Balance sheet
From Wikipedia, the free encyclopedia
In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a "fiscal year." It is known as a balance sheet because it reflects an accounting identity: the components of the balance sheet must (by definition) be equal, or in balance; in the most basic formulation, assets must equal liabilities, or assets must equal debt plus equity.
A balance sheet is often described as a "snapshot" of the company's financial condition on a given date. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time, instead of a period of time.
A simple business operating entirely in cash could measure its profits by simply withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, real businesses are not paid immediately; they build up inventories of goods to sell and they acquire buildings and equipment. In other words: businesses have assets and so they could not, even if they wanted to, immediately turn these into cash at the end of each period. Real businesses also 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.
A modern balance sheet usually has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the 'net assets' or the 'net worth' of the company.
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' 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" is 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 are a residual.
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[edit] Balance sheet structure
The following balance sheet structure is just an example. It does not show all possible kinds of assets, equity and liabilities, but it shows the most usual ones. Because it shows Goodwill it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd. as of 31 December 2006 ASSETS Current Assets Cash and cash equivalents [Marketable Securities] Accounts receivable Inventories Prepaid Expenses Investments held for trading Other current assets Fixed Assets (Non-Current Assets) Property, plant and equipment Less : Accumulated Depreciation Goodwill Other intangible fixed assets Investments in associates Deferred tax assets LIABILITIES and EQUITY Current liabilities Accounts payable Current income tax liabilities Current portion of bank loans payable Short-term provisions Other current liabilities Long term Liabilities (Fixed Liabilities) Bank loans Issued debt securities Deferred tax liability Provisions Minority interest Equity Share capital Capital reserves Revaluation reserve Translation reserve Retained earnings
[edit] Equity valuation
The real value to a purchaser of the business or a shareholder may be different from the net assets shown by the balance sheet. This is because factors that affect the value of a business may not be recorded yet. For example, a purchaser will be interested in the future earnings of the business, whether assets such as property have been revalued recently, and whether there are potential liabilities in the future such as lawsuits. The value of the assets in the balance has also been based on the assumption that the business is a going concern, otherwise the break-up value of the assets may be far less than the value in the balance sheet.
[edit] Constructing a Balance Sheet
Case Study
1.1
A new business starts up as a limited company called Sunrise Ltd by raising $10,000 from the owners i.e. share holders. The money is put in to a new bank account. What would the assets, liabilities and equity be?
Assets: Bank Balance 10,000 Equity & Liabilities: Share Capital 10,000
1.2
They then use 6,000 of its bank account to buy a delivery van. Assets and liabilities after this transaction:
Assets: Bank Balance 4,000 Delivery Van 6,000 Equity & Liabilities: Share Capital 10,000
1.3
Sunrise Ltd then buys some inventory at 3,000 on credit. Assets and liabilities after this transaction:
Assets: Bank Balance 4,000 Delivery Van 6,000 Inventory 3,000 Liabilities: Accounts Payable 3,000 (to be paid to creditors) Equity: Share Capital 10,000
Total assets must always equal total liabilities (and equity). It is inevitable as the liabilities (and equity) are providing the funds that we are spending on these assets.
1.4
Shortly afterwards, after selling 1,000 of inventory for 2,500, payment of 2,600 of the accounts payable and the purchase of 2,200 of machinery financed by a 2,200 bank loan, the assets and liabilities change to the following:
Sunrise Ltd. Balance Sheet As of December 31, 2005 ----------------------------------- Assets ----------------------------------- Fixed Assets Delivery Van 6,000 Machinery 2,200 Total fixed assets 8,200 Current Assets Bank Balance 1,400 Inventory 2,000 Accounts Receivable 2,500 ----------------------------------- Total current assets 5,900 Total assets 14,100 ----------------------------------- Liabilities and Equity ----------------------------------- Current Liability Accounts Payable 400 Long-Term Liabilities Loans Repayable 2,200 Total Liabilities 2,600 ----------------------------------- NET ASSETS 11,500 ----------------------------------- Shareholders' Equity Share Capital 10,000 Retained profits 1,500 ----------------------------------- TOTAL SHAREHOLDERS' EQUITY 11,500 -----------------------------------
Points to note:
- Must be headed with the name of the reporting entity (e.g. Sunrise Ltd) and the date.
- The van has not been depreciated and there are no other trading expenses
- The terms 'Current Liability' and 'Long-Term Liability' are the traditional names possibly used by sole traders or partnerships. Limited companies may use the phrases 'Liabilities: Amounts falling due within 1 year' and 'Liabilities: Amounts falling due after 1 year'.
- The Total Equity may also be called the 'Net Worth'.
- The Net Worth is in principle what the company is worth, it shows the monetary amount that would effectively be left, if all assets were sold and all liabilities paid off.
