Balance Sheet

A company’s assets, liabilities and shareholder’s equity are reported in the balance sheet of the company. A balance sheet is prepared at the end of a financial year / reporting period. Hence it is prepared as of date, and not for a period (which is the case for an income statement or Profit and Loss statement). Take for example, Balance sheet for company XYZ is as of 31^st March 2018 i.e. end of that particular day. It is never balance sheet for the year ended 31^st March 2018.

The Assets are shown on the right hand side of the balance sheet whereas the left had side comprises of the Liabilities and Shareholder’s Equity. Thus, the following formula comes into picture:

            Assets = Liabilities + Shareholders’ Equity

The above conveys that all the assets owned by the company are either paid from the initial capital from the investors or by borrowing the money in the form of loans and debts.

Let us understand each of these components individually in further detail:

Assets are represented on the Balance Sheet on the basis of their liquidity i.e. the less liquid asset is showing on top and the more liquid assets are shown at the bottom. They are further divided on the basis of their liquidity into fixed and current assets. Intangible Assets form a part of Fixed Assets and are shown on the asset side of the balance sheet only.

Shareholders’ Equity is the money of the owners of the company which comprises all the shareholders in that company. The elements of shareholder’s equity include retained earnings which are the net earnings of the company accumulated over the years of business existence. These are either reinvested into the business or given to shareholders in the form of dividend. The other elements are share capital which can be paid up or unpaid equity. Shareholders’ Equity is shown first on the left hand side of the balance sheet.

Liabilities are the money owed by the company to other parties like the creditors, interest on the loan to bank, loan borrowed, tax dues payable among others. Liabilities are classified on the basis of duration similarly like assets and are known as current liabilities and long-term liabilities. Current liabilities are those which are due within a year (next 12 months). Long term liabilities are those which become due after a period of one year. These are shown on the Balance Sheet on the basis of their due date, where the long term liabilities are shown on the top of the current liabilities.

Also, there are some liabilities which are off balance sheet items and are not shown on the balance sheet but are mentioned in the notes to the accounts like contingent liabilities and operating leases.

Find below a proforma extract of the balance sheet of a company -

                        Balance Sheet of company XYZ as of 31^st March 2018

The balance sheet helps the investors compute rates of return, liquidity ratios, leverage and various other comparison ratios helpful in analysing the company’s growth. Some ratios require data only from the balance sheet, whereas some require inputs from the P&L statement along with the Balance Sheet.