Here we will come back to the concept of Balance Sheet and provide explanations on what items you can find on this financial statement and also present Balance Sheet Example for a better understanding how to compose it and what information is necessary for its preparation. Here there will be also balance sheet template and sample format presented and explained to guide you through the process and provide knowledge of how to prepare this financial statement and understand it.
The Essence Of Balance Sheet
Coming back to the essence of Balance Sheet remember that it is one of the three main financial statements, which include:
1. Balance Sheet / 2. Income Statement / 3. Cash Flow Statement.
Balance Sheet reflects structure of the company’s assets and financing sources used to finance these assets (i.e. equity and/or liabilities) as of particular date. This means that in this financial statement we can find information on what kind of assets business had on the particular day and how these assets were financed, i.e. either by the own means of shareholders (equity) or by the borrowed financial means (liabilities), or by the mix of these two sources.
From the name of this financial statement, i.e. Balance Sheet, we can understand that there should be a balance between its parts, i.e. Assets must be equal to the sum of Equity and Liabilities. This is true since this financial statement reflects the essence of the Accounting Equation.
Items On The Balance Sheet
The following items can be found on the Balance Sheet and will be included into the sample Balance Sheet:
I. Assets – these are physical (tangible) things or intangible items which have a monetary value and are owned by the business. On the Balance Sheet assets are divided into:
a) current assets – which are reasonably expected to be realized in cash or sold within one year or less in the normal operations of the business;
b) long-term (fixed) assets – permanent assets or relatively fixed in nature and used by the business in its operations for the period longer than one year.
II. Equity (Owners’ equity) – residual claim against total assets of business after all the liabilities are deducted. In other words equity represents right of the shareholders to get share of the assets the business owns after all liabilities have been paid. Equity is not classified into current and long-term part since it does not have maturity date and there is no obligation to pay back equity to the shareholders. It might be done only after the liquidation of the business.
III. Liabilities – debts owed to third parties, i.e. creditors, which have a certain maturity date and must be repaid. Liabilities are also divided into 2 groups:
a) current liabilities – payable within the period of one year or shorter. Usually to be repaid back from the current assets
b) long-term liabilities – payable within the period longer than one year
Balance Sheet Example
Below you can find Balance Sheet Example and related explanations on the presentation of separate items in this financial statement.
Additional comments on the Sample Balance Sheet:
Items in the Balance Sheet (explore Balance Sheet Definition here) on the Assets side are presented starting from the most liquid ones and ending with the least liquid. Liquidity means the speed with which assets can be converted into cash. So we start from Cash, then go to the Accounts Receivable which can be quite quickly converted into cash, then to Inventories which are less liquid comparing to the Accounts Receivable and so on.
In the Balance Sheet on the Liabilities and Equity side first we include liabilities, i.e. showing how much financing the business will have to return to creditors, and then include equity, i.e. residual right of shareholders to get assets, which remain after all liabilities are paid.
This is a Sample Balance Sheet, not a template which can be used for any business. In practice depending of the types of activities the business carries on the Balance Sheet might include more items than indicated above.