Balance Sheet

A standard balance sheet contains three parts: assets, liabilities and owner’s equity. Assets are listed first, usually in order of liquidity (the ability of an asset to be converted into cash both quickly and without losing value). Liabilities are listed after assets. Assets minus liabilities should give the company’s net worth or net assets. This is determined by the accounting equation.

Another way of looking at the accounting equation is that your company’s assets should equal liabilities plus owner’s equity. This shows how assets were financed: either through borrowing (liabilities) or using the owner’s money (owner’s equity).

Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section, with the two sections ‘balancing’.

Sample Balance Sheet
 

Assets

Rs.

Liabilities

Rs.

Cash

25,000

Loans

10,000

Accounts Receivable

25,000

Accounts Payable

20,000

Equipment

1,00,000

Total Liabilities

30,000

 

 

Owner’s Equity

 

 

 

Shares

1,00,000

 

 

Retained Earnings

20,000

 

 

Total Owner’s Equity

1,20,000

 

 

 

 

Total

1,50,000

Total

1,50,000

 

Assets

Generally, assets can be classified either as current or non-current (fixed) assets.

  • Current Assets- an asset that can be converted to cash or to pay current liabilities within twelve months. Typical examples are: cash, accounts receivable, short term investments, inventory and prepaid expenses for future services that will be used within a year.
     
  • Fixed Assets- an asset that cannot be easily converted into cash. Their term is longer than twelve months. Typical examples are: property, plant, equipment, long term expenses and intangible assets such as copyrights, trademarks, patents.

Liabilities

Similar to assets, liabilities too can be classified as current or non-current liabilities.

  • Current Liabilities- they are reasonably expected to be liquidated within a year. Examples are: accounts payable, short term loans, taxes, salaries/wages payable and others.
     
  • Non-Current Liabilities- expected not to be liquidated within a year. Examples are: long term loans, bonds issued, long term leases and long term product warranties.

Owner’s Equity

The accounting equation shows us that net assets (assets minus liabilities) should equal owners’ equity. Generally, the following are included as owner’s equity: share capital, retained earnings and any reserves. They represent the money the owners have invested in the company.