Balance sheet

A balance sheet, in formal bookkeeping and accounting, is a statement of the book value of a business or other organization or person at a particular date, often at the end of its "fiscal year," as distinct from an income statement, also known as a profit and loss account (P&L), which records revenue and expenses over a specified period of time.

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 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. This balance 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.

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. It is a consolidated balance sheet, showing also consolidation-specific items. It is important to understand the difference between consolidated and non-consolidated balance sheets, and financial reports from Japan, South Korea, Taiwan and China are commonly presented in both formats. Monetary values are not shown, summary (total) rows are missing as well.

Consolidated Balance Sheet of XYZ, Ltd. as at 31 December 2005 ASSETS Current Assets Inventories Accounts receivable Investments held for trading Cash and cash equivalents Other current assets Non-Current Assets Property, plant and equipment Goodwill Other intangible fixed assets Investments in associates Deferred tax assets EQUITY AND LIABILITIES Capital and reserves Share capital Capital reserves Revaluation reserve Translation reserve Retained earnings Minority interest Non-Current Liabilities Bank loans Issued debt securities Deferred tax liability Provisions Current liabilities Accounts payable Current income tax liabilities Short-term part of bank loans Short-term provisions Other current liabilities

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.

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
Finally, Sunrise Ltd buys some stock at 3,000 on credit, agreeing to pay the following month. Assets and liabilities after this transaction: Assets: Bank Balance 4,000 Delivery Van 6,000 Stocks 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.

Shortly afterwards, the assets and liabilities change to the following: Assets: Bank Balance 500 Delivery Van 6,000 Stocks 3,000 Machinery 2,200 Accounts Receivable 700 (to be collected from debtors) Liabilities: Accounts Payable 400 (to be paid to creditors) Loans Repayable 2,000 (maturing in 5 years) Equity: Share Capital 10,000

1.4
List and total the fixed and current assets:

Fixed Assets Delivery Van 6,000 Machinery 2,200

--- Total 8,200 Current Assets Bank Balance 500 Stock 3,000 Accounts Receivable 700

--- Total 4,200

1.5
Now extend the balance sheet to include all liabilities, total your figures, and double underline your totals. Then list the share capital below the rest of the balance sheet.

Sunrise Ltd. Balance Sheet As of December 31, 2005

--- Fixed Assets Delivery Van 6,000 Machinery 2,200

--- Total 8,200 Current Assets Bank Balance 500 Stock 3,000 Accounts Receivable 700

--- Total 4,200

--- Total Assets 12,400 Current Liabilities Accounts Payable 400

--- Total 400 Long-Term Liabilities Loans Repayable 2,000

--- Total 2,000

--- Total Liabilities 2,400 Owner's Equity Share Capital 10,000

--- Total Equity 10,000

--- Total Liabilities & Equity 12,400

Points to note:

Must be headed with the name of the reporting entity (e.g. Sunrise Ltd) and the date.
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.

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Generally Accepted Accounting Principles

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Balance Sheet Structure

Equity valuation

Constructing a Balance Sheet

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