The Balance Sheet shows the financial position of a business at a particular point in time, usually at the end of the business’s fiscal year.
A Balance Sheet consists of:
- Owner’s Equity
Assets are resources owned by the business that are expected to benefit future operations. They represent things of value.
Types of Assets
Assets can be subdivided into two groups:
Current assets are those which will be consumed or used by your business operation over the ensuing 12 months.
Examples of current assets are:
- Accounts Receivable – sales made prior to Balance Sheet date for which money has not been received.
- Inventory – goods purchased for resale still on hand at Balance Sheet date.
- Stocks and Bonds – short term investments made with business cash.
- Prepaid Expense – expenses paid but expense not yet realized at Balance Sheet date, i.e. insurance paid for one year on November 1st, at Balance Sheet date of December 31st you still have 10 months insurance prepaid
Fixed assets are necessary for conducting the business operation.
Examples of fixed assets are:
Liabilities are the business debts.
Types of Liabilities
There are two types of liabilities:
Current liabilities should be repaid from business receipts in the ensuing 12 months.
Examples of current liabilities include:
- Demand Bank Loans
- Accounts Payable
- Any other debts payable within 12 months
Long Term Liabilities
Long Term liabilities are those which are paid over a longer period of time than 12 months. An example would be a mortgage or loan.
Owner’s Equity is the investment made by the owner.
Owner’s equity will:
- Increase with accumulated earnings of the business or contributions by the owner
- Decrease with accumulated losses or withdrawals by the owner
Balancing Your Balance Sheet
Your Balance Sheet is said to be balanced if your calculations satisfy the following formula:
ASSETS = LIABILITIES + OWNER’S EQUITY
Think of this equation in terms of a house (an asset) worth $100,000 with a mortgage (a liability) of $60,000. The equity the owner has in the house must be $40,000 to make the equation balance. This is why it is called a Balance Sheet.
(House) $100,000 = (Liability) $60,000 + (Owner’s Equity) $40,000
The mortgage is paid monthly and is decreasing with each payment. Accordingly, when the liability (mortgage) decreases the owner’s equity increases. To prepare the equation we must take a measurement or snapshot at a specified point in time to get an accurate picture of the value for each item. This is like a business where the assets are things of value (cash, inventory, accounts receivable) and the liabilities are things that the business owes (accounts payable, taxes payable, loans payable). The owner’s equity is the difference between assets minus liabilities. In this case the formula can be changed to:
ASSETS – LIABILITIES = OWNER’S EQUITY
An example of a Balance Sheet for Fay’s Variety is shown in Figure 1.
FAY’S VARIETY STORE
PROJECTED BALANCE SHEET
AS AT DECEMBER 31, 2012
|TOTAL CURRENT ASSETS||16,200|
|TOTAL CURRENT LIABILITIES||3,000|
|Capital – Fay Smith|
|Net Income for the Year||20,200|
|TOTAL OWNER’S EQUITY||16,200|
|TOTAL LIABILITIES & OWNER’S EQUITY||19,200|
Click on Worksheet 6.8 to prepare your balance sheet.