A part of the financial statements that shows a company's total assets, liabilities, and equity, indicating the business performance at a specific time.
Balance Sheet Details
Three components make up a business's financial statement: the income statement, cash flow, and balance sheet. The balance sheet is a vital component that determines an organization's financial condition at a specific time. The information on a balance sheet allows a manager or investor to analyze whether a company tends to rely on debt or equity to finance its operations.
The format of a balance sheet may vary depending on the company. In most cases, all of the information that makes up the balance sheet is on one page, with the left half of the page indicating the total assets. The page's right side is split into two sections: total liabilities and total owners/shareholders equity. Each section elaborates on how the company distributes funds.
The total assets section is divided into two different smaller parts: current assets and non-current assets. Current assets detail which accounts are part of the short-term resources--along with their amounts--such as cash, accounts receivable, investments, prepaid expenses, and more. On the other hand, non-current assets may consist of land, buildings, equipment, and others. The same is true with total liabilities and total owner's equity. Total liabilities include current and non-current liabilities, whereas owner's equity comprises retained earnings and share capital.
Example of a Balance Sheet
When using a balance sheet, we can see how a company is financed. Let's say a company takes a $10,000 loan from a bank to purchase a piece of equipment. In this case, the balance sheet will include this transaction at the end of the accounting period. Specifically, the bookkeeper will increase both total assets and total liabilities by $10,000. With a different circumstance, if the company purchased the equipment using money from investors, assets and shareholder's equity are the ones increased.
Shareholder's or owner's equity takes into account the net revenue of a company. Bookkeepers usually add the amount from net revenue to the retained earnings account on the balance sheet. Meanwhile, the account of either cash, investments, or similar accounts under the total assets section is also increased by the same amount.
Types of Balance Sheets
Entities use different types of formats to report balance sheets.
- Classified Balance Sheet. This is the most commonly used. The format shows information about assets, liabilities, and equity classified into subcategories of accounts. Doing it this way will improve readability as dozens of accounts in the ledger are grouped into specific accounts. For instance, the accounts for computer hardware, software, and machines are grouped into the equipment account.
- Comparative Balance Sheet. This format is useful for analyzing purposes. The format provides side-by-side data on assets, liabilities, and shareholder's equity over multiple periods. The comparative balance sheet helps determine changes over time.
- Common Size Balance Sheet. In addition to the standard information found on a classified balance sheet, a common size balance sheet includes a column presenting the percentages of individual accounts in comparison to total liabilities, shareholders' equity, or total assets. For instance, if the cash amount is $1,000 and the total assets are $20,000, then the common size balance sheet will also state that 5% of assets are in the form of cash.