Introduction to Balance Sheet
A financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time is known as Balance Sheet. Balance Sheet provides a basis for computing the rates of return and it evaluates the capital structure of the firm. The sheet provides a snapshot of what a company owns by itself and owes to its creditors. The amount invested by the shareholders in the company is also represented here in Balance Sheet.
But what else is recorded in a Balance Sheet? We will know about those in detail in the following sections to learn more effectively about ‘Balance Sheet’.
Definition of Balance Sheet
Balance Sheet can be simply said as the – “financial statement of a company”. Balance Sheet includes assets, liabilities, equity capital, total debt at a specific point of time. Balance sheet represents the assets on one side, and liabilities on the other side. A balance sheet must tally to reflect the true picture of both assets and liabilities.
Balance Sheets are calculated after every quarter or six months or even after one year.
Balance Sheet Assets and Liabilities
As already discussed, the balance sheet is a snapshot of representing the state of a company's finances at a particular time. A disadvantage of it is that it cannot give a sense of the trends over a longer period. For this reason, the balance sheet is only used to compare with those of the previous periods and to be compared with other businesses in the same industry as different industries have different approaches to financing.
In the section of assets, they are listed in order of their liquidity. In our list too, we will follow the same order as in a balance sheet.
First comes the current assets:
Cash and Cash Equivalents – they are the most liquid assets. Treasury bills and short-term certificates of deposit are perfect examples of cash and cash equivalents.
Marketable Securities – they are the equity and debt securities which they have a market for.
Accounts receivable – are the money that the customers owe the company.
Inventory – these are the goods available for sale, they are generally valued lower than the market price.
Prepaid expenses – value which has already been paid for, like insurance, advertising contracts or paying of rent in advance.
While, Long-term assets include the following:
Long-term investments – are the securities which cannot be turned into cash in the next year.
Fixed assets – are the land, machinery, equipment, buildings and other durable capital assets.
Intangible Assets - include non-physical assets like intellectual property and goodwill. Real intangible assets are included in the balance sheet if they are acquired, not developed.
Liabilities are the money which a company owes to the third or outside parties, these are the bills which have to be paid to the suppliers. Current liabilities are due within one year and are listed in order of their due date in the balance sheet. While the long-term liabilities are due at any point after a period of one year.
Current liabilities include:
Current portion of the long-term debt.
Bank indebtedness to be paid by the business.
Interest payable to the third party.
Wages payable to the workers.
Customer prepayments, orders to be sent.
Next, Long-term liabilities can include:
Long term debt – These are the interest and principal on bonds.
Pension fund liability – is the money that a company is required to pay into its employees' respective retirement accounts.
Deferred tax liability - taxes which have been accrued but will not be paid for another year.