We’ve already discussed the balance sheet in a few of our previous articles. This time, however, we’ll dive deeper into this financial statement and break down exactly how to compile it, what its elements are, and what they mean—read on to find out everything.
Balance Sheet Basics: A Brief Recap
One of the four most important financial statements that a company produces is the balance sheet. All four statements are as follows:
- Income Statement
- Balance Sheet
- Statement of Cash Flow
- Statement of Shareholders’ Equity
A snapshot in time is captured by a company's balance sheet, which details the company's assets, liabilities, and shareholders' equity.
(The other three financial statements report sums for a certain period of time, such as an annual period, a quarterly period, a monthly period, etc.)
Below is the accounting equation, the elements of which can all be found on the balance sheet.
Assets = Liabilities + Shareholders’ Equity
The amount of a company's working capital may be calculated by looking at the balance sheet.
Working capital is calculated by subtracting the amount of a company's current liabilities from its current assets.
In addition to this, they will examine the assets and liabilities of the company and compare these figures to the amount of equity held by the investors.
Note: A comparative balance sheet is what's known as a balance sheet when it reports at least one extra column of values from a previous balance sheet date. Comparative balance sheets are also known as historical balance sheets.
Balance Sheet Elements And How To Compile Them Together
A classified balance sheet is the type of balance sheet that most corporations provide.
The following are quick explanations of the many elements that are often found on the balance sheet of a corporation.
In general, cash and other assets that are anticipated to be converted into cash within one year of the date the balance sheet was created are included in the category of current assets.
Some examples of current assets are cash and cash equivalents, investments with a short-term time horizon, accounts receivable, inventory, and cost reimbursements that have already been pre-paid.
Investments (Noncurrent Assets)
The first category to fall under the umbrella of noncurrent or long-term assets is that of investments.
The cash that is limited for use in the development of plant and equipment as well as long-term investments in other enterprises, the cash-carrying value of life insurance policies, bond sinking funds, real estate held for sale, and other types of assets are all included in this category.
Property, Plant, And Equipment (PPE)
The cost of a company's land, buildings, machinery, equipment, furnishings, fixtures, and vehicles that are used in the running of the firm are all included in this category of noncurrent assets.
These assets, except land, will experience depreciation throughout the course of their useful life.
A company's goodwill, trademarks, patents, copyrights, and any other non-physical assets that it has paid to obtain are examples of intangible assets.
Note: Because they were not obtained via the acquisition of them from another individual or business, valuable trademarks and logos that were inherently owned by the corporation are not disclosed.
This category often contains expenditures that have already been paid for but are being written off over a period of time that is longer than one year.
The price of issuing bonds and certain income taxes that can be delayed are two examples.
Read more about Current Assets vs. Noncurrent Assets.
The obligations of a firm that are due to be paid within one year of the date the balance sheet was created are referred to as current liabilities (and will require the use of a current asset or will be replaced with another current liability).
The current part of long-term debt, accounts payable, liabilities for accumulated costs, and loans outstanding that will be due within a year of the date of the balance sheet are all examples of current liabilities.
Long-term liabilities is another word that may be used to refer to these obligations. To put it another way, these commitments will not be due within the following twelve months after the date of the balance sheet.
A few examples of this would include a portion of mortgage debt, a portion of a car loan, bonds payable, and income taxes that have been postponed.
This part of the balance sheet is broken up into many key divisions, which are as follows:
- Paid-in capital (the amounts paid by investors when the original shares of a corporation were issued)
- Retained earnings (the net earnings of the corporation since it began minus the amounts that were distributed in the form of dividends to the stockholders)
- Treasury stock (a deduction that reflects the amount paid by the firm to repurchase its own shares. This amount is known as the repurchase price.)
To know more read our article: Liabilities And Stockholder Equity
The balance sheet is an essential financial statement for all firms, and knowing how to compile it properly is therefore vital. With this article’s knowledge, you’ll be able to easily create, read, edit, and audit balance sheets, which will likely provide you the edge over the competition even in the short run.
If you’d like to understand the other financial statements as well, check out one of our related articles now where we simply explain everything you need to know—see you there!
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