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.
Assets
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
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.
Dividends payable.
Accounts payable
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.
FAQs on Assets in Balance Sheets: What to Know
1. What is an asset in the context of a company's balance sheet?
An asset is an economic resource that is owned or controlled by a company and is expected to provide future economic benefits. In a balance sheet, assets represent what a company owns and are listed as part of the fundamental accounting equation: Assets = Liabilities + Equity. They are crucial for understanding a company's value and operational capacity.
2. What are the main categories of assets shown on a balance sheet?
Assets on a balance sheet are primarily classified into two main categories based on their liquidity and intended use:
Current Assets: These are assets that are expected to be converted into cash, sold, or consumed within one year or an operating cycle. Key examples include cash, bank balances, inventory (stock), and accounts receivable (debtors).
Non-Current Assets: These are long-term assets not intended for sale within a year but are used to operate the business. This category includes tangible assets like land, buildings, and machinery, as well as intangible assets like patents and goodwill.
3. How are assets arranged or presented on a balance sheet?
Assets can be arranged in two primary ways. The most common format in India, as per Schedule III of the Companies Act, 2013, is in the order of permanence, where Non-Current Assets are listed first, followed by Current Assets. The alternative is the order of liquidity, where assets are listed from most liquid (e.g., Cash) to least liquid (e.g., Land and Building). The order of permanence is preferred for giving a long-term view of the company's operational base.
4. What is the difference between tangible and intangible assets?
The primary difference lies in their physical existence. Tangible assets have a physical form and can be seen and touched, such as machinery, buildings, and vehicles. In contrast, intangible assets lack physical substance but hold significant economic value. Examples include goodwill, patents, copyrights, and trademarks, which represent rights and competitive advantages for the business.
5. Why is it important for students and investors to distinguish between current and non-current assets?
This distinction is critical for financial analysis. Current assets are a key indicator of a company's liquidity—its ability to meet short-term financial obligations. A high value of current assets relative to current liabilities suggests good short-term financial health. Non-current assets reflect a company's investment in its long-term infrastructure and growth potential, indicating its capacity for future production and revenue generation.
6. How is the value of a non-current asset like machinery shown on the balance sheet over time?
A non-current asset like machinery is initially recorded at its historical cost (the price paid to acquire it). As the asset is used, its value decreases due to wear and tear. This reduction is systematically recorded as depreciation. On the balance sheet, the asset is shown at its book value, which is calculated as its original historical cost minus the total accumulated depreciation to date.
7. How do assets generate revenue for a business?
Assets are the primary tools a business uses to generate revenue. For example, a manufacturing company uses its non-current assets like machinery to produce goods. These goods become current assets (inventory), which are then sold to customers to generate revenue. Similarly, a service company uses its assets like computers and office space to deliver services, which in turn creates income. The effective management and utilisation of assets are directly linked to a company's profitability.
