A balance sheet is an important statement which helps in the financial planning of the company by way of projecting its probable future income and expenditure. It also gives a good idea to prospective investors, clients, creditors and customers about the status of the company in the market, so that they may make the right decision.
A balance sheet is the reflection of the company’s financial standing, that depicts what it owns and what it owes on a particular date. For this, the basic accounting method of including all items from the income statement is used. Why not just use the income statement? An income statement will reflect only the incomes of the company, after cutting its expenses. The final figure that you get in an income statement does not tell you anything about the company’s credit standing. Hence, we need one clear-cut statement that will give us a record of both these aspects of the company. Enter, the balance sheet. It has separate sections, clearly defined for the assets owned by the company, the liabilities of the company and the amount of equity that the owners hold in the company. While assets are maintained in a separate section altogether, the liabilities and owners’ equity can be taken on one side together. The final result, after taking into account all expenditures, revenues, dividends (expected and received), interests, etc., should be equal on both sides. That means the total on both sides of the balance sheet must tally, in order to prove that the record is true. Hence it can be said that
ASSETS = LIABILITIES + OWNERS’ EQUITY
Given below for your benefit, is a simple example that has almost all the necessary items that need to be included in a standard balance sheet.
| ABC Ltd. BALANCE SHEET AS ON 31/12/2011 |
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| ASSETS (IN $) | LIABILITIES (IN $) | ||||
| Current Assets | Current Liabilities | ||||
| Cash | 100,000 | Accounts Payable | 900,000 | ||
| Bank | 250,000 | Short Term Debts | 450,000 | ||
| Accounts Receivable 110,000 (-) Reserve for Doubtful Debts 35,000 |
75,000 | Long Term debts | 2,150,000 | ||
| Investments (short term) | 300,000 | Unpaid Wages and Salaries | 600,000 | ||
| Inventory | 600,000 | Warranty Liability | 50,000 | ||
| Prepaid Expenses | 40,000 | Interest Payable | 170,000 | ||
| Taxes Payable | 630,000 | ||||
| Total Current Assets | 1,365,000 | Total Current Liabilities | 4,950,000 | ||
| Fixed Assets | Long Term Liabilities | ||||
| Investments (Long Term) | 1,500,000 | Long Term Loans | 3,000,000 | ||
| Land & Building | 4,000,000 | Mortgages | 1,000,000 | ||
| Plant and Machinery (equipment) (-) Depreciation |
2,000,000 | ||||
| Furniture and Fixtures (-) Depreciation |
400,000 | ||||
| Total Fixed Assets | 7,900,000 | Total Long Term Liabilities | 4,000,000 | ||
| Intangible Assets | Share Owners’ Equity | ||||
| Goodwill | 300,000 | Capital Stock | 546,000 | ||
| Copyrights | 400,000 | Retained Earnings | 78,000 | ||
| Patents | 300,000 | Common Stock | 312,000 | ||
| Trademarks | 500,000 | Capital Surplus | 723,000 | ||
| Other Equity | 156000 | ||||
| Total Intangible Assets | 1,500,000 | Total Share Owners’ Equity | 1,815,000 | ||
| TOTAL | 10,765,000 | TOTAL | 10,765,000 | ||