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Balance sheet

A balance sheet, in formal bookkeeping and accounting, is a statement of the book value of a business or other organization or person at a particular date, at the end of a period such as a "fiscal year," as distinct from an income statement, also known as a profit and loss account (P&L), which records revenue and expenses over a specified period of time.

A balance sheet is often described as a "snapshot" of the company's financial condition on a given date. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time, instead of a period of time.

A simple business operating entirely in cash could measure its profits by simply withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, real businesses are not paid immediately; they build up inventories of goods to sell and they acquire buildings and equipment. In other words: businesses have assets and so they could not, even if they wanted to, immediately turn these into cash at the end of each period. Real businesses also 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.

A modern balance sheet usually has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the 'net assets' or the 'net worth' of the company.

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. This balance 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.


Contents

Balance Sheet Structure

The following Balance Sheet structure is just an example. It does not show all possible kinds of assets, equity and liabilities, 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 on 31 December 2005
ASSETS
Current AssetsCash and cash equivalents    Marketable Securities Accounts receivableInventories  Prepaid Expenses

Investments held for trading

Other current assets
Non-Current Assets (Fixed Assets)Property, plant and equipment Less : Accumulated DepreciationGoodwill Other intangible fixed assetsInvestments in associatesDeferred tax assets
LIABILITIES and EQUITY
 Current liabilitiesAccounts payableCurrent income tax liabilitiesCurrent portion of bank loans payableShort-term provisionsOther current liabilities

Long term Liabilities (Fixed Liabilities)

Bank loansIssued debt securitiesDeferred tax liabilityProvisions  Minority interest


Capital and reserves 

Share capitalCapital reservesRevaluation reserveTranslation reserveRetained earnings

Equity valuation

The real value to a purchaser of the business or a shareholder may be different from the net assets shown by the balance sheet. This is because factors that affect the value of a business may not be recorded yet. For example, a purchaser will be interested in the future earnings of the business, whether assets such as property have been revalued recently, and whether there are potential liabilities in the future such as lawsuits. The value of the assets in the balance has also been based on the assumption that the business is a going concern, otherwise the break-up value of the assets may be far less than the value in the balance sheet.

Constructing a Balance Sheet

Case Study

1.1
A new business starts up as a limited company called Sunrise Ltd by raising $10,000 from the owners i.e. share holders. The money is put in to a new bank account. What would the assets, liabilities and equity be?

Assets:Bank Balance		10,000
Equity & Liabilities:Share Capital		10,000

1.2
They then use 6,000 of its bank account to buy a delivery van. Assets and liabilities after this transaction:

Assets:Bank Balance		 4,000Delivery Van		 6,000
Equity & Liabilities:Share Capital		10,000

1.3
Sunrise Ltd then buys some inventory at 3,000 on credit. Assets and liabilities after this transaction:

Assets:Bank Balance		 4,000Delivery Van		 6,000Inventory		 3,000
Liabilities:Accounts Payable	 3,000	(to be paid to creditors)
Equity:Share Capital		10,000

Total assets must always equal total liabilities (and equity). It is inevitable as the liabilities (and equity) are providing the funds that we are spending on these assets.

1.4
Shortly afterwards, after selling 1,000 of inventory for 2,500, payment of 2,600 of the accounts payable and the purchase of 2,200 of machinery financed by a 2,200 bank loan, the assets and liabilities change to the following: 

Sunrise Ltd.Balance SheetAs of December 31, 2005-----------------------------------
Fixed AssetsDelivery Van		 6,000Machinery		 2,200-----------------------------------Total fixed assets			 8,200
Current AssetsBank Balance		 1,400Inventory		 2,000Accounts Receivable	 2,500-----------------------------------Total 			 5,900
Accounts Payable	        400-----------------------------------Net current assets 			 5,500
Long-Term LiabilitiesLoans Repayable		 2,200-----------------------------------Total Long Term Liabilities		 2,200-----------------------------------NET ASSETS				11,500-----------------------------------
Shareholders' EquityShare Capital		10,000Retained profits	 1,500-----------------------------------TOTAL SHAREHOLDERS' EQUITY		11,500-----------------------------------


Points to note:

See also

Categories


Generally Accepted Accounting Principles

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