Author: Jim Riley Last updated: Sunday 23 September, 2012
Balance Sheet (overview)
A balance sheet is a statement of the total assets and liabilities of an organisation at a particular date - usually
the last date of an accounting period.
The balance sheet is split into two parts:
(1) A statement of fixed assets, current assets and the liabilities (sometimes referred to as "Net Assets")
(2) A statement showing how the Net Assets have been financed,
for example through share capital and retained profits.
The Companies Act requires the balance sheet to be included
in the published financial accounts of all limited companies. In reality,
all other organisations that need to prepare accounting information for external
users (e.g. charities, clubs, partnerships) will also product a balance sheet
since it is an important statement of the financial affairs of the organisation.
A balance sheet does not necessary "value" a company,
since assets and liabilities are shown at "historical cost" and some intangible assets (e.g. brands, quality of management, market leadership)
are not included.
Example Balance Sheet
The structure of a typical balance sheet is illustrated below:
Boston Learning Systems plc Balance Sheet at 31 December
Goodwill and other intangible assets
Property, plant & equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Current tax liabilities
Net current assets
An asset is any right or thing that is owned by a business.
Assets include land, buildings, equipment and anything else a business owns
that can be given a value in money terms for the purpose of financial reporting.
Definition of Liabilities
To acquire its assets, a business may have to obtain money from
various sources in addition to its owners (shareholders) or from retained
profits. The various amounts of money owed by a business are called its liabilities.
Long-term and Current
To provide additional information to the user, assets and liabilities
are usually classified in the balance sheet as:
- Current: those due to be repaid or converted into cash within
12 months of the balance sheet date;
- Long-term: those due to be repaid or converted into cash more
than 12 months after the balance sheet date;
A further classification other than long-term or current is
also used for assets. A "fixed asset" is an asset which is intended
to be of a permanent nature and which is used by the business to provide the
capability to conduct its trade. Examples of "tangible fixed assets" include plant & machinery, land & buildings and motor vehicles. "Intangible
fixed assets" may include goodwill, patents, trademarks and brands
- although they may only be included if they have been "acquired".
Investments in other companies which are intended to be held for the long-term
can also be shown under the fixed asset heading.
Definition of Capital
As well as borrowing from banks and other sources, all companies
receive finance from their owners. This money is generally available for the
life of the business and is normally only repaid when the company is "wound
up". To distinguish between the liabilities owed to third parties and
to the business owners, the latter is referred to as the "capital" or "equity capital" of the company.
In addition, undistributed profits are re-invested in company
assets (such as stocks, equipment and the bank balance). Although these "retained
profits" may be available for distribution to shareholders - and may
be paid out as dividends as a future date - they are added to the equity capital
of the business in arriving at the total "equity shareholders' funds".
At any time, therefore, the capital of a business is equal to
the assets (usually cash) received from the shareholders plus any profits
made by the company through trading that remain undistributed.
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