Balance sheet

From Wikicpa

A balance sheet, in formal bookkeeping and accounting, is a statement of the book value of a business or other organization or person at a particular date, often at the end of its "fiscal year," as distinct from an income statement, also known as a profit and loss account (P&L), which records revenue and expenses over a specified period of time.

A balance sheet is often described as a "snapshot" of the company's financial condition on a given date. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time, instead of a period of time.

A simple business operating entirely in cash could measure its profits by simply withdrawing the entire bank balance at the end of the period, plus any cash in hand. However real businesses are not paid immediately, they build up inventories of goods to sell and they acquire buildings and equipment. In other words: businesses have assets and so they could not, even if they wanted to, immediately turn these into cash at the end of each period. Real businesses also owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses have liabilities.

A modern balance sheet usually has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the 'net assets' or the 'net worth' of the company.

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. This balance is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookeeping.

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Constructing a Balance Sheet

Case Study

1.1
A new business starts up as a limited company called Sunrise Ltd by raising $10,000 from the owners i.e. share holders. The money is put in to a new bank account. What would the assets, liabilities and equity be?

Assets:
Bank Balance		10,000

Equity & Liabilities:
Share Capital		10,000

1.2
They then use 6,000 of its bank account to buy a delivery van. Assets and liabilities after this transaction:

Assets:
Bank Balance		 4,000
Delivery Van		 6,000

Equity & Liabilities:
Share Capital		10,000

1.3
Finally, Sunrise Ltd buys some stock at 3,000 on credit, agreeing to pay the following month. Assets and liabilities after this transaction:

Assets:
Bank Balance		 4,000
Delivery Van		 6,000
Stocks			 3,000

Liabilities:
Accounts Payable	 3,000	(to be paid to creditors)

Equity:
Share Capital		10,000

Total assets must always equal total liabilities (and equity). It is inevitable as the liabilities (and equity) are providing the funds that we are spending on these assets.

Shortly afterwards, the assets and liabilities change to the following:

Assets:
Bank Balance		   500
Delivery Van		 6,000
Stocks			 3,000
Machinery		 2,200
Accounts Receivable	   700	(to be collected from debtors)

Liabilities:
Accounts Payable	   400	(to be paid to creditors)
Loans Repayable		 2,000	(maturing in 5 years)

Equity:
Share Capital		10,000

1.4
List and total the fixed and current assets:

Fixed Assets
Delivery Van		 6,000
Machinery		 2,200
-----------------------------------
Total			 8,200

Current Assets
Bank Balance		   500
Stock			 3,000
Accounts Receivable	   700
-----------------------------------
Total			 4,200

1.5
Now extend the balance sheet to include all liabilities, total your figures, and double underline your totals. Then list the share capital below the rest of the balance sheet.

Sunrise Ltd.
Balance Sheet
As of December 31, 2005
-----------------------------------

Fixed Assets
Delivery Van		 6,000
Machinery		 2,200
-----------------------------------
Total			 8,200

Current Assets
Bank Balance		   500
Stock			 3,000
Accounts Receivable	   700
-----------------------------------
Total			 4,200

-----------------------------------
Total Assets			12,400


Current Liabilities
Accounts Payable	   400
-----------------------------------
Total			   400

Long-Term Liabilities
Loans Repayable		 2,000
-----------------------------------
Total			 2,000

-----------------------------------
Total Liabilities		2,400

Owner's Equity
Share Capital		10,000
-----------------------------------
Total Equity			10,000

-----------------------------------
Total Liabilities & Equity   12,400

Points to note:

Must be headed with the name of the reporting entity (e.g. Sunrise Ltd) and the date.
The terms 'Current Liability' and 'Long-Term Liability' are the traditional names possibly used by sole traders or partnerships. Limited companies may use the phrases 'Liabilities: Amounts falling due within 1 year' and 'Liabilities: Amounts falling due after 1 year'.
The Total Equity may also be called the 'Net Worth'.
The Net Worth is in principle what the company is worth, it shows the monetary amount that would effectively be left, if all assets were sold and all liabilities paid off.

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