As we mentioned earlier, a balance sheet (financial position statement) is one of the most important financial statements. Other important financial statements include the income statement, cash flow statement and statement of changes in equity. A balance sheet (financial position statement) outlines the financial position of the company at a given point in time. It is often called a “snapshot” of the company’s financial position.
Below we present the general format of the balance sheet (financial position statement). We also explain the items in the balance sheet.
General balance sheet format
(1.1) Current assets comprise:
Total current assets
(1.2) Non-current assets (fixed assets) comprise
Land and buildings
Machinery and equipment
Fixtures and Furniture
Other (for example financial leases)
Total gross fixed assets
Less: Accumulated depreciation
Net fixed assets
Other assets (investments, goodwill, copyrights and patents)
(2) LIABILITIES AND (3) EQUITY
Liabilities comprise current and non-current liabilities:
(2.1) Current liabilities:
Short-term notes (notes payable)
Total current liabilities
(2.2) Non-current liabilities
Other long-term debt
Total Non-current liabilities
(3) Equity comprises:
Paid-in capital in excess of par on common stock
TOTAL LIABILITIES AND EQUITY
Current assets are listed first in the balance sheet (financial position statement). Current assets are those that can be converted into cash within 12 months. The main reason why small businesses often experience financial trouble is inefficient management of current assets. That is, they run out of cash. This can happen for such reasons as having insufficient cash on hand or underestimating the amount of time it takes to liquidate assets to create cash.
Marketable securities, also often called “near cash”, are liquid securities such as US Treasury bills.
Accounts payable refer to money that has not yet been received from the firm’s debtors. Debtors are the firm’s customers who bought from the firm on credit and still need to pay for a product or service provided.
Inventories refer to the raw materials, products in the process of production and completed products ready for sale. Basically, inventory is the physical products the business intends to sell.
In the balance sheet (financial position statement), the most liquid assets are usually listed before less liquid assets. That is why we also listed current assets in terms of decreasing liquidity: cash, marketable securities, accounts receivable and inventories.
NON-CURRENT ASSETS OR FIXED ASSETS
After current assets are listed, we can list non-current assets in the balance sheet. Non-current assets or fixed assets refer to assets that cannot be converted into cash within a 12 months period. The majority of fixed assets are depreciable. It means that the cost of the asset is allocated over its useful life and deducted as expenses on the income statement. This decreases the amount of tax the firm has to pay.
On the balance sheet we need to show the net fixed assets, which refer to the gross fixed assets (assets before depreciation is taken into account) less accumulated depreciation (depreciation deducted over the useful life of the asset, up to this point). The net fixed assets of the firm is also referred to as the book value.
Other assets show assets on the balance sheet that do not fit under the first two categories and include such assets as goodwill, copyrights and patents. For some companies this can contribute a sizable portion, if not the majority, of their value.
Liabilities and equity
The second part of the balance sheet presents how the business was financed. It basically shows from which sources assets were financed. The two main sources of financing are debt and equity.
We start the second part of the balance sheet with current liabilities. Current liabilities include accrued expenses, accounts payable and short-term notes.
Accrued expenses are expenses which the company is obligated to pay within 12 months and includes such items as salaries and wages.
Accounts payable refer to payments that company is still obligated to make within 12 months to the creditors which supplied their product on credit to the company.
Short-term notes refer to the money that must be repaid to the lenders within 12 months.
The next step in compiling the balance sheet requires us to list long-term liabilities. Long-term liabilities refer to debt payment which is due in a period longer than 12 months.
The last step in compiling the balance sheet requires us to illustrate the equity position of the firm. Equity indicates the claims of firm’s owners on the firm.
Items “common stock” and “paid-in capital in excess of par on common stock” indicate the amount paid by common stock shareholders for their shares of common stock.
Preferred stock shows the amount of money received from issuing preferred stock.
Retained earning show the earnings of the firm which were not distributed in the form of dividends to the shareholders.
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