- A balance sheet is a financial statement which is used in accounting to present an enterprise’s financial position at a specific date
- Shareholder’s Equity = Assets – Liabilities
- A balance sheet typically comprises of the following major sections: Current assets, non-current assets, current liabilities, non-current liabilities, and the shareholder’s equity
What is a Balance Sheet?
A balance sheet is a financial statement that is used in accounting to present an enterprise’s financial position at a specific date. The balance sheet is also called the statement of financial position. The balance sheet is constructed on the simple accounting formula, which is: –
Shareholder’s Equity = Assets – Liabilities
So, the balance sheet discloses all the resources which a company owns — all its assets — and all the liabilities which it owes — like creditor payments, short-term loans etc.
Structure of the Balance Sheet
The balance sheet is constructed with two halves placed side by side, one representing the assets and the other liabilities. After tallying both sides, it becomes clear whether assets exceed liabilities or not. If assets exceed liabilities, it denotes the capital that is with the company.
There are some ‘buckets’ that are almost always part of a balance sheet and are mentioned below:
Cash and Cash Equivalents: These are the most liquid assets and appear on the balance sheet’s first line. Along with cash, this section contains cash equivalents as well, which are the assets that can be liquidated on short notice.
Accounts Receivables: This section includes the amount of sales revenue that the company has given on credit and is yet to receive the payment. A decrease in the accounts receivables causes an increase in cash.
Inventory: This section consists of work-in-progress goods, raw material, and finished goods.
Plant, Property, and Equipment (PP&E): This section consists of the tangible assets of the company. Except for land, these assets are depreciable.
Intangible Assets: These are the assets that may not easily be identifiable. Examples of identifiable intangible assets are licenses, patents, etc. Examples of unidentifiable intangible assets are brand and goodwill.
Accounts Payable: This is the amount that a company owes to its suppliers for the raw materials, services, and other commodities purchased on credit. As the company pays its accounts payables, it decreases with an equal decrease in the cash account.
Current Debt: The current debt section includes obligations, apart from accounts payable, which are due within one operating cycle or one year.
Current Portion of a Long-Term Debt: This section can also be sometimes merged into the current debt section. Current Portion of a Long-Term Debt contains the portion which is due in the current year of debt with a maturity greater than one year.
Long-Term Debt: This component of the non-current liabilities contains the long-term debt of a company, excluding the current portion.
Bonds Payable: This account contains the amortized amount of bonds that the company has issued.
Share Capital: This contains the shareholder’s funds invested in the company.
Retained Earnings: This is the part of the net income that a company decides to keep.