Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.[2] Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.[3] Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing." Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system. A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses 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 also have liabilities.

Contents
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1 Origin 2 Types o 2.1 Personal balance sheet o 2.2 US small business balance sheet 3 Public Business Entities balance sheet structure o 3.1 Assets o 3.2 Liabilities o 3.3 Equity 4 Sample balance sheet structure 5 See also 6 References

[edit] Origin

Annual balance sheet written in cuneiform script. Sumeria, clay, ca. 2040 BCE. Department of Oriental Antiquities, Louvre. It was the Flemish mathematician Simon Stevin who persuaded merchants to make it a rule to summarize accounts at the end of every year in a chapter entitled Coopmansbouckhouding op de Italiaensche wyse (Dutch: "Commercial Book-keeping in the Italian Way") of his Wisconstigheg hedachtenissen (Dutch: "Mathematical memoirs", Leiden, 1605–08). Although the balance sheet he required every enterprise to prepare every year was based on entries of the ledger, it was prepared separately from the major books of account. The oldest semi-public balance sheet recorded was that of the East India Company dated 30 April 1671, which was submitted to the company's General

Meeting on in 30 August 1671. The publication and audit of the balance sheet was still a rarity in England until the passing of the Bank Charter Act 1844.[4]

[edit] Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets.[5] Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.[6] Large businesses also may prepare balance sheets for segments of their businesses.[7] A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.[8]
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[edit] Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.[10]

[edit] US small business balance sheet
Sample Small Business Balance Sheet[11] Assets Liabilities and Owners' Equity Cash $6,600 Liabilities Accounts Receivable $6,200 Notes Payable $30,000 Accounts Payable Total liabilities $30,000 Tools and equipment $25,000 Owners' equity Capital Stock $7,000 Retained Earnings $800 Total owners' equity $7,800 Total $37,800 Total $37,800 A really small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.[12]

[edit] Public Business Entities balance sheet structure
Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee and numerous country-specific organizations. Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses.[13][14][15][16] If applicable to the business, summary values for the following items should be included on the balance sheet:[17]

[edit] Assets
Current assets 1. 2. 3. 4. Cash and cash equivalents Inventories Accounts receivable Prepaid expenses for future services that will be used within a year

Fixed assets 1. 2. 3. 4. Property, plant and equipment Investment property, such as real estate held for investment purposes Intangible assets Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents) 5. Investments accounted for using the equity method 6. Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.[18]

[edit] Liabilities
1. Accounts payable 2. Provisions for warranties or court decisions 3. Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds 4. Liabilities and assets for current tax 5. Deferred tax liabilities and deferred tax assets 6. Minority interest in equity 7. Issued capital and reserves attributable to equity holders of the Parent company 8. Unearned revenue for services paid for by customers but not yet provided

[edit] Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) 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 bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual. 1. 2. 3. 4. 5. 6. 7. Numbers of shares authorized, issued and fully paid, and issued but not fully paid Par value of shares Reconciliation of shares outstanding at the beginning and the end of the period Description of rights, preferences, and restrictions of shares Treasury shares, including shares held by subsidiaries and associates Shares reserved for issuance under options and contracts A description of the nature and purpose of each reserve within owners' equity

[edit] Sample balance sheet structure
The following balance sheet structure is just an example. It does not show all possible kinds of assets, equity and liabilities, but it shows the most usual ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd. as of 31 December 2006 ASSETS Current Assets Cash and cash equivalents Accounts receivable (debtors) Inventories Prepaid Expenses Investments held for trading Other current assets Fixed Assets (Non-Current Assets) Property, plant and equipment Less : Accumulated Depreciation Goodwill Other intangible fixed assets Investments in associates Deferred tax assets LIABILITIES and EQUITY Creditors: amounts falling due within one year (Current Liabilities)

Accounts payable Current income tax liabilities Current portion of bank loans payable Short-term provisions Other current liabilities Creditors: amounts falling due after more than one year (Long-Term Liabilities) Bank loans Issued debt securities Deferred tax liability Provisions Minority interest Equity Share capital Capital reserves Revaluation reserve Translation reserve Retained earnings

Financial Statements Overview Components of Balance Sheet

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Total Assets = Total Liabilities + Total Stockholders' Equity --> Accounting Equation Total Assets = Current Assets + Investments + Property, Plant and Equipment + Intangible Assets + Other Non-Current Assets Total Liabilities = Current Liabilities + Long-Term Liabilities Total Stockholders' Equity = Contributed Capital + Retained Earnings - Treasury Stock = Common Stock + Preferred Stock + Additional Paid-in Capital + Retained Earnings - Treasury Stock Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Declared

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Liabilities Current Liabilities Current liabilities include liabilities that are expected to be paid within a year from the balance sheet date. Accounts payable (due within a year from the balance sheet date) Notes payable (due within a year from the balance sheet date) Short-term borrowings Salaries payable Income taxes payable Sales taxes payable Current maturities of long-term debt (due within a year from the balance sheet date) Other current liabilities Long-Term Liabilities Long-term liabilities include liabilities that are expected to be paid after a year from the balance sheet date. Bonds payable Long-term notes payable (due after a year from the balance sheet date) Long-term borrowings

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Assets and Contra-Asset Accounts Current Assets Current Assets include assets that are expected to be converted into cash within a year from the balance sheet date. Cash Bank deposits Accounts receivable (due within a year from the balance sheet date) Notes receivable (due within a year from the balance sheet date) Marketable securities Short-term loans Prepaid expenses Other current assets Inventories Inventories include merchandise or goods that are ready to be sold, and other assets that are in the process of producing goods. Merchandise Raw materials Work-in-process (WIP) Finished goods Property, Plant, and Equipment (PP&E) PP&E include tangible fixed assets that are used for the primary business operations. Land Buildings Machinery Equipment Vehicles Leasehold improvements Accumulated Depreciation Accumulated depreciation is a contra-asset account which is subtracted from asset accounts. Land does not have accumulated depreciation, because land account is not depreciated. Accumulated depreciation, buildings Accumulated depreciation, machinery Accumulated depreciation, equipment Accumulated depreciation, vehicles

Intangible Assets Intangible assets include assets that do not have physical substance, but provide future economic benefits. Trademark Copyright Patent Goodwill The amortization of intangible assets is --> directly subtracted from the balance of related intangible assets. --> accounts such as "accumulated amortization" are not used for intangible assets. Other Assets Other assets include noncurrent assets that are not classified as one of the above accounts. Long-term notes receivable (due after a year from the balance sheet date) Long-term loans related companies

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Stockholders' Equity Contributed Capital Contributed capital includes the amounts that are transferred from stockholders to the company. Preferred stock (par value x number of preferred shares issued) Common stock (par value x number of common shares issued) Additional paid in capital, preferred stock ( [issue price - par value] x number of preferred shares issued ) Additional paid in capital, common stock ( [issue price - par value] x number of common shares issued ) Additional paid in capital is also called as "Paid-in capital in excess of par value". Retained Earnings Retained earnings represent the amount of the company's past net income retained inside the company (not paid as dividend to stockholders.) Retained earnings Accumulated deficit (if the amount of retained earnings is negative, it is called as "accumulated deficit".) Treasury Stock Treasury stock represents the company's common or preferred stock currently owned by the company it self, as a result of stock repurchase in the past. The amount of treasury stock is subtracted from stockholders' equity. Treasury stock (the amount of treasury stock is determined by either cost method or par value method.)

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Accounting Equation Assets = Liabilities + Equity Equity = Assets - Liabilities ---> Assets = Liabilities + Equity

[Example] Company A has $800,000 liabilities and $1,200,000 equity. How much assets does the Company A have? Assets = Liabilities + Equity = $800,000 - $1,200,000 = $2,000,000 Assets = Liabilities + Equity Liabilities = Assets - Equity Equity = Assets - Liabilities From any balance sheet, --> it can be verified that --> Total Assets = Total Liabilities + Total Stockholders' Equity. Assets Assets are --> probable future economic benefits --> obtained or controlled by an entity --> as a result of past transactions or events. [SFAC No. 6., Para. 25] Essential characteristics of assets Probable future economics benefits Obtained or controlled by an entity Result of past transactions or events. Common characteristic of all assets --> is service potential or future economic benefits [SFAC No. 6., Para. 28] Liabilities Liabilities are --> probable future sacrifices of economic benefits --> arising from present obligations of an entity --> to transfer assets or provide services to other entities in the future --> as a result of past transactions or events. [SFAC No. 6., Para. 35] Essential characteristics of liabilities Probable future sacrifices of economic benefits Present obligations to transfer assets or provide services in the future Result of past transactions or events. Equity

Equity (or net assets) is --> residual interests in the assets of an entity --> that remains after deducting its liabilities. [SFAC No. 6., Para. 49] Essential characteristics of equity Equity is residual interests in the assets after deducting liabilities Equity = Assets - Liabilities [Example] Company A has $2,000,000 assets and $800,000 liabilities. How much equity does the Company A have? Equity = Assets - Liabilities = $2,000,000 - $800,000 = $1,200,000 Revenues Revenues are --> inflows of assets of an entity or --> settlements of its liabilities (or a combination of both) --> from delivering or producing goods, rendering services. [SFAC No. 6., Para. 78] Essential characteristics of revenues Inflows of assets or settlements of liabilities From delivering goods or rendering services Expenses Expenses are --> outflows or other using up of assets or --> incurrences of liabilities (or a combination of both) | --> from delivering or producing goods, rendering services. [SFAC No. 6., Para. 80] Essential characteristics of expenses Outflows of assets or incurrences of liabilities from delivering goods or rendering services Gains Gains are --> increases in equity (net assets) --> except those from revenues or investments by owners. [SFAC No. 6., Para. 82] Essential characteristics of gains Increases in equity from transactions or events Except those that result from revenues or investments by owners. Losses Losses are --> decreases in equity (net assets) --> except those from expenses or distributions to owners. [SFAC No. 6., Para. 83]

Essential characteristics of losses Decreases in equity from transactions or events Except those that result from expenses or distributions to owners. Net Income and Owner's Equity Assets = Liabilities + Equity Assets = Liabilities + Equity + Revenues - Expenses Assets = Liabilities + Equity + Revenues - Expenses + Gains - Losses Ending Assets = Ending Liabilities + Ending Owner's Equity Ending Owner's Equity = Beginning Owner's Equity + Investment by Owner + Net Income Net Income = Revenues - Expenses + Gains - Losses Ending Owner's Equity = Beginning Owner's Equity + Investment by Owner + Revenues - Expenses + Gains - Losses Ending Assets = Ending Liabilities + Ending Owner's Equity = Ending Liabilities + Beginning Owner's Equity + Investment by Owner + Net Income = Ending Liabilities + Beginning Owner's Equity + Investment by Owner + Revenues - Expenses + Gains - Losses If Investment by Owner = 0, Gains = 0, Losses = 0, then Ending Assets = Ending Liabilities + Beginning Owner's Equity + Revenues - Expenses Ending Assets = Ending Liabilities + Ending Owner's Equity Assets = Liabilities + Owner's Equity

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Assets are reported on the balance sheet. Asset accounts have normal balances on the debit side. Increase in assets is reported on the debit side of a journal entry. Decrease in assets is reported on the credit side of a journal entry. Liabilities are reported on the balance sheet. Liability accounts have normal balances on the credit side. Increase in liabilities is reported on the credit side of a journal entry. Decrease in liabilities is reported on the debit side of a journal entry. Owner's Equity is reported on the balance sheet. Owner's equity accounts have normal balances on the credit side. Increase in owner's equity is reported on the credit side of a journal entry. Decrease in owner's equity is reported on the debit side of a journal entry. Revenues are reported on the income statement. Revenue accounts have normal balances on the credit side. Increase in revenues is reported on the credit side of a journal entry. Decrease in revenues is reported on the debit side of a journal entry. Expenses are reported on the income statement. Expense accounts have normal balances on the debit side. Increase in expenses is reported on the debit side of a journal entry. Decrease in expenses is reported on the credit side of a journal entry. Gains are reported on the income statement. Gain accounts have normal balances on the credit side. Increase in gains is reported on the credit side of a journal entry. Decrease in gains is reported on the debit side of a journal entry. Losses are reported on the income statement. Loss accounts have normal balances on the debit side. Increase in losses is reported on the debit side of a journal entry. Decrease in losses is reported on the credit side of a journal entry.

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