Statement of Financial Position (Balance Sheet)

Definition:

A Balance Sheet or Statement of Financial Position is one of the five Financial Statements that report three main important financial information of the entity at the end of the balance sheet date. These three important pieces of information are covering Assets, Liabilities, and Equity. It is normally presented on a comparative basis like 31 December 20X1 and 31 December 20X0.

In the balance sheet, assets are classified into two types of assets: Current and Non-Current Assets based on nature and accounting classification. Non-current assets, for example, include the company’s building, land, and machinery. And current assets include the company’s cash, account receivables, and inventories.

Same as assets, liabilities are also separated into two classifications: Current Liabilities and Non-Current Liabilities. For example, the company will need a long-term loan to pay off in more than twelve months from the reporting date reports under the non-current liabilities.

Current liabilities include short-term loans, accounts payable, and others payable that the company will need to pay within twelve months.

The equity section contains the information that records the resources that owners invested and invested into the entity with the recording of gain or loss accumulation.

The balance of equity is affected by an income statement as well as assets and liabilities.

Noted, IFRS now has changed the words to call Balance Sheet to Statement of Financial Position.

So if your financial statements are prepared based on IFRS, then you should use Statement of Financial Position instead of Balance Sheet.

Formula:

Accounting Equation for Balance Sheet : Assets = Liabilities + Equity

Three Main Elements

The following are the three main elements of the statement of financial position:

  • Assets
  • Liabilities
  • Equity

Here is the detail,

Assets: First Items in the Balance Sheet

Assets are the resources belonging to the entity. Total assets here will report all types of entity’s assets. These include current assets and non-current assets. Current asset rank above non-current assets.

The common examples of assets are land, building, cars, cash in the bank and on hand, inventories, and accounts receivable. Any assets that bong to the owners or shareholders do not include here.

In the Balance Sheet, Assets are reported in the first part before Equity and Liabilities.

Current Assets:

1) Cash and Cash Equivalence:

Report the balance of cash and cash equivalence that is to the entity at the reporting date. It could be cash on hand, petty cash, cash deposit in the bank, or other financial note that are equivalent to cash. Equivalence to cash means easily converting into cash.

2) Accounts Receivable:

Accounts receivable are the receivable amount by the entity from its customers as the result of credit sales. This amount is expected to be received in a period of fewer than twelve months from the reporting date or Balance Sheet date.

If part of receivables is expected to receive over twelve months, then they have to class into long-term assets.

3) Prepaid Expenses:

Prepaid is the amount that the entity pays to its suppliers in advance to secure, through, services or products.

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For example, if the company wants to purchase computers, and because the computers are limited in the stores, or the computer needs to order from an outside country, the supplier requires the company to make a certain deposit.

At the time of deposit, the entity does not receive the computer from its supplier yet. Prepaid expenses are the entity’s assets and have to be recorded in the balance. They are not expenses yet.

4) Inventories:

Inventories here include all kinds of inventories: Raw material, work in process, and finish goods. At the end of the accounting period, the entity usually performs physical counts of all inventories and then qualifies them.

Auditors normally accompany the inventory count. Inventories are the main items in the Balance Sheet of a manufacturing company. Inventories normally record at selling prices less cost to sell.

5) Due to related parties:

This amount is required to be reported as a result of the accounting standard requirement. Amounts due from related parties are required to be present in the balance sheet and need to be disclosed properly in the note to financial statements.

This amount results from selling products or rendering services to its related parties—for example, parent company, associate, and subsidiary.

Non-Current Assets:

Non-current assets here include both tangible and intangible assets of an entity. Here is the detail of all of them.

1) Tangible Non-Current Assets:

  • Machinery needs to class and reported as non-current assets as its useful life of it are longer than one year. The machinery is recorded in the Balance Sheet at cost. And then depreciation based on entity depreciation policies. Once the entity disposes of, the cost and accumulated depreciation related to machinery need to be removed from the fixed assets schedule and Balance Sheet as well.
  • Equipment: This is the kind of equipment that uses in the entity which has a useful life of more than twelve months period. The same as machinery and other long-term assets, equipment is recorded as costs.
  • Leasehold Improvements: this type of asset happens when the entity does not own the building or office that it is using. The office or building is rented from others, and because of business requirements, the entity makes an improvement on it. For example, the entity rents an office building. The owner of the building provides only the building space. All other decorations and rooms for staff are the responsibility of the entity. In this case, to make decoration and room, the entity will incur costs that are not immediately classified as expenses. They treat as assets and depreciate as expenses over the period of time in the income statement.
  • Buildings: Buildings here could be the office building for the head office or brand. They are recorded as non-current assets and depreciate based on their useful life.
  • Vehicles: they include cars for use in the company or similar types of vehicles are included here. Vehicles’ rental experience should not record as fixed assets. The expenses should be recorded in the income statement.
  • Long-term notes receivable: This is the same as the account receivable that we record in the current assets. The reason we record this here is that part of receivables is expected to receive in a period of more than twelve months.
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2) Intangible Non-Current Assets:

  • Investments:  this is referring to long-term investment that expects to be recovered into cash in the long term or more than twelve months. The kind of investment is like stock or bond something.
  • Goodwill: This kind of asset happens when the entity purchases the new subsidiary while the net book value of the assets of that subsidiary is less than what the entity offers.
  • Trademarks: the costs of assets that the entity purchases probably from the government or professional body.
  • Patent: This is the cost that an entity purchases the right to operate the services or sales of the products in the country. This is usually a year.

Liabilities: Second Item in the Balance Sheet

There are two types of liabilities in the Balance Sheet. They are,

1) Short-term liabilities

Short-term liabilities are the liabilities that are expected to be paid within a period less than twelve months from the Balance Sheet date.

  • Accounts Payable is the amount that the entity owes to its suppliers as the result of purchases of goods, materials, or the rendering of services.
  • Accrued Expenses: The accrual is almost the same as the account payable. But just because you are not receiving the invoices from your suppliers yet, you can not book what the entity owns as payable.
  • Unearned Revenue is a type of liability, and this is a contrast to the deposit. For example, you are offering services to your customers, and they pay you in advance. In this case, you have not provided the services to them yet. In such a case, you have to book as unearned revenue rather than revenue.
  • Current Portion of Long-term Debt: this is part of the long-term debt. For example, the entity owns the bank for 10,000, and the loan needs to install on a monthly basis. In this case, you have to figure out how much the amount that the entity has to pay within one year. That amount is the current portion of long-term debt.

2) Long-term Liabilities

Here is a sample of long-term liabilities.

  • Mortgage Payable this is the number of mortgage liabilities that are expected to be paid longer than twelve months period, and for that amount that is payable less than twelve months, we need to class them out to current liabilities.
  • Notes Payable is quite the same as the account payable. These amounts are what we expected to pay in longer than twelve months periods.
  • Long-term Loans: these are the long-term liabilities that are expected to pay in a period of more than twelve months.
  • Finance Lease is the kind of financing that a company occurs assets by obtaining finance from another company or the entity that they are purchasing.
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Shareholders’ Equity: Third Items in the Balance Sheet

Shareholders’ Equity, Owner’s Equity, or Stockholders’ Equity are called differently in the Balance Sheet because of the nature of the business.

For a private company, we usually called owner equity, and for a corporation, we usually call it shareholders or stockholder equity.

The total amount of shareholders’ equity is the leftover amounts from assets and liabilities as well as from business operations. For example, if the company operating a loss, the equity will be reduced eventually.

There are many sub-components that are recorded under shareholders’ equity. These include Common Stock, Prefer Stock, Retained Earnings, and Accumulated Other Comprehensive Incomes.

All sub-elements that record or class under equity elements are increasing in credit site and decrease in debit side the same as liabilities element.

1) Common Stock:

Common Stock or Ordinary shares are the same, and this class of shares normally has voting right. The ordinary share is recorded at par value in the balance sheet under equity sections.

Detail of it could be found in the statement of change in equity and Noted to Financial Statements.

This types of stock represent the ownership of the corporation. If the corporation goes into liquidation, then the holders of this stock have less priority to get payments than others preferred shareholders or lenders.

2) Retain Earning or Accumulated Losses/ Profit :

Retain earnings or accumulated losses are recording the equity section of the balance sheet. This is the accumulation of profits or losses that a corporation or entity has earned so far.

The balance of return earnings could be reduced once the entity makes dividend payments to its shareholders or reinvestment.

It is depending on the company’s investment and financial strategy. Retain earnings can be calculated by the accumulation of the beginning balance of retained earnings plus net income during the year and minus dividend payments during the year.

3) Reserve:

It is normally the statutory or standard requirement for the company to make a reservation for a special occasion that could happen unexpectedly.

Sometimes it is named Capital Reserve. For example, if the corporation is the bank, then the central banks might require the corporation to have certain amounts of capital reserve for liquidation.

4) Dividend:

The dividend is the amount that reduces the total shareholders’ equity. It is what the company pays its shareholders and is mostly decided by the board at the end of the year.

A dividend might be reported as the contract to retain earnings, or sometimes recorded as the net off retain earnings.

Balance Sheet Template:

The following is the template below:

Conclusion:

  • Balance Sheet is the statement that shows the balance of assets, liabilities, and equity of the entity at the end of accounting periods.
  • This statement can be prepared base on a monthly, quarterly, or annual comparative basis.
  • It provides useful data about the entity’s financial status or position.
  • It provides useful data for Financial ratio analysis.

Written by Sinra