balance sheet
balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A 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 three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the 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 same equation is that assets equals 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 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 can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to 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.
Contents [hide]
1 Types
1.1 Personal balance sheet
1.2 US small business balance sheet
2 Public Business Entities balance sheet structure
2.1 Assets
2.2 Liabilities
2.3 Equity
3 Sample balance sheet
4 See also
5 References
Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report. Large businesses also may prepare balance sheets for segments of their businesses. A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.
Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.
US small business balance sheet
Sample Small Business Balance Sheet
Assets Liabilities and Owners' Equity
Cash $6,600 Liabilities
Accounts Receivable $6,200 Notes Payable $30,000 Accounts Payable
Total liabilities $30,000 Tools and equipment $25,000 Owners' equity
Capital Stock $7,000
Retained Earnings $800
Total owners' equity $7,800 Total $37,800 Total $37,800
A really small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.
Public Business Entities balance sheet structure
Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee (now
International Accounting Standards Board) and numerous country-specific organizations.
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:[16] Assets are all the things the business own, this will include propriety tools cars etc.
Assets
Current assets
Cash and cash equivalents
Inventories
Accounts receivable
Prepaid expenses for future services that will be used within a year
Non-current assets (Fixed assets)
Property, plant and equipment
Investment property, such as real estate held for investment purposes
Intangible assets
Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents) 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.
Liabilities
Accounts payable
Provisions for warranties or court decisions
Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
Liabilities and assets for current tax
Deferred tax liabilities and deferred tax assets
Unearned revenue for services paid for by customers but not yet provided
Equity
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" is 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 are a residual.
Regarding the items in 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
Sample balance sheet
The following balance sheet is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of assets, liabilities and equity, but it shows the most usual ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd.
As of 31 December 2009
ASSETS
Current Assets
Cash and Cash Equivalents
Accounts Receivable (Debtors)
Less : Allowances for Doubtful Accounts
Inventories
Prepaid Expenses
Investment Securities (Held for trading)
Other Current Assets
Non-Current Assets (Fixed Assets)
Property, Plant and Equipment (PPE)
Less : Accumulated Depreciation
Investment Securities (Available for sale/Held-to-maturity)
Investments in Associates
Intangible Assets (Patent, Copyright, Trademark, etc.)
Less : Accumulated Amortization
Goodwill
Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities (Creditors: amounts falling due within one year)
Accounts Payable
Current Income Tax Payable
Current portion of Loans Payable
Short-term Provisions
Other Current Liabilities, e.g. Unearned Revenue, Deposits
Non-Current Liabilities (Creditors: amounts falling due after more than one year)
Loans Payable
Issued Debt Securities, e.g. Notes/Bonds Payable
Deferred Tax Liabilities
Provisions, e.g. Pension Obligations
Other Non-Current Liabilities, e.g. Lease Obligations
SHAREHOLDERS' EQUITY
Paid-in Capital
Share Capital (Ordinary Shares, Preference Shares)
Share Premium
Less: Treasury Shares
Retained Earnings
Revaluation Reserve
Accumulated Other Comprehensive Income
Non-Controlling Interest
The Capital Statement
The next financial statement, the capital statement, is prepared to report all the changes in owner's equity that occurred over a period of time usually a month or year. The major sections of the statement are the heading, the owner's capital balance at the beginning of the period, the increases and decreases during the period , and the calculated ending balance.
What do you think affects "Mom" (Owner's Equity) ? Of course her "kids" (revenue, expense, and draws) and any capital contributed to the business by the owner. We learned earlier that the activities of the
"kids" revenue and expense are summarized in the Income Statement. This net income or loss is presented on a line in the Capital Statement. All the owner withdrawals (kid draws) is also presented on a line in the statement.
The capital statement serves as the bridge between the income statement and balance sheet. It uses the net income/loss from the income statement in addition to the owner's investments and withdrawal to determine the Owner's Capital balance shown on the balance sheet.
Let's illustrate this statement with a simple equation.
Ending Owner's Equity = Beginning Equity + Additional Capital Contributed + Profit or - Loss - Draws
ABC Mowing
Capital Statement
For The Period Ending December 31, xxxx
Capital Beginning$7500
Capital Contributed 0
Net Income 820
Less withdrawals1,100
Decrease in capital 280
Ending Capital $7,220
How The Balance Sheet, Income Statement, and Capital Statement Are Related.
If you compare the owner's equity (owner's claim to assets) for two year end balance sheets, the difference (increase or decrease) is explained by the Income Statement and Capital Statement. Remember, revenues increase equity; capital contributed to the business increases equity; expenses decrease equity; and owner's draws decrease equity.