Balance sheet definition
/What is a Balance Sheet?
A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report. As such, it provides a picture of what a business owns and owes, as well as how much as been invested in it. The balance sheet is commonly used for a great deal of financial analysis of a business' performance. The balance sheet is one of the key elements in the financial statements, of which the other documents are the income statement and the statement of cash flows. A statement of retained earnings may sometimes be attached.
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Formula Used for a Balance Sheet
The information listed on the balance sheet must comply with the formula below, which states that the aggregate amount of all assets on the balance sheet must equal the total of all liabilities and equity on the report. This is known as the accounting equation. The accounting equation is required when using the double entry accounting system.
Total assets = Total liabilities + Equity
Format of the Balance Sheet
The format of the balance sheet is not mandated by accounting standards, but rather by customary usage. The two most common formats are the vertical balance sheet (where all line items are presented down the left side of the page) and the horizontal balance sheet (where asset line items are listed down the first column and liabilities and equity line items are listed in a later column). The vertical format is easier to use when information is being presented for multiple periods.
What is Listed on the Balance Sheet?
The line items to be included in the balance sheet are up to the issuing entity, though common practice typically includes some or all of the following items:
Current Assets:
Trade receivables and other receivables
Assets held for sale
Non-Current Assets:
Property, plant, and equipment
Current Liabilities:
Trade payables and other payables
Current tax liabilities
Other financial liabilities
Liabilities held for sale
Non-Current Liabilities:
Other non-current liabilities
Equity:
Example of a Balance Sheet
An example of a balance sheet appears below. It shows a basic set of line items that a seller of goods is likely to use. A seller of services might not use the inventories line item in its balance sheet.
Domicilio Corporation
Balance Sheet
| (000s) | as of 12/31/x2 | as of 12/31/x1 |
| ASSETS | ||
| Current assets | ||
| Cash and cash equivalents | $135,000 | $110,000 |
| Trade receivables | 70,000 | 62,000 |
| Inventories | 65,000 | 58,000 |
| Other current assets | 8,000 | 31,000 |
| Total current assets | 278,000 | 261,000 |
| Non-current assets | ||
| Property, plant, and equipment | 275,000 | 260,000 |
| Goodwill | 40,000 | 40,000 |
| Other intangible assets | 72,000 | 70,000 |
| Total non-current assets | 387,000 | 370,000 |
| Total assets | $665,000 | $631,000 |
| LIABILITIES AND EQUITY | ||
| Current liabilities | ||
| Trade and other payables | $105,000 | $100,000 |
| Short-term borrowings | 50,000 | 90,000 |
| Current portion of long-term borrowings | 7,000 | 6,000 |
| Current tax payable | 21,000 | 14,000 |
| Accrued expenses | 5,000 | 3,000 |
| Total current liabilities | 188,000 | 213,000 |
| Non-current liabilities | ||
| Long-term debt | 40,000 | 35,000 |
| Deferred taxes | 29,000 | 21,000 |
| Total non-current liabilities | 69,000 | 56,000 |
| Total liabilities | 257,000 | 269,000 |
| Shareholders’ Equity | ||
| Capital | $150,000 | $150,000 |
| Additional paid-in capital | 30,000 | 30,000 |
| Retained earnings | 228,000 | 182,000 |
| Total equity | 408,000 | 362,000 |
| Total liabilities and equity | $665,000 | $631,000 |
Current Assets on the Balance Sheet
Within the balance sheet, the items noted below should be classified as current assets. In general, any asset is classified as a current asset when there is a reasonable expectation that the asset will be consumed within the next year, or within the operating cycle of the business. All other assets are to be classified as non-current.
Cash
Cash includes all liquid, short-term investments that are easily convertible into cash. Do not include in current assets cash that is restricted, or to be used to pay down a long-term liability.
Marketable Securities
Marketable securities includes all securities that are held for trading.
Accounts Receivable
Accounts receivable includes all trade receivables, as well as all other types of receivables that should be collected within one year.
Prepaid Expenses
Prepaid expenses includes any prepayment that is expected to be used within one year.
Inventory
Inventory includes all raw materials, work in process, and finished goods items, less an obsolescence reserve.
Current Liabilities on the Balance Sheet
Within the balance sheet, the following should be classified as current liabilities:
Payables. This is all trade payables related to the purchase of goods or services from suppliers.
Accrued expenses. This is expenses incurred by the business, for which no supplier invoice has yet been received.
Short-term debt. This is loans for which payment is due within the next year.
Unearned revenue. This is advance payments from customers that have not yet been earned by the company.
In general, a liability is classified as current when there is a reasonable expectation that the liability will come due within the next year, or within the operating cycle of the business. All other liabilities are to be classified as non-current.
Balance Sheet Ratios
Some of the more common ratios that include balance sheet information are:
Accounts receivable collection period (measures the average amount of time required to collect accounts receivable)
Current ratio (compares the total amount of current assets to total current liabilities to see if there is a liquidity problem)
Debt to equity ratio (compares total debt to total equity to see if a business is excessively leveraged)
Inventory turnover (measures the amount of time required to sell off inventory)
Quick ratio (compares the most liquid assets to current liabilities, to see if a business can support its immediate obligations)
Return on net assets (measures the income generated on a company’s asset base; this is a measure of asset efficiency)
Working capital turnover ratio (compares the working capital investment to sales, to see if working capital is being used efficiently)
Many of these ratios are used by creditors and lenders to determine whether they should extend credit to a business, or perhaps withdraw existing credit.
Terms Similar to Balance Sheet
The balance sheet is also known as the statement of financial position.
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