What is Balance Sheet?
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“.
There are four types of basic financial statements:
- Balance sheet: also referred to the statement of financial position or condition, reports on a company’s assets, liabilities, and Ownership equity at a given point in time.
- Income statement: also referred to as Profit and Loss statement, reports on a company’s income, expenses, and profits over a period of time. Profit & Loss account provides information on the operation of the enterprise. These include the sale and the various expenses incurred during the processing state.
- Statement of retained earnings: explains the changes in a company’s retained earnings over the reporting period.
- Statement of cash flows: reports on a company’s cash flow activities, particularly its operating, investing and financing activities.
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.
How does the Balance Sheet work?
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”.
Classification of Assets:
(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
Classification of Liabilities:
(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
Classification of Equity:
(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
Here’s a format of the Balance sheet:
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.