What is a Balance Sheet?
A Balance Sheet is a financial statement that shows the company’s financial position at a specific point of time. It shows what a company owns, how much it owes as well as the amount invested by the shareholders. The Balance Sheet is a snapshot of the company’s financial situation at a particular point of time.
The Balance Sheet Formula:
ASSETS = LIABILITIES + EQUITY
This accounting equation has to balance all the time and that’s why it’s called a balance sheet, this formula is intuitive even at the individual’s level, everything owned is called assets, if it’s completely clear and free it’s called ” equity”, if it’s purchased into debt it’s a liability, and it means that assets must always equal equity plus liabilities.
Assets, liabilities and shareholders’ equity each consist of several accounts according to the specifics of a company’s finances, these accounts vary by industry, and for that the balance sheet shouldn’t be compared to other businesses in deferent industries.
The Balance Sheet is divided into two sections. The left side outlines the company’s assets. The other side outlines the liabilities and shareholders’ equity.
Assets consist of:
1-Fixed Assets such as: Buildings, Land, Vehicles, Machines, Furniture.
2- Current Assets: Cash, Account Receivable, Banks, Customers, Inventory.
3-Other Assets includes Brand, Logo, Reputation.
The balance sheet always starts with current assets, which consists of cash and equivalents, account receivable, inventory and prepaid expenses, and there are also the non-current assets such as plant, property and intangible assets.
How to prepare a balance sheet from the trial balance:
The trial balance is a standard report in the accounting software package.
• Print and adjust the trial balance if you’re operating a manual system by first transferring the ending balance in every general ledger account to a spreadsheet, make sure the balance sheet is compliance with the relevant accounting framework ( such as GAAP or IFRS)
• Take all assets from the trial balance and report them in the balance sheet, total current assets are separated from total non-current assets, draw a line between every mathematical operation, Then calculate the amount of total assets.
• Present all liabilities and capital. Calculate the total current liabilities followed by the total non-current liabilities, like what we did for assets. Draw a line between every mathematical operation. After that take the amount of total liabilities.
• From the statement of changes in equity, report the ending balances of capital. After that, take the total amount of liabilities and capital.
• Total assets should be equal to total liabilities and capital. If they aren’t, then something has gone wrong.
The main items included in the balance sheet:
It consists of current assets, fixed assets and intangible assets.
1-1. Current Assets include cash and cash equivalents, marketable securities, accounts receivable, prepaid expenses and inventory.
Cash equivalents represent highly liquid, very safe investments securities that are meant for short-term investing, they have no risk and low-return profile, and they have a short maturity period of 90 days.
Accounts receivable represents the amount of money that the company’s customers owe to it due to a firm of goods or services delivered or used but not yet paid for such employee’s entitlements and salaries, and accrued revenues.
Inventory refers to what the company produces or buy to sell to its customers, including, finished goods, work-in-progress, and raw materials. It’s a current asset on the company’s balance sheet, although inventory isn’t an income statement account, the changes in inventory is a component in the total amount of the cost of goods sold, which is presented on the company’s income statement.
Liabilities are obligations of the business. They represent what the company owes to various groups or businesses such as suppliers and customers. They’re categorized into current liabilities and long-term liabilities.
2-1- Current Liabilities
• Accounts payable: Accounts payable represents goods or services that the company received on credit from its vendors and suppliers. On the balance sheet it appears under current liabilities.
• Accrued expenses: Accrued expenses are liabilities to pay for products or services that were already received but not yet been paid or logged under accounts payable during an accounting period. Once an invoice is received, an accrued expense becomes an account payable.
• Current portion of long-term debt:
The current portion of long-term debt is the amount of debt unpaid that has matured, or is due, within 12 months. For example, if the company has $1,000,000 of debt and $200.000 of it is due and must be paid off in the current year, it records $800,000 as long-term debt and $200.000 as the current portion of long-term debt.
.Income taxes payable:
Income taxes payable is an obligation to the government. It’s an account in the current liabilities of the company’s balance sheet. The reason why it’s a liability is because it is not paid immediately after the sale but retained by the company usually until the quarter ends.
2-2- Long-term Liabilities:
• Long-term liabilities, or non-current liabilities are the company’s obligations that are due beyond a year on the normal operation period of the company. They are listed in the balance sheet after current liabilities. Some examples of long-term liabilities include loans, pension obligations, and lease obligations. The worst debt is incurred when a
company does not generate enough money internally and has to borrow for regular operating expenditures to be able to stay competitive. On the other hand, not all debt is bad.
Shareholders’ equity is the amount of money left after total liabilities are subtracted from total assets.
• Capital Stock:
The original capital and additional funds invested into the business by the shareholders when the corporation shares of capital stock were issued. It includes both common and preferred stock and can only be issued by the company. The amount of capital stock issued to an investor determines the percentage of the company ownership he owns.
• Retained Earnings:
Retained earnings are the amount of net income that the company generated and did not pay out as dividends.
It is the enterprise’s undistributed profits from all years in operation, not just one year.
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