Balance sheet reports the financial position of a firm as of a specific date. That is it reveals the firmâ€™s assets, liabilities and shareholderâ€™s equity position.
Some key points to note in a Balance Sheet:
- Balance Sheet gives bird eye view of a firmâ€™s financial position.
- Balance Sheet is drawn for a specific date.
- Balance Sheet is like a bucket! Firmâ€™s assets, liabilities (Borrowed Funds) and ownerâ€™s contributions (Equity) appear on it.
Continuing with our example of chocolate business:
So your chocolate business that you have started uses raw materials to manufacture chocolates (such as sugar, cocoa, dry fruits, milk powder, etc.), this raw material may not be fully used to the extent you have purchased in the production process â€“ the unused material becomes work-in-progress inventory for this period and will be used in next period.
Suppose you have produced 10000 units of chocolates (yumm!) but are able to sell only 8000 units, the remaining 2000 units becomes the finished inventory. Donâ€™t eat up all your finished inventory!!
It is very obvious that to increase your market share and to become a known brand you will work hard to push your product and for that you may need to sell products on credit (at least initially). This credit sale to your distributors is called account receivables because you have to receive money in future.
In the business you may meet contingencies so you maintain cash. Even cash is generated in the course of business. How it is generated we will seen in the next article on Cash Flow Statement!
Because inventories, account receivables can be quickly converted into cash and cash in itself is a liquid asset, they all come under the current assets in the balance sheet.
The plant and equipment you are using to produce chocolates are your fixed assets i.e. non-current assets.
The current and non-current assets are the left hand side of your organizationâ€™s balance sheet.
There is a possibility that you may purchase some of the raw-materials needed to produce chocolates on credit from your suppliers, even there may be a possibility that you may not fully pay to your workers in a period due to some constraints â€“ all these transactions will become your current liabilities.
Talking about the capital structure if you have borrowed funds to start your business, it will come under non-current liabilities as debt. And the fund you have contributed in your business is the equity and in the period if your business has made any profit which has not been distributed as dividends to owners; it will be added to equity as retained earnings.
The liabilities and equity are the right hand side of the balance sheet.
Remember, the left and right side of the balance sheet should always be equal.
Procedure for preparing the Balance sheet
Step 1: Get the cash balance information from the Cash Flow Statement (CF) and add to the balance sheet
Step 2: Sum cash balance and other given current assets together
Step 3: Get the Gross Plant & Equipment information from the Asset & Depreciation Schedule and add to the balance sheet.
Step 4: Get Accumulated Depreciation information from the Asset & Depreciation Schedule and add to the balance sheet.
Accumulated Depreciation = sum of depreciationâ€™s on an asset till date.
Step 5: Calculate the Net Plant & Equipment
*Negative numbers are in bracket
Step 6: Add all non-current assets together
Step 7: Calculate the Total Assets
Total Assets = Current Assets + Non-current Assets
Calculation of left hand side of the above mentioned equation is finished, now let start the equationâ€™s right side calculation.
Step 8: Sum all the given current liabilities together
Step 9: Sum all the given non-current liabilities together
Total Liabilities = Current Liabilities + Non-current Liabilities
Step 11: Calculate the retained earnings
Closing Retained Earning = Beginning Retained Earnings + Net Income â€“ Dividends paid
Step 12: Link the retained earnings to the balance sheet
Step 13: Calculate the Total Equity
Balance Sheet Templates to download
I have created a Balance Sheet format for you, where the subheadings are given and you have to link the model to get the numbers! You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).
Also you can download this filled template and check, if the information you recorded, matches mine or not!