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:
- Trade and other payables
- Accrued expenses
- Current tax liabilities
- Current portion of loans payable
- Other financial liabilities
- Liabilities held for sale
Here is an example of a balance sheet:
|(000s)||as of 12/31/x2||as of 12/31/x1|
|Cash and cash equivalents||$135,000||$110,000|
|Other current assets||8,000||31,000|
|Total current assets||278,000||261,000|
|Property, plant, and equipment||275,000||260,000|
|Other intangible assets||72,000||70,000|
|Total non-current assets||387,000||370,000|
|LIABILITIES AND EQUITY|
|Trade and other payables||$105,000||$100,000|
|Current portion of long-term borrowings||7,000||6,000|
|Current tax payable||21,000||14,000|
|Total current liabilities||188,000||213,000|
|Total non-current liabilities||69,000||56,000|
|Additional paid-in capital||30,000||30,000|
|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.
The balance sheet is also known as the statement of financial position.
Classified balance sheet
Classified balance sheet
Common size balance sheet
Comparative balance sheet
Does an expense appear on the balance sheet?
Should there be negative cash on the balance sheet?
What is a balance sheet?
What is a vertical balance sheet?
Where do accruals appear on the balance sheet?