Balance Sheet Explanation

Definition

Accounting Balance Sheet is a component of Financial Statements which primarily determines the financial position of a business at a given date. As per new International Accounting standards, Balance sheet is also called statement of financial position.

Balance Sheet is a great source of financial information for both external and internal users. It shows what a company owns and owes. This statement shows the financial institutions whether the company qualifies for loans. There are other parties like creditors, investors, management, competitors and government tax agencies interested in this financial statement.

Like accounting equation balance sheet equation reports assets, liabilities and equity of a company. One side generally called asset side contains all the assets. While the other side called liability side contains all liabilities and owner and shareholder equity (capital, shares etc). Assets are shown in various groups and similarly equity and liabilities items are also shown in various expressive groups.

Format and Examle

In this example we will show you sample balance sheet format. Mainly there are two formats report form and account form format. 

The above format contains the followign sections. 

Assets

Assets are financial resources owns and control by a company as a result of past events and have economic benefits in future. Examples of assets accounts are cash, accounts receivables, machinery, building, vehicles, supplies and prepaid insurance etc.

Main groups or structure of assets are current assets and non-current assets. Non-current assets are further classified in fixed assets, long-terms assets, capital work in progress etc. Likewise, current assets are also classified in sub-groups like liquid assets, floating assets.

Mostly asset accounts have debits balances.

Liabilities

Liabilities are present obligations payable by the business from past events if paid will cause outflow from the company resources. Examples of liability accounts are notes and accounts payable, accrued expenses, unearned revenue, mortgage payable, salaries payable, customers deposits etc.

Liabilities portion is sub-divided into two main categories namely long term and short term liabilities. Short term liabilities are also called current liabilities. Current liabilities usually include account payables, tax provisions and accruals.

Mostly asset accounts have credit balances.

Equity

Equity or capital is the residual interest after deducting liabilities for the company assets. The equity or capital is an obligation of the company. Examples of capital accounts are preferred stock, common stock, retained earnings and treasury stock, partner’s capital, owners’ equity.

Why We Prepare Balance Sheet

We have already told our students that the main purpose of preparing balance sheet is to determine the financial position of the business. However, the balance sheet also serves the following secondary purposes.

1. From the contents of Balance sheet various accounting ratios are worked out to measure the progress of business;
2. Balance sheet is considered almost the first financial report which the investors and owners want to look in;
3. Balance also fulfills various requirements of prevailing laws.

Forms

Likewise, Income statement the balance sheet can also be prepared in any of the following two forms

1. Report form
2. Account form

Report Form

In the Report form, balance sheet is prepared in a statement form showing elements from top to bottom. In general practices, assets are shown at the top while equities and liabilities are shown under the total of assets. The total of both assets portion and equity and liabilities portion must be equal.

ASSETS	($)	($)
NON-CURRENT ASSETS
Fixed Assets:
Land	60,000
Building	25,000
Furniture	10,000
Equipment	5,500
Vehicles	20,000
Total fixed assets		120,500
Other Non-current Assets
Investments	6,000
Capital work-in-progress	9.5
Total other non-current assets		15,500
CURRENT ASSETS
Stocks in trade	1,540
Loose tools & others	950
Account receivables	12,000
Advances & prepayments	3,500
Cash & bank balances	10,500
Total current assets		28,490
TOTAL ASSETS		164,490
EQUITY & LIABILITIES
EQUITY
Capital	85,000
Retained earnings	25,450
Total equities		110,450
LONG TERM LIABILITIES
Bank borrowings		30,000
CURRENT LIABILITIES
Account payables	15,500
Notes payables	1,050
Accrued & other liabilities	7,490
Total current liabilities		24,040
TOTAL EQUITIES & LIABILITIES		164,490

Account Form

In an account form balance sheet, all assets are written on the left side and the portion of equities and liabilities is written on the right side of the report. Keep in mind that in British accounting, assets are recorded on the right side while equities and liabilities on the left side.

Assets	($)	($)	Equities & liabilities	($)	($)
NON-CURRENT ASSETS			EQUITY
Fixed Assets			Capital	85,000
Land	60,000		Retained earnings	25,450
Building	25,000		Total equities		110,450
Furniture	10,000
Equipment	5,500		LONG TERM LIABILITIES
Vehicles	20,000		Bank borrowings		30,000
Total fixed assets		120,500
			CURRENT LIABILITIES
Other Non-current Assets			Account payables	15,500
Investments	6,000		Notes payables	1,050
Capital work-in-progress	9.5		Accrued & other liabilities	7,490
Total other non-current assets		15,500	Total current liabilities		24,040
CURRENT ASSETS
Stocks in trade	1,540
Loose tools & others	950
Account receivables	12,000
Advances & prepayments	3,500
Cash & bank balances	10,500
Total current assets		28,490
		164,490			164,490

Since the balance sheet carries important information with regards to business assets and its liabilities, it permits the readers such as investors and creditors to see what the business owns and what the business owes to others. This financial information allows the concerned parties to determine whether the business qualifies for more investments or loans to be given.