BALANCE SHEET: WHAT IS IT, HOW IS IT DONE, EXAMPLE - DUDAS - 2025

A balance sheet is a financial statement that reports the assets, liabilities, and equity of a company at a specific time, providing a basis for calculating rates of return and evaluating its capital structure.

That is, it provides a photograph of what a company owns and owes, as well as the amount invested by shareholders. The balance sheet represents the state of a company's finances at any given time. By itself, it cannot give an idea of ​​the trends that are developing over a longer period.

Source: flickr.com

For this reason, the balance sheet must be compared with others from previous periods. It should also be compared to those of other companies in the same industry.

Various balance sheet metrics can be generated, helping investors get an idea of ​​how healthy a company is. The income statement and cash flow statement also provide valuable context for evaluating a company's finances.

What does it consist of?

The balance sheet is based on the following equation, where assets are balanced on the one hand, and liabilities plus the shareholders' equity on the other:

Assets = Liabilities + Shareholders' Equity

This is intuitive: a company has to pay for all the things it owns (assets), either by borrowing money (assuming liabilities) or by taking it from investors (shareholders' equity).

For example, if a business borrows a loan for $ 4,000 from a bank, then its assets, specifically the cash account, will increase by $ 4,000. Your liabilities, specifically the debt account, will also increase by $ 4,000, balancing the two sides of the equation.

If the company takes $ 8,000 from investors, its assets will increase by that amount, as will its shareholders' equity.

All income that the company generates in excess of its liabilities will go to the share capital account, representing the net assets held by the owners. This income will balance on the asset side, showing up as cash, investments, inventory, or some other asset.

Balance sheet accounts

Assets, liabilities, and shareholders' equity are made up of several smaller accounts, which break down the financial details of a business.

These accounts vary by industry, and the same terms can have different implications depending on the nature of the business. However, there are common components that investors can find.

How is it done?

The balance sheet is divided into two parts. The first condenses all the assets of a company. In the second part, the liabilities of the company and the equity of the shareholders are described.

In each section, the items are classified by liquidity. The most liquid accounts are placed before the illiquid accounts.

Assets

Within this segment, accounts are listed in order of liquidity, which is the ease with which they can be converted to cash. They are divided into current assets and non-current assets.

Current assets

They are the items that can be converted into cash in less than a year . It includes the following accounts:

Cash and equivalents

They are the most liquid assets, they can include Treasury bills and short-term certificates of deposit, as well as currencies.

Negotiable values

For example, debt and equity securities, for which there is a liquid market.

Accounts receivable

It is the money that customers owe the company, including a provision for doubtful accounts.

Inventory

They are the products available for sale, valued at cost or market price, whichever is lower.

Prepaid expenses

Represents the value that has already been paid, such as insurance, advertising or rental contracts.

Non-current assets

They can be turned into cash in over a year, in the long run. It includes the following accounts:

Long-term investments

Securities that will not be settled in the course of the year.

Fixed assets

They include land, machinery, equipment, buildings, and other durable assets, generally capital intensive.

Intangible assets

Includes non-physical assets, such as intellectual property and goodwill. In general, intangible assets are only listed on the balance sheet if they were acquired, rather than being developed internally.

Passives

It is the money that a company owes to third parties, from bills payable to suppliers, to rent, utilities and wages. It is divided into current liabilities and long-term liabilities.

Current liabilities

They are those that expire before one year. They are listed in the order of their expiration date. Current liabilities can include:

Debts to pay

It is the amount that a company owes suppliers for items or services purchased on credit.

Current debt / notes to pay

It includes other obligations that expire within one year of the company's operating cycle. Notes to pay can also have a long-term version.

Current portion of long-term debt

It is specifically the part that is owed within this year of a debt with a maturity of more than one year.

For example, if a company takes out a bank loan to be paid in 5 years, this account will include the portion of that loan that is due during the current year.

Long term passives

They expire after one year, in the long term. Long-term liability accounts can include:

Obligations to the public

Includes the amortized amount of any bonds that the company has publicly issued.

Long term debts

This account includes the total amount of long-term debt, excluding the current portion. Describes interest expense and principal repayment.

Obligation of the pension fund

It is the money that a company must pay into the retirement accounts of the employees, for their retirement.

Heritage

It is the money attributable to the owners of a company, that is, to its shareholders. It includes the following accounts:

Social capital

This is the value of the funds that shareholders have invested in the company. Some companies issue preferred shares, which are listed separately from ordinary shares.

Preferred shares are assigned an arbitrary nominal value, which is unrelated to the market value of the shares. Often the face value is just $ 0.01.

Treasury shares

They are the shares that a company has bought back or that were not issued in the first instance. They can be sold later or reserved to repel some hostile purchase.

Retained earnings

They are the net earnings that a company reinvests in the business or uses to pay off debt. The rest is distributed to shareholders in the form of dividends.

Example

Amazon's 2017 balance sheet is shown. It starts with current assets, then non-current assets, and total assets.

Then there are liabilities and shareholders' equity, which includes current liabilities, non-current liabilities and, finally, equity.

References

1. Investopedia (2018). Balance Sheet. Taken from: investopedia.com.
2. CFI (2018). Balance Sheet. Taken from: corporatefinanceinstitute.com.
3. Harold Averkamp (2018). Balance Sheet. Accounting Coach. Taken from: accountingcoach.com.
4. Wikipedia, the free encyclopedia (2018). Balance sheet. Taken from: en.wikipedia.org.
5. Steven Bragg (2018). The balance sheet. Accounting Tools. Taken from: accountingtools.com.