The balance sheet is a financial statement of the assets and liabilities of a business or organization at a specific date. The main balances reported being separated between fixed and current assets, and current and long-term liabilities to provide a snapshot of the financial standing of the business.
Fixed assets are the long-term items the business owns that the business has acquired and uses to generate business over a number of years. Fixed assets consist of tangible items such as land and buildings, plant and machinery, fixtures and fittings, vehicles, and computers.
The numerical value of the fixed assets shown in the balance sheet represents the original cost of those items less the amount that has been written off as accumulated depreciation.
Depreciation is the amount that management has decided to reduce the net worth of the assets as those assets are used and also serves to put aside from the declared management profits that amount which would often be required at some future date to replace those assets.
Fixed assets include a category known as intangible assets. An intangible asset is a long-term acquisition by the business that may not be a physical item. Intangible assets would include items such as goodwill which is an amount of money the business has paid out to acquire another business or certain rights.
Other intangible assets would be investments in royalties, trademarks, and patents. Items the business has bought to support and extend its business empire. Long-term investments such as loans, debentures, and shareholdings would also be regarded as intangible assets.
Current assets are the items the business owns which can change from day to day and provide a snapshot of the asset liquidity of the business. Current assets include stock which will be made up of both finished stock available for resale, work in progress, and raw materials.
Other current assets include debtors which is the short-term money owed to the business often from clients and customers who have received credit terms. Debtors may also include money the business has paid out in advance of the liability, and prepayments.
If the business has a credit balance at the bank then this is also included in current assets as would be a credit balance on a business credit card, cash in hand, and other short-term investments the business can quickly turn into cash.
Current liabilities are normally shown immediately under the current assets as the size of each balance is an indication of the liquidity of the business.
Current liabilities represent the short-term debts of the business being amounts owing that should be repaid within one year which is before the next balance sheet is required for publication by most companies.
Current liabilities include trade creditors which are the short-term debts owed by the business to its suppliers and other creditors since it is normal practice to separate debts owed to the tax authority such as vat, tax deductions from subcontractors, income tax, national insurance liabilities, and other corporate taxes.
If the business has short-term loans repayable within one year these items would be included with items such as bank overdrafts and other short-term financial arrangements.
Long-term debts and financial agreements including director loan accounts that do not have a short-term repayment plan would be long-term liabilities. Creditors are also included in long-term liabilities where there is an agreement for repayment longer than one year.
The final section of the balance sheet concerns the capital of the business. While the owners of that capital such as the shareholding regard the item as an asset to themselves for the business it is a long-term liability as the business effectively owes that money to its shareholders as is the case of retained profits and reserves which are also owned by the shareholders.
The total of the assets side of the balance sheet and the liabilities side must always be the same. This is because to produce a balance sheet double entry bookkeeping is used to record all financial transactions. So whenever an accounting entry is made it is made twice to reflect the action and reaction.
An example of double-entry bookkeeping would be the purchase of stock from a supplier. The stock acquired is an asset while until paid the amount invoiced by the supplier is a debt, the creditor, and a liability. In accounting terms, the transaction is recorded by debiting the stock account and crediting the trade creditor account.
Alternatively, when goods are sold by the business the double-entry bookkeeping would be to debit the customer account, the debtor, as the proceeds owed by the customer are now an asset. The equal and opposite financial record is to reduce the stock value since those goods are now sold and no longer an asset of the business.
ABOUT THE AUTHOR: Terry Cartwright