BALANCE SHEET

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 financial 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 and net worth, or equivalently, net worth must equal assets minus liabilities (see the accounting equation).
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.

Contents

Balance sheet structure

Sample balance sheet structure

Equity valuation

Constructing a balance sheet

See also

References

Balance sheet structure

A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets^[1][2]. Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.^[3] Large businesses also may prepare balance sheets for segments of their businesses.^[4] A balance sheet often ''compares'' two balance sheets for a single organization.^[5][6]
Guidelines for corporate balance sheets are given by the International Accounting Standards Committee and numerous country-specific organizations.
Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses.^{[7][8][9][10][11]}
If applicable to the business, summary values for the following items should be included on the balance sheet:^[12]
'Assets'

Long-term assets
# property, plant and equipment
# investment property, such as real estate held for investment purposes
# intangible assets
# financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)
# investments accounted for using the equity method
# biological assets
Current assets
# inventories
# accounts receivable
# cash and cash equivalents
'Liabilities'
# accounts payable
# provisions for warranties or court decisions
# financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
# liabilities and assets for current tax
# deferred tax liabilities and deferred tax assets
# minority interest in equity
# issued capital and reserves attributable to equity holders of the parent company
'Equity'
# numbers of shares authorised, issued and fully paid, and issued but not fully paid
# par value of shares
# reconciliation of shares outstanding at the beginning and the end of the period
# description of rights, preferences, and restrictions of shares
# treasury shares, including shares held by subsidiaries and associates
# shares reserved for issuance under options and contracts
# a description of the nature and purpose of each reserve within owners' equity

Sample 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
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

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 liability company called Sunrise Ltd by raising $10,000 from the owners i.e. share holders. The money is put into 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'
Current assets
Bank balance	1,400
Inventory	2,000
Accounts receivable	2,500
''Total current assets''	''5,900''
Fixed assets
Delivery van	6,000
Machinery	2,200
''Total fixed assets''	''8,200''
'Total assets'	'14,100'
'Liabilities and stockholders' equity'
Current liabilities
Accounts payable	400
Long-term liabilities
Loans payable	2,200
'Total liabilities'	'2,600'
Stockholders' equity
Share capital	10,000
Retained earnings	1,500
'Total stockholders' equity (Net worth)'	'11,500'
'Total liabilities and stockholders' equity'	'14,100'

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.

See also

★ Off-balance-sheet

★ National accounts

★ Minority interest

References

1. Personal balance sheet structure
2. US Small Business Administration sample spreadsheet for a small business
3. Microsoft Corporation balance sheet, June 30, 2004
4. International Business Machines "Global Financing" balance sheet comparing 2003 to 2004
5. Balance sheet comparing two year-end balance sheets
6. Balance sheet comparing monthly balances
7. University of Calgary (Canada) Financial Services balance sheet accounts
8. University of Victoria (Canada) balance sheet accounts
9. University of Minnesota (USA) balance sheet accounts
10. State of Alabama (USA) balance sheet accounts
11. New York State (USA) public utilities balance sheet accounts
12. "Presentation of Financial Statements" International Accounting Standards Board. Accessed 24 June 2007.