ₦3,300,000 and cash (₦500,000), where the bracketed figure is a bank overdraft. Equity is ₦12,500,000 and trade payables are ₦2,300,000. (a) Calculate the correct total assets and total equity and liabilities. (6 marks) (b) Explain what was wrong with the trainee’s presentation. (4 marks)
Model answers
Show the model answer to Question 11
(a) An asset is current if the entity expects to realise, sell or consume it in its normal operating cycle, holds it for trading, expects to realise it within 12 months after the reporting period, or it is cash or a cash equivalent that is not restricted for at least 12 months.
(b) A liability is current if the entity expects to settle it in its normal operating cycle, holds it primarily for trading, it is due to be settled within 12 months after the reporting period, or the entity has no unconditional right to defer settlement for at least 12 months. (c) The instalment due within 12 months, ₦10,000,000, is a current liability. The remaining ₦90,000,000 is a non-current liability.
Show the model answer to Question 12
(a)
- Non-current assets.
400,000 + 180,000 = 580,000. - Current assets.
inventories 70,000; receivables 120,000 − 6,000 = 114,000; prepayments 5,000; cash 14,000, a total of 203,000. - Total assets 783,000.
- Liabilities.
loan notes 100,000 (non-current); current liabilities 80,000 + 12,000 + 18,000 = 110,000. - Total liabilities 210,000.
- Equity = 783,000 − 210,000 = 573,000, made up of share capital 300,000, share premium 80,000 and retained earnings 193,000.
- Total equity and liabilities 783,000.
(b) The loan notes are repayable in 2032, more than 12 months after the reporting date, so they are non-current. At 31 December 2031 they fall due within 12 months and become a current liability.
(c) Share capital is the nominal value of the shares issued. Share premium is the excess of the issue price over nominal value. It is a separate reserve and is not available for dividends.
Show the model answer to Question 13
(a)
- Total assets.
10,000,000 + 2,000,000 + 3,300,000 = ₦15,300,000. - Total equity and liabilities.
equity 12,500,000 + trade payables 2,300,000 + bank overdraft 500,000 = ₦15,300,000.
(b) The overdraft is a liability, because the bank is owed the money. It should be shown within current liabilities as short-term borrowings. The trainee netted it against cash, which understated both total assets and total liabilities by ₦500,000.
Pathfinder on Company statement of financial position
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the previous syllabus. Gives the balances of a company after the gross profit has been found, with depreciation, provisions for directors’ and audit fees, prepaid insurance and accrued electricity, and asks for the statement of financial position without notes.
Revise first: The standard layout
From the previous syllabus. Asks for the statement of financial position of a limited company after a transfer of ₦15,000,000 to general reserves and a 5% dividend recommended by the directors, ignoring tax.
Revise first: Equity, loan notes and preference shares
From the previous syllabus. Asks for the statement of financial position of a company with a bank loan, share premium, an inventory write-down to net realisable value and unpaid loan interest.
Revise first: Current and non-current items
From the previous syllabus. Part (a) asks for the components of financial statements under IAS 1. Part (b)(ii) asks for the statement of financial position of a PLC with a bank loan, share premium and an income tax charge.
Revise first: The complete set of financial statements
From the previous syllabus. Asks what differs between a sole trader and a company, how equity is described, and which item is not a component of equity.
Revise first: Equity, loan notes and preference shares
Expect items on the components of a complete set, the current or non-current classification of an item, and the contents of equity. Check Section A of every diet you practise.
Revise first: Current and non-current items
Source: ICAN Pathfinder, Financial Accounting. Diets covered: May Diet, 2015, May Diet, 2016, May Diet, 2017, November Diet, 2015, May Diet, 2019, November Diet, 2021, May Diet, 2022 and November Diet, 2022. All are on the previous syllabus. Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
Spotted a mistake? Tell us and we will check it.
