Balance sheet is a financial statement that shows an entity’s financial position at a particular point in time. By nature, there are five (5) types/categories of accounts in which all business transactions are classified:
- Income (or revenue)
Balance sheet reports the amounts of assets, liabilities, and equity of an entity at any particular point in time, whereas the income statement reports the amounts of income and expenses of an entity during a particular period of time.
Let’s briefly go through each type of account which is reported in the balance sheet.
Assets of an entity are the resources that are owned and controlled by the entity. Things that are beneficial to the entity and which will be used to generate economic benefits for the entity in future. Let’s take a look at some examples of assets to make it clearer. First asset that comes in mind is CASH, Yes! That is an asset. Factory building, machinery, office equipment, computers, vehicles, stock of materials and finished goods etc. are all examples of assets. But wait! we might be missing something. What about the sales that an entity has made on credit? Such trade receivables are also assets of the entity. Similarly, prepayments are also a type of asset which is not that obvious, for example, prepaid insurance, advance rent, advances to suppliers etc.
Liabilities are the amounts that an entity owes to other parties. These financial obligations include both legal and constructive obligations. Legal obligations are the ones which are enforceable by law, such as those arising from any contractual arrangements or statutory obligations such as tax payable etc. Constructive obligation is an obligation which is created by an entity’s pattern of past practices, published policies or statements that has created a valid expectation in the minds of third parties that the entity will discharge certain responsibilities. For example, annual bonus has not been agreed contractually with the staff, but an entity regularly pays annual bonus to its staff. Other common examples of liabilities include payable to suppliers, salaries payable, utility bills payable, loan payable etc.
Equity is the difference of assets and liabilities of an entity at any particular point in time, which is why it is also referred to as “Net Assets” or “Book Value” of an entity. It comprises of the amounts invested by the owners and accumulated profits or losses of the entity. For sole proprietorship, it is called owner’s equity whereas for corporations where there are more than one owners, it is called shareholders’ equity.
We have briefly explained all three components of balance sheet. Let’s take a look at how the balance sheet looks like. Following is a sample balance sheet of Ricardo Garments Inc. as at 31 December 20xx.
Ricardo Garments Inc.
As at 31 December 20xx
|Property, plant and equipment||805,000|
|Advances and prepayments||3,600|
|Cash and bank balances||30,205|
|EQUITY AND LIABILITIES|
|Retained earnings/accumulated profits||181,155|
|Long term loan payable||50,000|
|Short term loan payable||10,000|
|Trade and other payables||25,150|
|Total equity and liabilities||866,305|