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9.3: Balance Sheet

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    22107
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    In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company. Assets, liabilities and ownership equity list as of a specific date, such as the end of its financial year. A balance sheet is a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement that applies to a single point in time of a business' calendar year.

    A standard company balance sheet has two sides: assets, on the left and financing, which itself has two parts, liabilities and ownership equity, on the right. The main categories of assets usually list first and typically in order of liquidity. Liabilities follow assets. The difference between the assets and the liabilities is ‘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 balance sheet equation is that total 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 or shareholders' 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".

    Types of Balance Sheets

    A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Two forms of balance sheet exist. They are the report form and the account form. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have 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

    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 list 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.

    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 enter in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.

    Public business entities structure

    Guidelines for constructing balance sheets of public business entities are available from the International Accounting Standards Board and numerous other country-specific organizations and companies. The standard used by companies in the USA adhere to U.S. Generally Accepted Accounting Principles (GAAP). The Federal Accounting Standards Advisory Board (FASAB) is a United States federal advisory committee whose mission is to develop generally accepted accounting principles (GAAP) for federal financial reporting entities.

    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 in the balance sheet: Assets are all the things the business owns. This will include property, tools, vehicles, furniture, machinery, and so on.

    Assets

    Fixed assets

    1. Property, plant and equipment (cannot easily be converted into cash)
    2. Investment property, such as real estate held for investment purposes
    3. Intangible assets such as (patents, copyrights and goodwill)
    4. Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents), such as notes receivables
    5. Investments accounted for using the equity method
    6. Biological assets, which are living plants or animals. Bearer biological assets are plants or animals that bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.
    7. Loan To (More than one financial period)

    Current assets

    1. Prepaid expenses for future services that will be used within a year
    2. Accounts receivable
    3. Cash and cash equivalents (Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount")
    4. Cash at bank, Petty Cash, Cash On Hand
    5. Revenue Earned In Arrears (Accrued Revenue) for services done but not yet received for the year
    6. Loan To (Less than one financial period)

    Liabilities

    1. Accounts payable
    2. Provisions for warranties or court decisions (contingent liabilities that are both probable and measurable)
    3. Financial liabilities (excluding provisions and accounts payables), such as promissory notes and corporate bonds
    4. Liabilities and assets for current tax
    5. Deferred tax liabilities and deferred tax assets
    6. Unearned revenue for services paid for by customers but not yet provided
    7. Interests on loan stock

    Equity / capital

    The net assets shown by the balance sheet equals the third part of the balance sheet known as the shareholders' equity. It comprises:

    1. Issued capital and reserves attributable to equity holders of the parent company (controlling interest)
    2. Non-controlling interest in 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 useful 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 thus the shareholders' equity is a residual. Regarding the items in equity section, the following disclosures are required:

    • Numbers of shares authorized, issued and fully paid, and issued but not fully paid
    • Par value (market 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

    Pro-Forma Balance Sheet Example
    The Porker - Annual Forecast

    ASSETS 2016 2017 2018 2019
    CURRENT ASSETS        
    Cash $25,085 $31,639 $86,323 $149,933
    Net accounts receivable $0 $0 $0 $0
    Inventory $0 $58,064 $28,745 $32,440
    Temporary investment $45,150 $40,150 $45,000 $50,000
    Prepaid expenses $950 $1,100 $1,200 $1,250
    Total Current Assets $71,185 $130,953 $161,268 $233,623
     
    FIXED ASSETS        
    Long-term investments $0 $0 $0 $0
    Land $45,000 $45,000 $45,000 $45,000
    Buildings (net depreciation) $90,000 $87,000 $84,000 $81,000
    PLant & equipment (net) $25,608 $23,047 $20,486 $17,925
    Furniture & fixture (net) $7,575 $7,575 $7,575 $7,575
    Total Net Fixed Assets $168,183 $162,622 $157,061 $151,500
    TOTAL ASSETS $239,368 $301,150 $318,329 $385,123
     
    LIABILITIES        
    Current Liabilities        
    Accounts payable $12,246 $14,587 $16,258 $17,277
    Short-term notes $0 $0 $0 $0
    Current long-term notes $0 $0 $0 $0
    Accruals/other payables $14,150 $15,140 $16,950 $17,546
    Total Current Liabilities $26,396 $29,727 $33,208 $34,823
     
    Long-term Liabilities        
    Mortgage $108,000 $102,650 $99,780 $94,121
    Other long-term liabilities $0 $0 $0 $0
    Total Long-term Liabilities $108,000 $102,650 $99,780 $94,121
             
    SHAREHOLDERS' EQUITY        
    Capitol Stock $0 $0 $0 $0
    Retained earnings $104,972 $168,773 $185,341 $128,944
    Total Shareholders' Equity $104,972 $168,773 $185,341 $128,944
    TOTAL LIABILITIES & EQUITY $239,368 $301,150 $318,329 $318,329

    This page titled 9.3: Balance Sheet is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by William R. Thibodeaux.

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