In this tutorial we're going to go over the difference between the balance sheet and other financial statements, the general format of this statement and its components, as well as an example of how to put together this key report.
Don't forget to check out the Test Yourself section further below for a free Balance Sheet Quiz! And at the bottom of the page, more questions on the balance sheet submitted by fellow students.
The Balance Sheet vs Income Statement and Statement of Changes in Equity
And just like these previous two statements (income statement and statement of changes in equity), the balance sheet is usually drawn up annually.
But there is one key difference between the balance sheet and those other two reports, a difference which is very important and which you really need to understand.
Whereas the income statement and statement of changes in equity show changesover a certain period of time (changes to income and expenses and changes to the owner's equity), 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.
The Vertical Balance Sheet Format
Here is a balance sheet shown in the vertical 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.
One can clearly see that the balance sheet shows the accounting equation 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.
Well, the balance sheet is actually known by another name. Want to guess what that is?
The balance sheet is also known as the statement of financial position.
Makes sense, right?
But bottom line, just remember that the balance sheet is simply the accounting equation in the vertical format.
Did you know?
The balance sheet used to sometimes be shown in a horizontal format, instead of the vertical format shown above. This horizontal format basically looked like one giant T-account for the whole business, with Assets on one side and Liabilities and Owner's Equity on the other.
Also, the balance sheet is often abbreviated as BS or B/S.
And that's no B.S. my friends ;-)
Balance Sheet Categories: Non-Current Versus Current
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.
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) in less than 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 from the date of the balance sheet.
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 subcategories is done to provide more meaningful information to the readers of the balance sheet.
Note that owner's equity, the third major component of the balance sheet, is presumed to always be a long-term item and so is not broken down into current and non-current.
Want to test yourself on categorizing balance sheet items as current or non-current?
Finally, we take this closing balance of owner's equity and put it into our balance sheet.
The Balance Sheet Mirrors the Accounting Equation
FYI, if you check the balance sheet example for George's Catering above, you'll see that the balances of the assets, liabilities and the owner’s equity is the same as what we calculated in earlier lessons:
Budgeted Balance Sheets
As a final point, 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.
Test Yourself with this Quick Quiz!
Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.
Difficulty Rating: Beginner --> Intermediate
Quiz length: 5 questions
Time limit: 10 minutes
Important:The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.
Hope this lesson and the balance sheet example shown above has helped you get a better understanding of this key report.