Balance sheet: Difference between revisions
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==Types of balance sheets== |
==Types of balance sheets== |
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A balance sheet summarizes an organization or individual's |
A balance sheet summarizes an organization or individual's asset, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets.<ref>[http://www.sba.gov/library/balsheet.xls US Small Business Administration sample spreadsheet for a small business]</ref>{{Dead link|date=November 2007}} Larger businesses tend to have more complex balance sheets, and these are presented in the organization's [[annual report]].<ref>[http://www.microsoft.com/msft/ar04/nonflash/10k_fr_bs.html Microsoft Corporation balance sheet, June 30, 2004]</ref> Large businesses also may prepare balance sheets for segments of their businesses.<ref>[http://www.ibm.com/annualreport/2004/annual/md_8fc.shtml International Business Machines "Global Financing" balance sheet comparing 2003 to 2004]</ref> A balance sheet often ''compares'' two balance sheets for a single organization.<ref>[http://www.xbrl.org/taxonomy/int/fr/ifrs/ci/2003-07-15/ifrs-ci-2003-07-15_files/image016.jpg Balance sheet comparing two year-end balance sheets]</ref><ref>[http://www.timberry.com/fm/BalanceSheet5-1-04.png Balance sheet comparing monthly balances]</ref> |
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===Personal balance sheet=== |
===Personal balance sheet=== |
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A personal balance sheet lists current assets such as cash in [[checking account]]s and [[savings account]]s, long-term assets such as [[common stock]] and [[real estate]], current liabilities such as [[loan]] debt and [[mortgage]] debt due or overdue, and 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.<ref>[http://www.state.co.us/oed/sbdc/business/pbs.pdf Personal balance sheet structure]</ref> |
A personal balance sheet lists current assets such as cash in [[checking account]]s and [[savings account]]s, long-term assets such as [[common stock]] and [[real estate]], current liabilities such as [[loan]] debt and [[mortgage]] debt due or overdue, and 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.<ref>[http://www.state.co.us/oed/sbdc/business/pbs.pdf Personal balance sheet structure]</ref> |
Revision as of 22:12, 6 December 2007
This article needs additional citations for verification. (June 2007) |
In financial accounting, a balance sheet or statement of financial position is a summary of the value of all assets, liabilities and owners' equity for an organization or individual on 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 on a given date.[1] 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 company balance sheet 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. According to the accounting equation, net worth must equal assets minus liabilities.[2]
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 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.
Types of balance sheets
A balance sheet summarizes an organization or individual's asset, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets.[3][dead link] Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.[4] Large businesses also may prepare balance sheets for segments of their businesses.[5] A balance sheet often compares two balance sheets for a single organization.[6][7]
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, and 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.[8]
Small business balance sheet
Assets | Liabilities and Owners' Equity | |||
---|---|---|---|---|
Cash | $ 16,600 | Liabilities: | ||
Accounts Receivable | $ 1,200 | Notes Payable | $ 30,000 | |
Land | $ 52,000 | Accounts Payable | $ 7,000 | |
Building | $ 36,000 | Total liabilities | $ 37,000 | |
Tools and equipment | $ 12,000 | Owner's equity: | ||
Capital Stock | $ 80,000 | |||
Retained Earnings | $ 800 | |||
Total owner's equity | $80,800 | |||
Total | $117,800 | Total | $117,800 |
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. [10]
Corporate balance sheet structure
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.[11][12][13][14][15]
If applicable to the business, summary values for the following items should be included on the balance sheet:[16]
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.[17]
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
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 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 at 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 profit
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). This is inevitable, as liabilities (and equity) provide the funds that are spent 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
References
- ^ Williams, Jan R. (2008). Financial & Managerial Accounting. McGraw-Hill Irwin. pp. p. 40. ISBN 9780072996500.
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- ^ US Small Business Administration sample spreadsheet for a small business
- ^ Microsoft Corporation balance sheet, June 30, 2004
- ^ International Business Machines "Global Financing" balance sheet comparing 2003 to 2004
- ^ Balance sheet comparing two year-end balance sheets
- ^ Balance sheet comparing monthly balances
- ^ Personal balance sheet structure
- ^ Williams, p. 50.
- ^ http://www.sba.gov/services/financialassistance/basics/statement/finst_balsheet.html
- ^ University of Calgary (Canada) Financial Services balance sheet accounts
- ^ University of Victoria (Canada) balance sheet accounts
- ^ University of Minnesota (USA) balance sheet accounts
- ^ State of Alabama (USA) balance sheet accounts
- ^ New York State (USA) public utilities balance sheet accounts
- ^ "Presentation of Financial Statements" International Accounting Standards Board. Accessed 24 June 2007.
- ^ Epstein, Barry J. (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. pp. p. 931. ISBN 9780471798231.
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