A balance sheet is a financial statement that provides a snapshot of the company’s financial position at a specific time. It lists the company’s assets, liabilities, and shareholders’ equity. It offers a detailed view of what the company owns and owes and the invested amount by the shareholders.
Why is preparing a Statement of Financial Position important?
- Financial Health Assessment: It allows stakeholders to assess a business’s financial health and stability.
- Liquidity Analysis: Helps in understanding the liquidity and solvency of the company.
- Decision Making: Aids in making informed business decisions by investors, creditors, and management.
- Regulatory Compliance: Essential for financial reporting and compliance with accounting standards and legal requirements.
What are the components of a Balance Sheet?
It comprises three primary components: assets, liabilities, and shareholders’ equity. These elements together provide a comprehensive picture of a company’s financial position at a given time.
- Assets: These resources owned or controlled by the company provide future economic benefits. There are two types of assets:
- Current Assets: Short-term resources that will be converted into cash within one year. Examples include cash and cash equivalents, accounts receivable, inventory, and short-term investments.
- Non-Current Assets: Long-term resources that will not be converted into cash within one year. This category includes long-term investments, property, plant and equipment (PPE), intangible assets like patents and copyrights, and deferred tax assets.
- Liabilities: These are obligations of the company that arise from past transactions and will result in an outflow of the company’s resources.
- Current Liabilities: These are obligations that will be settled within one year. These include accounts payable, short-term loans, accrued liabilities, and other short-term borrowings.
- Non-Current Liabilities: Obligations that are due beyond one year. This can include long-term loans, bonds payable, deferred tax liabilities, and long-term lease obligations.
- Shareholders’ Equity: It is also known as owners’ equity. It represents the residual interest in the company’s assets after deducting liabilities. It includes:
- Capital Stock: The amount invested by shareholders in exchange for shares of stock.
- Retained Earnings: Cumulative earnings of the company that have not been distributed as dividends to shareholders.
- Additional paid-in capital, treasury stock, and other components
Balance Sheet Template
Access our free simple balance sheet template
How do you prepare a Balance Sheet
Preparing a balance sheet involves organizing financial information about a company’s assets, liabilities, and shareholders’ equity as of a specific date. This document provides a snapshot of the company’s financial position. Below is a simplified example, showing how information from the income statement (like net income) feeds into the balance sheet:
Example: XYZ Wholesaler Balance Sheet as of December 31, 2023
Assets
| Current Assets | Amount ($) |
|---|---|
| Cash and Cash Equivalents | 15,000 |
| Accounts Receivable | 20,000 |
| Inventory | 35,000 |
| Prepaid Expenses | 5,000 |
| Total Current Assets | 75,000 |
| Non-Current Assets | Amount ($) |
|---|---|
| Property, Plant & Equipment | 100,000 |
| Less: Accumulated Depreciation | (10,000) |
| Long-term Investments | 15,000 |
| Total Non-Current Assets | 105,000 |
Total Assets = 180,000
Liabilities
| Current Liabilities | Amount ($) |
|---|---|
| Accounts Payable | 12,000 |
| Short-term Loans | 8,000 |
| Accrued Liabilities | 4,000 |
| Total Current Liabilities | 24,000 |
| Non-Current Liabilities | Amount ($) |
|---|---|
| Long-term Loans | 50,000 |
| Total Non-Current Liabilities | 50,000 |
Total Liabilities = 74,000
Shareholders’ Equity
| Equity | Amount ($) |
|---|---|
| Common Stock | 50,000 |
| Retained Earnings* | 56,000 |
| Total Shareholders’ Equity | 106,000 |
Total Liabilities and Shareholders’ Equity = 180,000
Retained Earnings Calculation:
- Previous Year’s Retained Earnings: $40,000
- Net Income from Income Statement: $20,000 (assumed for the year)
- Dividends Paid: ($4,000)
- Retained Earnings End of Year: $40,000 + $20,000 – $4,000 = $56,000
Understanding this structure helps you gauge your business’s financial position, make informed decisions, and plan for future growth.
What account does not appear on a balance sheet?
Several types of accounts do not appear on a balance sheet. This is primarily because they relate to income, expenses, gains, or losses. These accounts are elements of a company’s performance not its financial position at a specific point in time. These accounts typically appear on the income statement or other financial reports. Key examples include:
- Revenue Accounts: These accounts record the income earned by the company from its normal business operations. For example, sales revenue, service revenue, and interest income.
- Expense Accounts: These capture the costs incurred by the company in earning revenue. Common examples include cost of goods sold, salaries expense, rent expense, utility expenses, and depreciation expense.
- Dividends: Although dividends impact shareholders’ equity, they are not recorded on the balance sheet. Instead, they are deducted from retained earnings, a component of shareholders’ equity.
- Gain and Loss Accounts: Accounts that record gains and losses from various activities, such as gain on asset sales or loss due to asset impairment, are also not included on the balance sheet.
These accounts are part of the company’s profit and loss statement or income statement, which records operational performance over a specific period (e.g., a quarter or a year), in contrast to the balance sheet, which is a snapshot of the company’s financial position at a single point in time.
Futher Reading
- Simple Balance Sheet Templates(Opens in a new browser tab)
- 20 Accounting Terms Every Retailer and Wholesaler Should Know
- How To Create Accounting Reports For A Small Business: Ultimate Guide
- Accounting For Small Business: 7 Tips For Good Annual Reporting
- Double-entry Accounting Software for Small Businesses
