March 4, 2010
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“.
Out of the above, the balance sheet is the only statement which applies to a single point in time. It reveals a company’s assets, liabilities, and owners’ equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.
The balance sheet is divided into two parts that, based on the following equation, must equal each other, or balance each other out. The main formula behind balance sheets is:
Assets = Liabilities + Shareholders’ Equity
There is one more way to look at the same equation: 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 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”.
(B) Cash and cash equivalents
(C) Accounts receivable
(D) Prepaid expenses for future services that will be used within a year
(A) Investment property, such as real estate held for investment purposes
(B) Intangible assets
(C) Financial assets
(D) Property, plant, and equipment
(E) Biological assets, which are living plants or animals
(F) Investments accounted for using the equity method
(A) Liabilities and assets for current tax
(B) Deferred tax liabilities and deferred tax assets
(C) Accounts payable
(D) Financial liabilities, such as promissory notes and corporate bonds
(E) Minority interest in equity
(F) Issued capital and reserves attributable to equity holders of the Parent company
(G) Provisions for warranties or court decisions
(H) Unearned revenue for services paid for by customers but not yet provided
(A) Description of rights, preferences, and restrictions of shares
(B) Treasury shares, including shares held by subsidiaries and associates
(C) Shares reserved for issuance under options and contracts
(D) Numbers of shares authorized, issued and fully paid, and issued but not fully paid
(E) Par value of shares
(F) Reconciliation of shares outstanding at the beginning and the end of the period
(G) A description of the nature and purpose of each reserve within owners’ equity
If you are in the field of accounting or finance, knowing your balance sheet right is a MUST. So if you have any questions or doubts do mention them in the comments box below.