Balance sheet

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. 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.

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. 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 often compares two balance sheets for a single organization.

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.

Small business balance sheet

Sample 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.

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.

If applicable to the business, summary values for the following items should be included on the balance sheet:

Assets

Current assets

1. inventories
2. accounts receivable
3. cash and cash equivalents

Long-term assets

1. property, plant and equipment
2. investment property, such as real estate held for investment purposes
3. intangible assets
4. financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)
5. investments accounted for using the equity method
6. 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

1. accounts payable
2. provisions for warranties or court decisions
3. financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
4. liabilities and assets for current tax
5. deferred tax liabilities and deferred tax assets
6. minority interest in equity
7. 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.

1. numbers of shares authorised, issued and fully paid, and issued but not fully paid
2. par value of shares
3. reconciliation of shares outstanding at the beginning and the end of the period
4. description of rights, preferences, and restrictions of shares
5. treasury shares, including shares held by subsidiaries and associates
6. shares reserved for issuance under options and contracts
7. 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

• Off-balance-sheet
• National accounts
• Minority interest