This lesson and the balance sheet example below will show the format and components of this key report.
But before we even look at the balance sheet format, here's a key point: whereas the income statement and statement of changes in equity show changes (to income and expenses or owner's equity) over a certain period of time, the balance sheet shows the balances of assets, liabilities and owner's equity on a particular day.
The balance sheet thus provides a snapshot of a business at an exact point in time - it shows the balances of the various accounts on the last day of the reporting period.
Here is a basic balance sheet format:
As you can see from the balance sheet above, the total of the assets agrees in value (balances) with the total of the owner's equity and liabilities.
Let’s compare that report to our original accounting equation:
One can clearly see that the balance sheet shows the accounting equation (or the financial position) of a business, except that this accounting equation is turned on its head and shown in a vertical format, with the assets on top and the equity and liabilities on the bottom.
The balance sheet also divides the assets and liabilities into categories.
Assets and liabilities must be divided up into long-term and short-term categories. Non-current means long-term and current means short-term.
The dividing line between current and non-current is one year from the date that the balance sheet is issued.
In other words, an asset will be classified as current if it is expected to be sold (or used) within a year from the date of the report.
An asset will be classified as non-current if it is expected to be used for more than one year.
A liability that is expected to be paid off within a year, such as a creditor, is classified as current.
A loan, which is expected to be paid off more than a year from the balance sheet date, is classified as a non-current liability.
The division of assets and liabilities into these categories is done to provide more meaningful information to the readers of this report.
One type of asset that we haven't gone over in previous lessons is investments. Investments are also known as other financial assets.
This category of assets includes investments in other businesses as well as long-term investments with the bank. Note that investments are usually non-current assets (unless you intend to sell off the investment within a year, in which case it is classified as a current asset).
As mentioned previously, inventory are stock or goods. See our later section on inventory for numerous lessons on this topic.
The "10% loan" means that we have a loan that has a 10% interest charge on it per year.
Just like the previous two statements, the balance sheet is usually drawn up annually.
Here is our previous trial balance for George’s Catering again.
Our balance sheet is going to require the balances of all assets and liabilities. So we stick these in there. That's fairly simple.
But what about the owner’s equity - what do we do with this?
The answer is that we take the closing balance of the owner’s equity from the statement of changes in equity and put this in our balance sheet. Here's how this accounting report looked from the last lesson:
And this is how the balance sheet for George's Catering would look:
So we draw up the income statement first and get the profit, then put this profit into the statement of owner's equity and get the closing balance of owner's equity, and then take this closing balance and put it into our balance sheet.
FYI if you check the balance sheet example above, the balances of the assets, liabilities and the owner’s equity is the same as what we calculated in earlier lessons.
Just like the income statement, the balance sheet can also be drawn up at the start of the period with budgeted figures, and these budgeted figures (assets, liabilities, equity) can later be compared to actual results on a specific day.
Hope that balance sheet example helped!
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