What is Balance Sheet
Alright, you just got into the business line and had to make a balance sheet for the first time, and you don’t know what a balance sheet is. Not to worry, we are going to try to explain what is balance sheet. And we are going to try to do that in simple words. So, for all those that don’t know anything about making a balance sheet template. Here’s a little run down for you all.
Balance Sheet Definition:
If you want in an abstract, how to make a balance sheet is all about knowing your assets. And by that, we mean something like this. Every balance sheet sample is based on the fundamental equation that goes something like this:
Balance Sheet Equation
Assets = Liabilities + Equity
So in other words, businesses have to pay for all the things that they own or their “assets.” Now, they do that by borrowing money (i.e., taking a liability) or they can take the money from their investors by issuing stockholders’ equity. Not that hard once you get the hang of these things. Keeping that equation in mind; you can tell that a personal balance sheet plays a pretty significant role if you are in the world of finance and or accounting. In fact, the sheet is one of the three major economic reports. You can even go as far as to say that the business balance sheet is key to both financial modeling and accounting. Through your balance sheet assets, you get to see the company’s total assets. And as anyone with a brain can tell, that is kind of necessary when you are working in any field.
The sheet reports also cover how these assets are financed. So you can know whether debt or equity power your company’s finances. Other times, the balance sheet analysis is also termed as a declaration of net worth as they say. Or it can simply be called as a statement of financial position of your corporation.
Ok, so we now know what is balance sheet. The next step? How to make balance sheet. We will be discussing the subdivisions of the balance sheet namely Assets, Liabilities and Equity.
You can also Read Balance Sheet Example Click Here
Within the assets section, you have to list accounts from top to bottom in order of their “Liquidity.”
What is liquidity you ask? Liquidity is the ease with which the assets can be converted into currency. Subdivisions include Current Assets and Non-current or Long-term Assets.
So, let’s dive into the subcategories real quick. Firstly the current assets, what are they? Well if your assets can convert to cash in either one year or less, then they are termed as current assets. And as you might’ve guessed by now, non-current or long-term assets, hold true to their name and cannot be converted in such a short amount of time.
Going into more detail on the issue, this is the broad order of accounts you will find within current assets.
- Cash and cash equivalents:
These are the most liquid assets you’ll come across. Treasury bills, short-term certificates of deposit, or plain old hard cash fall under this category.
- Marketable securities:
A liquid market for equity and debt securities.
- Accounts receivable:
Money that the customers owe the business.
Imports available for sale, valued at market price or below.
- Prepaid expenses:
Signifying cost that has already been paid for, such as rent, insurance or advertising contracts.
- Long-term Investments:
Investments that will not or cannot be liquidated in a year.
- Fixed Assets:
Land, buildings machinery, equipment and other durable, generally capital-intensive resources come under here.
- Intangible Assets:
Non-physical assets such as intellectual property and goodwill are categorized under this. Remember only to enlist intangible assets that are acquired rather than developed in-house.
A Liability for a business is the money it owes to an outside party. Liabilities include the bills needed to be paid to the suppliers to interest on bonds it has delivered to creditors to lease, utilities and wages. Same as before we have current and long-term liabilities. The ones that are due within one year are current and liabilities that are due at any point after one year are long-term.
Current liabilities accounts may contain:
- Wages Payable
- Interest Payable
- Bank Indebtedness
- Customer Prepayments
- Dividends Payable And Others
- Current Portion Of Long-Term Debt
Here are some examples of long-term liabilities:
- Long-term debt:
Interest on issued bonds.
- Pension fund liability:
Money, a company, is required to pay its employees after they retire.
- Deferred tax liability:
Taxes accrued that is not to be paid for another year.
You will find that some liabilities are off-balance sheet. Such will not appear on the business balance sheet. An example of this kind of liability is an Operating Lease.
Equity or Shareholders’ Equity:
The money attributable to a business’ owners, i.e., its shareholders is known as equity. Equity is also called “net assets,” as it is equal to the total assets of a firm minus its liabilities. For example, the debt it owes to non-shareholders.
The retained earnings are the net income of a company. From there the choice is to either re-invests in the business or uses it to pay off debt. The rest is circulated to investors in the form of surpluses. Then there is “Treasury stock” which is stock a company has either re-purchased or the firm never issued it in the first place. Treasury stocks can later be sold to raise cash or set aside to repel a hostile overthrow in the future. Most companies issue something called “preferred stock.”
Preferred stock is listed independently from a common stock under shareholders’ equity. Preferred stock is given an arbitrary par value that has no bearing on the market value of the shares. If you want to calculate the Common stock and Preferred stock accounts you can do so by multiplying the par value by the number of shares issued.
Added paid-in capital or investment surplus is the representation of the amount that the shareholders have invested more than the common stock or preferred stock. Both of which are based on par worth rather than market value. Equity is not in direct relation to a company’s market capitalization. Market capitalization is based on the present value of a stock. Whereas paid-in funds are the sum of the equity that has been bought at any expense.