Sample Balance Sheet – The balance sheet is among the 3 main financial statements and is critical for financial modelling and accounting. The balance sheet summarises the firm’s total assets and the way by which those assets are funded, either via debt or equity. Additionally, it is called a statement of net worth or financial position. The balance sheet is constructed using the basic equation: Assets = Liabilities + Equity.
As being such, the balance sheet is bipolar in nature (or sections). The balance sheet’s left summarises all of a business’s assets and the right side summarises the firm’s liabilities and shareholders’ equity.
Sample Balance Sheet Image
As with other financial records, balance sheets may vary somewhat across firms and industries. Numerous “buckets” and line items, on the other hand, are usually included in standard balance sheets. We quickly discuss the various items listed that include Current Assets, Long-Term Assets, Current Liabilities, Long-term Liabilities, and Equity.
Current Assets –
Cash and Equivalents
One of highest liquid of all assets in nature is cash, displays on the very first row of the balance sheet. Cash Equivalents are indeed bundled underneath this line item and comprise assets which possess short-term maturities within 3 months or assets which the business may liquidate on moment ’s notice, like marketable securities. Businesses would normally declare whatever equivalents it contains in the footnotes to the balance sheet.
This account balances all sales income that is still payable on credit, less any allowances for doubtful accounts. As businesses collect receivables, this account reduces in value, while cash grows in value by same proportion.
Raw materials, work-in-progress items, and completed products are all included in inventory. This account is used by the corporation to record sales of products, often under cost of goods sold on the income statement.
Plant, Property, and Equipment (PP&E)
Property, Plant, and Equipment refers to a business’s tangible fixed assets. The line item is denoted after depreciation has been accrued. Certain businesses may categorise their PP&E by asset type, like land, buildings, and other kinds of equipment. With the exception of land, all PP&E is depreciable.
This line item covers all intangible fixed assets of the business, that can or may not be recognisable. Patents, licences, and proprietary formulas are all examples of identifiable intangible assets.
Accounts Payables, or AP, refers to the balance owed by a business to suppliers for goods or services acquired on credit. As the business pays off its accounts payable, it drops in value, resulting in a corresponding reduction in the cash account.
Current Debt/Notes Payable.
Contains non-current liabilities that are payable in a year or within business’s operational cycle (whichever is longest). There is also a long-term variant of notes payable, that contains notes having a duration of ever more than 12 months.
Current Portion of Long-Term Debt
This account may or may not be combined with Current Debt. Although they may appear to be identical, the current part of long-term debt refers to the percentage of debt due within this year on a security having a maturity of much more beyond 12 months. For instance, if a business takes out a five-year loan from a bank, this account would contain the part of the loan payable in the coming year.
This account contains the amortised value of any bonds sold by the business.
This account is used to keep track of the overall amount of long-term debt. This account is created from the business’s debt schedule, that details all existing debt, interest expenditure, and principle payback for each period.
This reflects the worth of the money invested by shareholders in the business. Typically, whenever a business is created, its stockholders contribute cash. For instance, an investor establishes a business and funds it with $1 million. Cash (an asset) increases by $1 million, while Share Capital (an equity account) increases by $1 million, bringing the balance sheet into balance.
This is the entire amount of net income retained by the business. A firm may distribute dividends out of its net profits at any time. Any leftover/excess funds are added/subtracted from retained profits.
Importance of the Balance Sheet For Small Business
For several reasons, the balance sheet is a critical financial statement. It may be seen alone or in combination with other financial statements such as the income statement and cash flow statement to provide a comprehensive picture of a business’s health.
Four critical financial performance indicators contain the following:
Liquidity is determined by evaluating a business’s current assets to its current obligations. Current assets must exceed current liabilities in order for the business to meet its short-term commitments. Current Ratio and Quick Ratio are two liquidity finance ratios.
Examining how a business is funded reveals how much leverage it has, that in turn reveals how significant financial risk the business is incurring. Leverage is often measured on the balance sheet by measuring debt to equity and debt to total capital.
By comparing the income statement to the balance sheet, it is feasible to determine how effectively a business utilises its assets. For instance, dividing revenue by the average total assets yields the Asset Turnover Ratio, which indicates the efficiency with which the business converts assets to revenue. Furthermore, the working capital cycle demonstrates how successfully a business controls its short-term cash flow.
Rates of Return
The balance sheet may be utilized to determine how profitably a business earns revenue. Divide net income by shareholders’ equity to get Return on Equity (ROE), net income ÷ total assets to obtain Return on Assets (ROA), and net income ÷ debt + equity to obtain Return on Invested Capital (ROIC).