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Tuesday, June 1, 2010

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 or a company. 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 or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."
Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system.
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses 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.

Origin

Annual balance sheet written in cuneiform script. Sumeria, clay, ca. 2040 BCE. Department of Oriental Antiquities, Louvre.
It was the Flemish mathematician Simon Stevin who persuaded merchants to make it a rule to summarize accounts at the end of every year in a chapter entitled Coopmansbouckhouding op de Italiaensche wyse (Dutch: "Commercial Book-keeping in the Italian Way") of his Wisconstigheg hedachtenissen (Dutch: "Mathematical memoirs", Leiden, 1605–08). Although the balance sheet he required every enterprise to prepare every year was based on entries of the ledger, it was prepared separately from the major books of account. The oldest semi-public balance sheet recorded was that of the East India Company dated 30 April 1671, which was submitted to the company's General Meeting on in 30 August 1671. The publication and audit of the balance sheet was still a rarity in England until the passing of the Bank Charter Act 1844.

Types

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. 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 overdue, 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.

Public Business Entities balance sheet structure

Guidelines for balance sheets of public business entities 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.
If applicable to the business, summary values for the following items should be included on the balance sheet:

Assets

Current assets

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

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
Minority interest in equity
Issued capital and reserves attributable to equity holders of the Parent company
Unearned revenue for services paid for by customers but not yet provided

Equity

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.
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

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 (debtors)
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

Creditors: amounts falling due within one year (Current Liabilities)
Accounts payable
Current income tax liabilities
Current portion of bank loans payable
Short-term provisions
Other current liabilities

Creditors: amounts falling due after more than one year (Long-Term Liabilities)
Bank loans
Issued debt securities
Deferred tax liability
Provisions
Minority interest


Equity
Share capital
Capital reserves
Revaluation reserve
Translation reserve
Retained earnings

1 comment:

  1. The balance sheet in which assets are shown classifying them into current and fixed-and liabilities as short term and long term and owner’s equity separately is called classified balance sheet.

    ReplyDelete

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