The balance sheet

A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report.  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 information listed on the report must match the following formula:

Total assets = Total liabilities + Equity

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. A statement of retained earnings may sometimes be attached.

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:

  • Property, plant, and equipment
  • Intangible assets
  • Goodwill

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:

  • Capital stock
  • Additional paid-in capital
  • Retained earnings

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.