Balance Sheet
BALANCE SHEET/ STATEMENT OF FINANCIAL POSITION
A balance sheet is also called a statement of financial position reflecting the status of business Assets, liabilities, and capital. As per the accounting equation Assets of a business shall be equal to the sum of capital contributed by the owners and liabilities owed by the business. Therefore the balance sheet is divided into two sections
-One reporting Assets of the company whereas,
-The other presents the amounts contributed by the owner of their business Plus any amount owed to external creditors of the business.
The total of both sections shall be equal and balanced. This way of presenting the information is called a balance sheet.
Since all the nominal accounts are summarized and reported through the profit and loss statement whereas, all the remaining real or personal accounts are summarized on the balance sheet.
It is imperative to understand that unlike the profit and loss statement which comprises the trading account and profit & loss account balance sheet is merely a statement. The balance of profit & loss statement is reported on the balance sheet as retained earnings. Further the fact that the balance sheet provides the status of a business’s financial position at a particular time instead of reporting performance for a given period.
The balance sheet comprises the following various sections and heads;
Assets
Assets are resources controlled by a business that can be turned into economic benefits in the coming period. Assets include property, buildings, Bank account balances, cash vehicles, any short and long-term investment made by the company, etc. Assets can be further classified into two broader categories,
Long Term/ NonCurrent Assets:
Those assets from which economic benefits are expected to be retrieved for more than one accounting period. For example, buildings and vehicles can be used for business use for more than a single accounting period and economic benefit from these assets can be obtained beyond one reporting period. Long-term assets can be further classified as
Fixed assets:
Fix Fixed assets are tangible long-term assets used by businesses during their operations for earning revenues and reducing costs. Examples of fixed assets are property, plant, equipment, buildings, furniture and fixtures, office equipment and vehicles, etc.
Intangible non-current assets:
The resources and rights owned by a business that cannot be physically touched and can be used to drive long-term economic benefit for more than a single accounting period. Examples of intangible noncurrent assets include long-term investments made by the business, the right to use software applications, and any other intellectual rights.
Current Assets:
Are those resources from which a business intends to drive economic benefit within the coming single accounting period. Inventory, trade receivables, cash, bank account balances, and short-term liquid Investments are examples of noncurrent assets.
Liabilities.
The amount of obligations and commitments to finance the company’s assets, which may result in an outflow of economic benefits to external parties from the organization, are called liabilities.
Depending upon the time scale available to exhaust the commitments for or outflow of economic benefits to third parties, liabilities may further be subdivided into the following two categories;
Non-Current Liabilities:
All those liabilities which are expected to be discharged after the coming accounting period are called noncurrent liabilities. Bank loans, bonds, and loan notes issued by the companies are famous examples of noncurrent liabilities.
Current Liabilities:
All those commitments and obligations on a business that are expected to be discharged during the coming accounting period are classified as noncurrent liabilities. Trade payables, the current portion of bank loans, and tax payable are commonly classified as current liabilities.
Contingent Liabilities:
Those liabilities and obligations may result in an outflow of economic benefit. However, the amount and time of the expected outflow are not sure.
For example, an ex-employee of the company has filed a lawsuit in the court of law against the company for an amount of $10,000. Since the matter is sub-judice with the court of law, it is not confirmed whether the lawsuit against the company will be successful and if the company will have to pay the amount to the complainant employee.
Such expected liabilities are not needed to be included in the financial statements; however accounting standards from various jurisdictions require that such liabilities shall be disclosed in the notes to financial statements if not included in the balance sheet.
