Balance sheet

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In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. 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". [1] It is the summary of each and every financial statement of an organization.

Contents

Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business's calendar year. [2]

A standard company balance sheet has two sides: assets on the left, and financing on the right–which itself has two parts; liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. [3] 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. [4]

Another way to look at the balance sheet equation is that total 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 or shareholders' 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 acquire buildings and equipment. In other words: businesses have assets and so they cannot, 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.

Types

A balance sheet summarizes an organization's or individual's assets, equity and liabilities at a specific point in time. Two forms of balance sheet exist. They are the report form and account form. Individuals and small businesses tend to have simple balance sheets. [5] Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report. [6] Large businesses also may prepare balance sheets for segments of their businesses. [7] A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison. [8] [9]

Personal

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. [10]

US small business

Sample Small Business Balance Sheet [11]
Assets (current)Liabilities and Owners' Equity
Cash$6,600Liabilities
Accounts Receivable$6,200 Notes Payable $5,000
Assets (fixed)Accounts Payable$25,000
Tools and equipment$25,000Total liabilities$30,000
Owners' equity
Capital Stock$7,000
Retained Earnings$800
Total owners' equity$7,800
Total$37,800Total$37,800

A 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. [12]

Charities

In England and Wales, smaller charities which are not also companies are permitted to file a statement of assets and liabilities instead of a balance sheet. This statement lists the charity's main assets and liabilities as at the end of its financial year. [13]

Public business entities structure

Guidelines for balance sheets of public business entities are given by the International Accounting Standards Board and numerous country-specific organizations/companies. The standard used by companies in the US adheres to U.S. Generally Accepted Accounting Principles (GAAP). The Federal Accounting Standards Advisory Board (FASAB) is a United States federal advisory committee whose mission is to develop generally accepted accounting principles (GAAP) for federal financial reporting entities.

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. [14] [15] [16]

If applicable to the business, summary values for the following items should be included in the balance sheet: [17] Assets are all the things the business owns. This will include property, tools, vehicles, furniture, machinery, and so on.

Assets

Current assets

  1. Accounts receivable
  2. Cash and cash equivalents
  3. Inventories
  4. Cash at bank, Petty Cash, Cash On Hand
  5. Prepaid expenses for future services that will be used within a year
  6. Revenue Earned In Arrears (Accrued Revenue) for services done but not yet received for the year
  7. Loan To (Less than one financial period)

Non-current assets (Fixed assets)

  1. Property, plant and equipment
  2. Investment property, such as real estate held for investment purposes
  3. Intangible assets, such as patents, copyrights and goodwill
  4. Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents), such as notes receivables
  5. Investments accounted for using the equity method
  6. 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. [18]
  7. Loan To (More than one financial period)

Liabilities

  1. Accounts payable
  2. Provisions for warranties or court decisions (contingent liabilities that are both probable and measurable)
  3. Financial liabilities (excluding provisions and accounts payables), such as promissory notes and corporate bonds
  4. Liabilities and assets for current tax
  5. Deferred tax liabilities and deferred tax assets
  6. Unearned revenue for services paid for by customers but not yet provided
  7. Interests on loan stock
  8. Creditors' equity

Net current assets

Net current assets means current assets minus current liabilities. [19]

Equity / capital

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:

  1. Issued capital and reserves attributable to equity holders of the parent company (controlling interest)
  2. 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" are 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 thus the shareholders' equity is considered to be a residual.

Regarding the items in the equity section, the following disclosures are required:

  1. Numbers of shares authorized, issued and fully-paid, and issued but not fully paid
  2. Par value of shares
  3. Reconciliation of shares outstanding at the beginning and the end of the period
  4. Description of rights, preferences, and restrictions of shares
  5. Treasury shares, including shares held by subsidiaries and associates
  6. Shares reserved for issuance under options and contracts
  7. A description of the nature and purpose of each reserve within owners' equity

Substantiation

Balance sheet substantiation is the accounting process conducted by businesses on a regular basis to confirm that the balances held in the primary accounting system of record (e.g. SAP, Oracle, other ERP system's General Ledger) are reconciled (in balance with) with the balance and transaction records held in the same or supporting sub-systems.

Balance sheet substantiation includes multiple processes including reconciliation (at a transactional or at a balance level) of the account, a process of review of the reconciliation and any pertinent supporting documentation and a formal certification (sign-off) of the account in a predetermined form driven by corporate policy.

Balance sheet substantiation is an important process that is typically carried out on a monthly, quarterly and year-end basis. The results help to drive the regulatory balance sheet reporting obligations of the organization.

Historically, balance sheet substantiation has been a wholly manual process, driven by spreadsheets, email and manual monitoring and reporting. In recent years software solutions have been developed to bring a level of process automation, standardization and enhanced control to the balance sheet substantiation or account certification process. These solutions are suitable for organizations with a high volume of accounts and/or personnel involved in the Balance Sheet Substantiation process and can be used to drive efficiencies, improve transparency and help to reduce risk.

Balance sheet substantiation is a key control process in the SOX 404 top-down risk assessment.

Sample

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 (subtotal) rows are missing as well.

Under IFRS items are always shown based on liquidity from the least liquid assets at the top, usually land and buildings to the most liquid, i.e. cash. Then liabilities and equity continue from the most immediate liability to be paid (usual account payable) to the least i.e. long-term debt such as mortgages and owner's equity at the very bottom. [20] 

Consolidated Statement of Finance Position of XYZ, Ltd. As of 31 December 2025
 ASSETS Non-Current Assets (Fixed Assets) Property, Plant and Equipment (PPE)      Less : Accumulated Depreciation  Goodwill Intangible Assets (Patent, Copyright, Trademark, etc.)      Less : Accumulated Amortization   Investments in Financial assets due after one year   Investments in Associates and Joint Ventures   Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable and Receivables due after one year    Current Assets  Inventories Prepaid Expenses   Investments in Financial assets due within one year   Non-Current and Current Assets Held for sale Accounts Receivable (Debtors) due within one year      Less : Allowances for Doubtful debts  Cash and Cash Equivalents 
TOTAL ASSETS (this will match/balance the total for Liabilities and Equity below)
LIABILITIES and EQUITYCurrent 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. Deferred income, Security 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 EQUITY Paid-in Capital  Share Capital (Ordinary Shares, Preference Shares)     Share Premium Less: Treasury Shares  Retained Earnings  Revaluation Reserve  Other Accumulated Reserves  Accumulated Other Comprehensive Income  Non-Controlling Interest 
TOTAL LIABILITIES and EQUITY (this will match/balance the total for Assets above)

See also

Related Research Articles

In finance, equity is an ownership interest in property that may be offset by debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a car worth $24,000 and owes $10,000 on the loan used to buy the car, the difference of $14,000 is equity. Equity can apply to a single asset, such as a car or house, or to an entire business. A business that needs to start up or expand its operations can sell its equity in order to raise cash that does not have to be repaid on a set schedule.

The historical cost of an asset at the time it is acquired or created is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values.

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited.

<span class="mw-page-title-main">Income statement</span> Type of financial statement

An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Financial assets minus outstanding liabilities equal net financial assets, so net worth can be expressed as the sum of non-financial assets and net financial assets. This concept can apply to companies, individuals, governments, or economic sectors such as the financial corporations sector, or even entire countries.

Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 is the International Accounting Standard that deals with cash flow statements.

In accounting and finance, an accrual is an asset or liability that represents revenue or expenses that are receivable or payable but which have not yet been paid.

The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point in time, such as at the end of the reporting period. At the end of that period, the net income at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses, accumulated deficit, or similar terminology.

In bookkeeping, a general ledger is a bookkeeping ledger in which accounting data are posted from journals and aggregated from subledgers, such as accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects. A general ledger may be maintained on paper, on a computer, or in the cloud. A ledger account is created for each account in the chart of accounts for an organization and is classified into account categories, such as income, expense, assets, liabilities, and equity; the collection of all these accounts is known as the general ledger. The general ledger holds financial and non-financial data for an organization. Each account in the general ledger consists of one or more pages. It includes details such as the date of sale, invoice number, customer details, and the amount due. This ledger helps businesses track outstanding receivables and manage cash flow efficiently. An organization's statement of financial position and the income statement are both derived from income and expense account categories in the general ledger.

Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital.

A chart of accounts (COA) is a list of financial accounts and reference numbers, grouped into categories, such as assets, liabilities, equity, revenue and expenses, and used for recording transactions in the organization's general ledger. Accounts may be associated with an identifier and a caption or header and are coded by account type. In computerized accounting systems with computable quantity accounting, the accounts can have a quantity measure definition. Account numbers may consist of numerical, alphabetic, or alpha-numeric characters, although in many computerized environments, like the SIE format, only numerical identifiers are allowed. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique, which allows its ledger to be located. The accounts are typically arranged in the order of the customary appearance of accounts in the financial statements: balance sheet accounts followed by profit and loss accounts.

A company's tax expense is the income before tax multiplied by the appropriate tax rate. Generally, companies report income before tax to their shareholder under generally accepted accounting principles (GAAP). However, companies report income before tax to their government under tax law.

<span class="mw-page-title-main">Financial statement analysis</span>

Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, valuation, financial health, and future prospects of an organization.

In accounting, goodwill is an intangible asset recognized when a firm is purchased as a going concern. It reflects the premium that the buyer pays in addition to the net value of its other assets. Goodwill is often understood to represent the firm's intrinsic ability to acquire and retain customer business, where that ability is not otherwise attributable to brand name recognition, contractual arrangements or other specific factors. It is recognized only through an acquisition; it cannot be self-created. It is classified as an intangible asset on the balance sheet, since it can neither be seen nor touched.

<span class="mw-page-title-main">Flow of funds</span>

Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets: those showing

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash . The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. Total assets can also be called the balance sheet total.

Net operating assets (NOA) are a business's operating assets minus its operating liabilities. NOA is calculated by reformatting the balance sheet so that operating activities are separated from financing activities. This is done so that the operating performance of the business can be isolated and valued independently of the financing performance. Management is usually not responsible for creating value through financing activities unless the company is in the finance industry, therefore reformatting the balance sheet allows investors to value just the operating activities and hence get a more accurate valuation of the company. One school of thought is that there is no such security as an operating liability. All liabilities are a form of invested capital, and are discretionary, so the concept of net operating assets has no basis because operating assets are not discretionary.

A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are publicly listed, the market price of the shares is used in certain financial ratios.

References

  1. ↑ Williams, Jan R.; Susan F. Haka; Mark S. Bettner; Joseph V. Carcello (2008). Financial & Managerial Accounting. McGraw-Hill Irwin. p. 40. ISBN   978-0-07-299650-0.
  2. ↑ "Four Types of Financial Statements". William & Mary. 2022-11-28. Retrieved 2024-02-15.
  3. ↑ Daniels, Mortimer (1980). Corporation Financial Statements. New York City: Arno Press. pp. 13–14. ISBN   0-405-13514-9.
  4. ↑ Williams, p.50
  5. ↑ "US Small Business Administration sample spreadsheet for a small business". Archived from the original on 2007-07-15. Retrieved 2003-08-10.
  6. ↑ "Microsoft Corporation balance sheet, June 30, 2004". Microsoft.com. Retrieved 2012-10-04.
  7. ↑ "International Business Machines "Global Financing" balance sheet comparing 2003 to 2004". Ibm.com. Retrieved 2012-10-04.
  8. ↑ "Balance sheet comparing two year-end balance sheets" . Retrieved 2012-10-04.
  9. ↑ "Balance sheet comparing two year-end balance sheets". Archived from the original on 2007-10-19. Retrieved 2010-05-08.
  10. ↑ "Personal balance sheet structure" (PDF). Archived from the original (PDF) on 2008-03-07. Retrieved 2010-05-08.
  11. ↑ Williams, p. 50.
  12. ↑ "Get more funding". Business Guide. U.S. Small Business Administration. Retrieved 2022-07-15.
  13. ↑ Charity Commission for England and Wales, Receipts and Payments Accounts Introductory Notes, document CC16b, published June 2013, new format January 2017, accessed 16 November 2023
  14. ↑ "Personal balance sheet structure". Archived from the original on 2007-11-19. Retrieved 2010-05-08.
  15. ↑ "STATE OF ALABAMA CHART OF ACCOUNTS" (PDF). Archived from the original (PDF) on 2007-07-29. Retrieved 2007-09-21.
  16. ↑ "New York State (USA) public utilities balance sheet accounts". Archived from the original on 2017-03-24. Retrieved 2012-07-24.
  17. ↑ "Presentation of Financial Statements" International Accounting Standards Board. Accessed 24 June 2007.
  18. ↑ Epstein, Barry J.; Eva K. Jermakowicz (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. p. 931. ISBN   978-0-471-79823-1.
  19. ↑ Accounting Tools, Inc., Net current assets definition, published 28 October 2023, accessed 15 November 2023
  20. ↑ "IFRS VS GAAP: BALANCE SHEET AND INCOME STATEMENT". Accounting-financial-tax.com. Archived from the original (web) on 2019-04-30. Retrieved 2016-05-14.
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