Balance Sheet – Definition, Example, Formula & Components

A balance sheet is a financial statement that contains information about a company’s assets or liabilities at a specific point in time. It is one of the three main financial statements (the income statement and the cash flow are the other two) used to evaluate a company’s performance.

The balance sheet is a reference document for investors and other interested groups to get an idea of ​​the organization’s financial status. This allows them to compare current assets and liabilities to determine the company’s solvency or calculate the company’s profitability. By comparing two or more balance sheets from different moments, you can also show how the company has grown.

With this information, stakeholders can also understand the company’s future prospects. The balance sheet can be used, for example, as proof of creditworthiness when the company applies for a loan. By seeing if current assets are greater than current liabilities, creditors can see if the company can meet its short-term obligations and how much financial risk it is taking.

Example of a balance sheet with model format

The balance sheet contains several accounts classified under assets and liabilities. Like any other financial statement, there are slight differences in the structure of the balance sheet depending on the organization. The following is an example balance sheet that shows all major accounts classified as assets and liabilities so that both sides of the balance sheet are equal.

Example of a balance sheet with model format

Main parts and components of the balance sheet

The balance sheet consists of two main sections: assets and liabilities. Let’s look at these components in detail.

Assets

An asset is something that a company owns and that benefits the growth of the company. Assets can be classified based on exchangeability, physical existence, and use.

a. Convertibility: This describes whether the asset can be easily converted into money. Based on exchangeability, assets are further divided into current and fixed assets.

Current Assets: Assets that can easily be converted into money or cash within one year. For example, short-term deposits, marketable securities, and shares.

Fixed Assets: Assets that cannot be readily or easily converted into money. For example, buildings, machines, equipment, or brands.

b. Physical existence: Assets can be of two types, tangible and intangible.

Tangible assets: assets that you can see and feel, such as office supplies, machinery, equipment, and buildings.

Intangible assets: assets that do not have a physical existence, such as patents, trademarks, and copyrights.

c. Use: Assets can be classified as operating and non-operating assets.

Fixed assets: resources needed to operate the company. For example, buildings, machinery, and equipment.

Non-operating assets: short-term investments or marketable securities that are not necessary for day-to-day operations.

Liabilities

Liabilities are what the company owes to other parties. This includes debts and other financial obligations that arise as a result of transactions. Companies manage their debts by paying them back in cash or by providing a similar service to another party. Liabilities are listed on the right side of the balance sheet.

Depending on the context, liabilities can be classified as current and long-term.

1. Short-term liabilities: This includes debts or obligations that must be paid within one year. Current liabilities are also called current assets and include accounts payable, interest payments, and short-term loans.

2. Long-term liabilities: These are debts or obligations that are due for more than a year. Long-term liabilities, also called long-term liabilities, include accounts payable, long-term liabilities, and deferred tax liabilities.

Equity/profit

Equity equals total assets minus liabilities. In other words, it is the amount that can be transferred to the shareholders after the debts are paid and the assets are liquidated. Share capital is one of the most common ways to represent a company’s net worth. Part of equity is retained earnings, which is a fixed percentage of equity that must be paid out as dividends.

The share value can be positive or negative. If equity is positive, the company has sufficient funds to pay its debts. If it is negative, liabilities exceed assets.

General sequence of accounts in the balance sheet

According to generally accepted accounting principles (GAAP), current assets must be shown separately from liabilities. Also, short-term liabilities must be presented separately from long-term liabilities. Current asset accounts include cash, accounts receivable, inventory, and advances, while long-term assets include long-term investments, fixed assets, and intangible assets.

Your current liabilities may include long-term debt, interest payable, wages, and customer fees, while long-term liabilities include long-term liabilities, pension liabilities, and bonds payable.

Asset accounts are entered in descending order of maturity and liabilities in ascending order. In the share capital, the accounts are arranged in descending order of importance.

Balance sheet formula

The balance sheet equation follows the accounting equation, where assets are on one side, liabilities, and shareholder’s equity are on the other side, and both sides balance out.

Assets = Liabilities + Shareholder’s Equity

 According to the equation, a company pays for what it owns (assets) by borrowing money as a service (liabilities) or taking from the shareholders or investors (equity).

Conclusion

The balance sheet is an important reference document for investors and stakeholders in evaluating the financial condition of the company. This document provides detailed information about assets and liabilities for a specific period. 

This information allows you to understand the operations of the company. By analyzing the balance sheet, business owners can keep their company in good financial shape.

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