The Balance Sheet
The Balance Sheet
The Balance Sheet is one of three financial statements is a summary of the financial balances of company assets, liabilities, and equity.
In financial accounting, The Balance Sheet or statement of financial position or statement of financial condition is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership LLP, a corporation, private limited company, or other organization such as Government or not-for-profit entity. Assets, liabilities, and ownership equity are listed as of a specific date, such as the end of its financial year. The Balance Sheet is often described as a “snapshot of a company’s financial condition”. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business’ calendar year.
A standard company balance sheet has two sides: assets on the left, and financing on the right–which itself has two parts; liabilities and ownership equity. The main categories of assets are usually listed first, and typically in the order of liquidity. Assets are followed by liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the balance sheet equation is that total assets equal liabilities plus owner’s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner’s money (owner’s or shareholders’ equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections “balancing”.
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they cannot, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words, businesses also have liabilities.
Guidelines for balance sheets of public business entities are given by the International Accounting Standards Board and numerous country-specific organizations/companies. The standard used by companies in the USA adhere to U.S. Generally Accepted Accounting Principles (GAAP). The Federal Accounting Standards Advisory Board (FASAB) is a United States federal advisory committee whose mission is to develop generally accepted accounting principles (GAAP) for federal financial reporting entities.
The Balance sheet account names and usage depend on the organization’s country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses.
If applicable to the business, summary values for the following items should be included in the balance sheet: Assets are all the things the business owns. This will include property, tools, vehicles, furniture, machinery, and so on.
- Accounts receivable
- Cash and cash equivalents
- Cash at the bank, Petty Cash, Cash On Hand
- Prepaid expenses for future services that will be used within a year
- Revenue Earned In Arrears (Accrued Revenue) for services done but not yet received for the year
- Loan To (Less than one financial period)
- Non-current assets (Fixed assets)
Property, plant, and equipment
Investment property, such as real estate held for investment purposes
- Intangible assets such as (patents, copyrights, and goodwill)
- Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents), such as notes receivables
- Investments accounted for using the equity method
- Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.
- Loan To (More than one financial period)
- Provisions for warranties or court decisions (contingent liabilities that are both probable and measurable)
- Financial liabilities (excluding provisions and accounts payables), such as promissory notes and corporate bonds
- Liabilities and assets for the current tax
- Deferred tax liabilities and deferred tax assets
- Unearned revenue for services paid for by customers but not yet provided
- Interests on loan stock
Equity / capital
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders’ equity. It comprises:
- Issued capital and reserves attributable to equity holders of the parent company (controlling interest)
- Non-controlling interest in equity
Formally, shareholders’ equity is part of the company’s liabilities: they are funds “owing” to shareholders (after payment of all other liabilities); usually, however, “liabilities” are used in the more restrictive sense of liabilities excluding shareholders’ equity. The balance of assets and liabilities (including shareholders’ equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders’ equity by construction must equal assets minus liabilities, and thus the shareholders’ equity is considered to be a residual.
Regarding the items in the equity section, the following disclosures are required:
- Numbers of shares authorized, issued and fully-paid, and issued but not fully paid
- Par value of shares
- Reconciliation of shares outstanding at the beginning and the end of the period
- Description of rights, preferences, and restrictions of shares
- Treasury shares, including shares held by subsidiaries and associates
- Shares reserved for issuance under options and contracts
- A description of the nature and purpose of each reserve within owners’ equity