BUS202: Principles of Finance

A standard balance sheet has three parts: assets, liabilities, and ownership equity; Asset = Liabilities + Equity.

TERMS

• asset

  Something or someone of any value; any portion of one's property or effects so considered.

• equity

  Ownership, especially in terms of net monetary value, of a business.

• balance sheet

  A summary of a person's or organization's assets, liabilities and equity as of a specific date.

Balance Sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has three parts: assets, liabilities, and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as "equity". Equity is the net assets or net worth of the capital of the company. According to the accounting equation, net worth must equal assets minus liabilities.

Types

A balance sheet summarizes an organization or individual's assets, equity, and liabilities at a specific point in time. We have two forms of balance sheet. They are the report form and the account form. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report. Large businesses also may prepare balance sheets for segments of their businesses. A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.

Personal Balance Sheet

A personal balance sheet lists current assets, such as cash in checking accounts and savings accounts; long-term assets, such as common stock and real estate; current liabilities, such as loan debt and mortgage debt due; or long-term liabilities, such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.

U.S. Small Business Balance Sheet

A small business balance sheet lists current assets, such as cash, accounts receivable and inventory; fixed assets, such as land, buildings, and equipment; intangible assets, such as patents; and liabilities, such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities, such as warranties, are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.

Public Business Entities Balance Sheet Structure

Guidelines for balance sheets of public business entities are given by the International Accounting Standards Board and numerous country-specific organizations/companies.

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.

If applicable to the business, summary values for the following items should be included in the balance sheet: Assets are all the things the business owns, including property, tools, cars, etc.

Assets:

1. Current assets

• Cash and cash equivalents
• Accounts receivable
• Inventories
• Prepaid expenses for future services that will be used within a year

2. Non-current assets (fixed 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, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.

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.
• Unearned revenue for services paid for by customers but not yet provided.

Equity:

• Issued capital and reserves attributable to equity holders of the parent company (controlling interest).
• Non-controlling interest in equity.

Regarding the items in equity section, the following disclosures are required:

• Numbers of shares authorized, 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