Balance Sheet Overview - AccountingTools

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The Balance Sheet

A balance sheet is used to inform a reader of the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report. The information listed on the report must match the following formula:

Total assets = Total liabilities + Equity

The most common use of the balance sheet is as the basis for ratio analysis, to determine the liquidity of a business. Liquidity is essentially the ability to pay one's debts in a timely manner.

The balance sheet is one of the key elements in the financial statements, of which the other documents are the income statement and the statement of cash flows.

The format of the balance sheet is not mandated by accounting standards, but rather by customary usage. The two most common formats are the vertical balance sheet (where all line items are presented down the left side of the page) and the horizontal balance sheet (where asset line items are listed down the first column and liabilities and equity line items are listed in a later column). The vertical format is easier to use when information is being presented for multiple periods.

The line items to be included in the balance sheet are up to the issuing entity, though common practice typically includes some or all of the following items:

Current Assets:

Cash and cash equivalents
Trade and other receivables
Investments
Inventories
Assets held for sale

Non-Current Assets:

Current Liabilities:

Trade and other payables
Accrued expenses
Current tax liabilities
Current portion of loans payable
Other financial liabilities
Liabilities held for sale

Non-Current Liabilities:

Loans payable
Deferred tax liabilities
Other non-current liabilities

Equity:

Here is an example of a balance sheet:

Domicilio Corporation
Balance Sheet

(000s)	as of 12/31/x2	as of 12/31/x1
ASSETS
Current assets
Cash and cash equivalents	$135,000	$110,000
Trade receivables	70,000	62,000
Inventories	65,000	58,000
Other current assets	8,000	31,000
Total current assets	278,000	261,000

Non-current assets
Property, plant, and equipment	275,000	260,000
Goodwill	40,000	40,000
Other intangible assets	72,000	70,000
Total non-current assets	387,000	370,000

Total assets	$665,000	$631,000

LIABILITIES AND EQUITY
Current liabilities
Trade and other payables	$105,000	$100,000
Short-term borrowings	50,000	90,000
Current portion of long-term borrowings	7,000	6,000
Current tax payable	21,000	14,000
Accrued expenses	5,000	3,000
Total current liabilities	188,000	213,000

Non-current liabilities
Long-term debt	40,000	35,000
Deferred taxes	29,000	21,000
Total non-current liabilities	69,000	56,000

Total liabilities	257,000	269,000

Shareholders’ Equity
Capital	$150,000	$150,000
Additional paid-in capital	30,000	30,000
Retained earnings	228,000	182,000
Total equity	408,000	362,000

Total liabilities and equity	$665,000	$631,000

Within the balance sheet, the following should be classified as current assets:

Cash. This includes all liquid, short-term investments that are easily convertible into cash. Do not include in current assets cash that is restricted, or to be used to pay down a long-term liability.
Marketable securities. This includes all securities that are held for trading.
Accounts receivable. This includes all trade receivables, as well as all other types of receivables that should be collected within one year.
Prepaid expenses. This includes any prepayment that is expected to be used within one year.
Inventory. This includes all raw materials, work in process, and finished goods items, less an obsolescence reserve.

In general, any asset is classified as a current asset when there is a reasonable expectation that the asset will be consumed within the next year, or within the operating cycle of the business. All other assets are to be classified as non-current.

Within the balance sheet, the following should be classified as current liabilities:

Payables. This is all trade payables related to the purchase of goods or services from suppliers.
Accrued expenses. This is expenses incurred by the business, for which no supplier invoice has yet been received.
Short-term debt. This is loans for which payment is due within the next year.
Unearned revenue. This is advance payments from customers that have not yet been earned by the company.

In general, a liability is classified as current when there is a reasonable expectation that the liability will come due within the next year, or within the operating cycle of the business. All other liabilities are to be classified as non-current.

Similar Terms

The balance sheet is also known as the statement of financial position.