A balance sheet is one of the most important financial statements that provide a comprehensive summary of a company’s financial position at a point in time. The balance sheet format details the company’s liabilities – what it owes, its assets – ownership, and shareholders’ equity – the amount invested by shareholders.
In this comprehensive guide, we will demystify the companies balance sheet by explaining its key components, utility, formulation, and presentation using illustrative examples. Read on to gain insight into interpreting and analyzing this pivotal financial statement.
What is a Balance Sheet?
A balance sheet format captures the company’s financial situation on a set date, laying out what the business owns and owes. The main pieces of this financial picture are assets, liabilities, and shareholder equity.
The balance sheet format adheres to the fundamental accounting equation:
Assets = Liabilities + Shareholders’ Equity
This means that the total assets of a company are always equal to the sum of its liabilities and shareholders’ equity.
A balance sheet format provides an overall view of a company’s financial position at a snapshot in time. It can give stakeholders, like investors, creditors, etc., an idea of the company’s health and an insight into its operations.
What are the Features of a Balance Sheet?
- Follows the accounting equation: Assets will always equal liabilities plus equity. This allows for easy checking of the format balance sheet balances.
- Classifies items by liquidity: Assets and liabilities are arranged in order of liquidity, which is how easily they can be converted to cash. This allows readers to assess the company’s ability to pay debts.
- Follows Accrual Accounting: The balance sheet adheres to accrual-based accounting. This means revenue and expenses are logged when generated or incurred rather than when money actually changes hands. The accrual approach provides a more accurate picture than cash-based accounting of what the company owes and is owed at a particular time.
- Balances to zero: As per the accounting equation, total debits and credits balance out. This allows for ease of understanding and analysis.
- Comparative for analysis: A company balance sheet format is presented in a comparative format, which allows comparison across different periods to analyze performance.
Key Elements and Components of a Balance Sheet
Assets
Assets represent what a company owns that holds economic value and can be converted into cash. They are listed on a balance sheet format in order of liquidity – how quickly an asset can be converted to cash.
Assets are broadly classified into current assets and non-current (long-term) assets.
Current Assets are assets that are either cash or can be converted into cash within 12 months. They include:
- Cash and Cash Equivalents – Any assets that can quickly become cold, hard cash. We’re talking about the money in registers and bank accounts, as well as low-risk investments like short-term bonds that can easily be sold for cash.
- Accounts Receivable – The money that customers owe for getting stuff from the company, like goods purchased on credit. This represents revenue already earned but not yet paid.
- Inventory – All the stuff the company has on hand to sell. This includes the raw materials used to produce goods, unfinished products still being made, and finished products ready for sale.
- Marketable securities – Short-term securities that can be readily sold, like bonds and equity shares.
- Prepaid expenses – Expenses paid for in advance, like insurance, rent, etc.
Non-current assets are assets with an economic value extending beyond 12 months. They include:
- Fixed assets – Tangible and relatively illiquid assets like property, plant, and equipment.
- Intangible Assets – Non-physical assets like patents, trademarks, copyrights, and goodwill. They lack a concrete existence but still hold value for the company.
- Long-Term Investments – Assets meant to be held for over a year, including stakes in other companies along with bonds and funds. Unlike short-term investments, these can’t quickly convert to cash.
Liabilities
Liabilities represent the money or obligations that a company owes to others. Just like assets, liabilities are classified as current and long-term.
Current liabilities are financial obligations that need to be paid off within 12 months. These include:
- Accounts payable – Money owed to suppliers for raw materials purchased.
- Short-term debt – Debt obligations like loans that need to be paid back within 12 months.
- Accrued liabilities – Expenses incurred but not yet paid off, like wages, taxes, utilities, etc.
Long-term liabilities are financial obligations that extend beyond 12 months. These include:
- Long-term debt – Loans and financial obligations that are due after 12 months, like bonds.
- Deferred taxes – Income taxes owed in future years.
- Pension obligations – Post-retirement pension benefits owed to employees.
Shareholders’ Equity
Shareholders’ equity represents the funds contributed by shareholders to finance the company. It is calculated as:
Shareholders’ Equity = Assets – Liabilities
Components of shareholders’ equity include:
- Paid-up share capital – The amount invested by shareholders through the purchase of shares.
- Retained earnings – Cumulative net earnings not paid out as dividends but retained for reinvestment.
- Treasury shares – Shares repurchased by the company, lowering the share capital.
Why Do You Need a Balance Sheet?
- It helps determine the company’s liquidity to meet its obligations by assessing its current assets.
- It helps ascertain a company’s solvency – its ability to pay off long-term liabilities.
- It provides valuable information to investors to determine financial health and valuation.
- It helps creditors determine creditworthiness for lending purposes.
- It enables comparison with competitors to benchmark financial position.
- It allows monitoring of financial progress over time.
- It is necessary for tax calculations and compliance with regulations.
Balance Sheet Format & Equation
The balance sheet format adheres to the accounting equation, which states that:
Assets = Liabilities + Shareholders’ Equity
This means that assets are funded through a combination of liabilities and equity financing.
According to the balance sheet format:
- Assets are items of economic value owned by the company.
- Liabilities represent a company’s financial debts and obligations.
- Shareholders’ equity is the residual interest shareholders hold in assets after discounting liabilities.
This equation underlies the balance sheet format and ensures that it always balances. The total assets of a company will always equal the sum of its liabilities and shareholders’ equity.
Format Balance Sheet Example
Let’s take a look at an example balance sheet format for a fictitious company – Swaggy Inc.
Swaggy Inc. company balance sheet format as of 31 March 2023
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Current Liabilities | Current Assets | ||
| Accounts Payable | 5,00,000 | Cash | 10,00,000 |
| Short-term Debt | 3,00,000 | Accounts Receivable | 7,00,000 |
| Total Current Liabilities | 8,00,000 | Inventory | 12,00,000 |
| Total Current Assets | 29,00,000 | ||
| Long-term Liabilities | Fixed Assets | ||
| Bank Loans | 20,00,000 | Land | 15,00,000 |
| Total Long-term Liabilities | 20,00,000 | Buildings | 22,00,000 |
| Equipment | 18,00,000 | ||
| Total Liabilities | 28,00,000 | Less: Depreciation | (10,00,000) |
| Total Fixed Assets | 45,00,000 | ||
| Shareholders’ Equity | Intangible Assets | ||
| Share Capital | 15,00,000 | Goodwill | 4,00,000 |
| Retained Earnings | 12,00,000 | ||
| Treasury Shares | (5,00,000) | Total Intangible Assets | 4,00,000 |
| Total Shareholders’ Equity | 22,00,000 | Total Assets | 78,00,000 |
| Total Liabilities & Equity | 50,00,000 |
This company balance sheet format balances according to the accounting equation:
Assets = Liabilities + Equity
Assets = ₹28,00,000 + ₹22,00,000
Assets = ₹78,00,000
Conclusion
The balance sheet format adheres to the fundamental accounting equation whereby assets equal liabilities plus equity. The key components are assets, liabilities, and shareholders’ equity, each split into current and long-term. Analyzing and monitoring a balance sheet format is vital for effective financial management and reporting. It enables the assessment of liquidity, solvency, financial flexibility, and operating efficiency of a company.
FAQs on Balance Sheet
Q1. What are the main users of a balance sheet?
A1. The key users of a company balance sheet format include company management, investors, lenders, suppliers, regulators, and analysts. It provides valuable information to both internal and external stakeholders.
Q2. How often should a balance sheet be prepared?
A2. Most companies prepare a company balance sheet format quarterly and annually as part of their financial reporting process. Public listed companies are required to issue quarterly and annual balance sheets.
Q3. What are some of the limitations of a balance sheet?
A3. Limitations include only providing a snapshot at a point in time, being open to window dressing techniques, not reflecting the market value of assets, and not capturing off-balance sheet items.
Q4. What is working capital?
A4. Working capital is the difference between current assets and current liabilities. It represents the liquid assets available to run the day-to-day operations of a business.
Q5. Where can I find a company’s balance sheet?
A5. Publicly listed companies publish their balance sheets as part of their mandatory financial reporting. For private companies, you can obtain a company balance sheet format directly from them or credit reporting agencies if available. The company balance sheet format is also included in a company’s annual return filing.