What is a Balance Sheet?
In the previous article, we have gone through how to prepare an Income Statement. The Balance Sheet is simply a list of accounts that fall in the Asset, Shareholders’ Equity and Liabilities categories with their balances. This is in contrast to the Income Statement which is essentially an account on its own. You can also find more about the differences between the Income Statement and Balance Sheet.
Note that you have to prepare the Income Statement first and update the retained earnings account before proceeding to prepare the Balance Sheet.
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[Company Name] |
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Balance Sheet as at 31 December 2015 |
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ASSETS |
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Non-current assets |
$ |
$ |
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Land and Property |
58,000 |
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Plant and Machinery |
3,000 |
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Motor Vehicles |
8,000 |
69,000 |
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Current assets |
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Inventory |
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Accounts Receivable |
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Cash |
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33,000 |
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TOTAL ASSETS |
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102,000 |
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SHAREHOLDERS’ EQUITY |
$ |
$ |
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Paid-in Capital |
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75,000 |
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Retained Earnings |
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7,000 |
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TOTAL SHAREHOLDERS’ EQUITY |
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82,000 |
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LIABILITIES |
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Current Liabilities |
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Bank Overdraft |
500 |
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Accounts Payable |
6,500 |
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Provisions |
1,000 |
8,000 |
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Non-current Liabilities |
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Loan from Bank |
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12,000 |
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TOTAL LIABILITIES |
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22,000 |
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TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES |
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102,000 |
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The Balance Sheet above resembles the accounting equation. It shows the assets at the top and shareholders’ equity and liabilities at the bottom. Both halves sum up to be $102,000. It reflects the accounting equation of “Assets = Shareholders’ Equity + Liabilities”. Some Balance Sheets may place the Current Liabilities section right below the Current Assets section. These Balance Sheets present the accounting equation as “Assets – Current Liabilities = Shareholders’ Equity + non-current Liabilities”. While this helps users of the Balance Sheet carry out financial statement analysis in a more convenient manner, the underlying concept is still the same.
Note that this is only a simple version of the Balance Sheet. We have not taken into account some of the year-end adjustments that will affect the Income Statement and Balance Sheet. The next article in this series talk about depreciation, an important year-end adjustment.
References
Horngren, C., Sundem, G., Elliott, J., & Philbrick, D. (2014). Accounting: The Language of Business. In Introduction to Financial Accounting (Eleventh ed.)