What is a Balance Sheet?
Balance Sheet is also known as the statement of financial position. A balance sheet is a financial statement/report that depicts the company’s assets, liabilities, and shareholder’s equity. The Balance Sheet is prepared at the end of an accounting period like a month, quarter, or year-end. A balance sheet is required to evaluate an organization’s financial position.
The Balance Sheet has two sides, one side shows the various sources from which money came into the business. It consists of things that the company owes. These sources consist of short-term and long-term loans, Owner’s capital, Shareholder’s equity, etc. This side is called Liabilities.
Another side of the balance sheet shows in what way money was used in the business. It consists of things that the company owns/possessed. These sources consist of Cash, stock, fixed assets, etc. This side is called Assets.
What is Balance Sheet Formula?
The Balance Sheet is based on the following equation:
Assets = Liabilities + Owner’s Equity/Shareholder’s Equity
The Balance Sheet includes major components, they are; Assets, Liabilities, and Owner’s Equity.
Assets
Assets can be defined as the valuables that the company owns. Assets are classified as
- Fixed Assets
- Investments
- Current Assets
- Other Assets
Fixed Assets
Fixed Assets are long-term tangible assets that cannot be converted into cash easily.
Examples: Building, Computer equipment, furniture, land, etc.
Investments
It includes company’s investment in stocks, bonds, real estate, mutual funds etc.
Current Assets
It includes the cash, accounts receivable, prepaid expenses and all that can be converted into cash within a year.
Other Assets
All assets that are not covered under the above, shall be treated under separate heading i.e., other Assets.
Examples: investment in unconsolidated subsidiaries, customer liability on outstanding acceptances.
Liabilities
Liabilities are debts owed by the business. Companies’ total liabilities are the combination of debts and obligations owed to other parties. They are the amounts owed by the business to people who have lent money or provided goods or services on credit.
Liabilities are categorized into 2, they are:
- Current Liabilities
- Long Term Liabilities
Current Liabilities
Current liabilities are debts of firm payable within an accounting period. It includes outstanding expenses, creditors, bills payable, loan etc.
Long Term Liabilities
Long-Term liabilities are the debts of a firm for more than one year. Long-term liabilities include secured long-term liabilities (Loans that are backed up by collateral assets/securities) and unsecured long-term liabilities (Loans that are not backed up by collateral assets/securities).
Owner’s Equity / Shareholder’s Equity
It shows how much the owners of a company (i.e., Board of Directors / Shareholders) have invested in the business.
Why is Balance Sheet prepared?
- To know the financial position of the business.
- To compare balance sheets of 2 or more financial years.
- It is necessary to obtain a business loan.
- It is essential to know the value of assets and liabilities.
- It is essential to know the creditworthiness of the company.
- It helps to know the liquidity position of the business.
Balance Sheet Format
| HARI ENTERPRISES | |||
|---|---|---|---|
| Balance Sheet on 31st March 2020 | |||
| Assets | Rs. | Liabilities | Rs. |
| Current Assets | Shareholders' Equity | ||
| Cash and cash equivalents | 7000 | Stocks/ Shares | 75000 |
| Accounts Recievables | 6000 | Retained Earnings | 35000 |
| Inventory | 3000 | ||
| Prepaid Expenses | 3000 | Current Liabilities | |
| Accounts Payables | 5000 | ||
| Investments | 4000 | Short-term loan payable | 5000 |
| Income Tax Payable | 4000 | ||
| Tangible Assets | Deferred revenue | 3000 | |
| Land and Building | 50000 | ||
| Furniture | 10000 | Long-Term Liabilities | |
| Tools and Equipments | 3000 | Notes Payable | 2000 |
| Less: Accumulated Depreciation | (3000) | Bonds payable | 2000 |
| Intangible Assets | |||
| Goodwill | 30000 | ||
| Patent right | 15000 | ||
| Other Assets | 3000 | ||
| Total Assets | 1,31,000 | Total Liabilities | 1,31,000 |
