Balance Sheet Definition:
A financial statement that lists the assets, liabilities and equity of a company at a specific point in time and is used to calculate the net worth of a business. A basic tenet of double-entry book-keeping is that total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance. Subtracting liabilities from assets shows the net worth of the business A basic tenet of double-entry bookkeeping is that total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance.
The top portion of the balance sheet should list your company's assets in order of liquidity, from most liquid to least liquid. Current assets are cash or its equivalent or those assets that will be used by the business in a year or less. They include the following:
- Cash is the cash on hand at the time books are closed at the end of the fiscal year. This refers to all cash in checking, savings and short-term investment accounts.
- Accounts receivable is the income derived from credit accounts. For the balance sheet, it's the total amount of income to be received that's logged into the books at the close of the fiscal year.
- Inventory is derived from the cost of goods table. It's the inventory of material used to manufacture a product not yet sold.
"Total current assets" is the sum of cash, accounts receivable, inventory and supplies.
Other assets that appear in the balance sheet are called long-term or fixed assets because they're durable and will last more than one year. Examples of long-term assets include the following.
- Capital and plant is the book value of all capital equipment and property (if you own the land and building), less depreciation.
- Investment includes all investments owned by the company that can't be converted to cash in less than one year. For the most part, companies just starting out have not accumulated long-term investments.
- Miscellaneous assets are all other long-term assets that are not "capital and plant" or "investment."
"Total long-term assets" is the sum of capital and plant,
investments, and miscellaneous assets.
"Total assets" is the sum of total current assets and total long-term assets
After listing the assets, you then have to account for the liabilities of your business. Like assets, liabilities are classified as current or long term. Debts that are due in one year or less are classified as current liabilities. If they're due in more than one year, they're long-term liabilities. Here are examples of current liabilities:
- Accounts payable include all expenses incurred by the business that are purchased from regular creditors on an open account and are due and payable.
- Accrued liabilities are all expenses incurred by the business that are required for operation but have not yet been paid at the time the books are closed. These expenses are usually the company's overhead and salaries.
- Taxes are those payments still due and payable at the time the books are closed.
"Total current liabilities" is the sum of accounts payable, accrued liabilities and taxes.
Long-term liabilities include the following:
- Bonds payable is the total of all bonds at the end of the year that are due and payable over a period exceeding one year.
- Mortgage payable is loans taken out for the purchase of real estate that are repaid over a long-term period. The mortgage payable is that amount still due at the close of the fiscal year.
- Notes payable are the amounts still owed on any long-term debts that won't be repaid during the current fiscal year.
"Total long-term liabilities" is the sum of bonds payable,
mortgages payable and notes payable.
"Total liabilities" is the sum of total current and long-term liabilities.
Once the liabilities have been listed, the owner's equity can then be calculated. The amount attributed to owner's equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors to evaluate the company. Many times, it determines the amount of capital they feel they can safely invest in the business.