3 Element of Balance Sheet – What Are They?

Overview:

The balance sheet is one of the most important elements of financial statements. This statement shows the entity’s financial position at the point in time.

What we mean by financial position is that this statement tells us how the entity’s assets, liabilities as well equity are at a specific time frame. For example, if you obtain your entity balance sheet as of 31 December 2017, you will see how is your entity’s assets as of 31 December 2017 and its comparative figure.

So what are the elements of the balance sheet?

The balance sheet has three main elements including assets, liabilities, and equity where we can see the total amount of them as at the specific reporting date. In the balance sheet, assets also present their sub-element which generally includes current and non-current assets. Liabilities also present its sub-element including current and non-current liability.

The Balance sheet has three main importance that forms up the accounting equation. This element could have many sub-elements according to the nature of the business.

For example, the sub-element of assets could be current assets and non-current assets. And in the current assets, there are many components of them.

In this article, we will discuss the detail of the balance sheet’s main element as well as sub-component.

List of Balance Sheet:

The balance sheet is constructed based on the combination of these three main elements that principally follow the accounting equation. Those include:

  • Assets
  • Liabilities
  • Equity

Assets = Liabilities + Equity

#1 Assets:

Assets consist of current assets and non-current assets. The official definition of assets is defined by IASB’s Framework for preparation and presentation of financial statements are the control of the resource by the entity as the result of past events and from which the future economic benefits are expected to flow into the entity.

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This definition is to give you the principle on which events or transactions should be classed and recorded as assets, and which are not. This element of the balance sheet has many components under it.

And those sub-elements range from short or current assets to long-term assets.

Long-term assets usually have a useful life for longer than 12 months. That means the period that those kinds of assets generate the economic inflow into the entity for more than one year.

For example, buildings and machinery. The useful life of these assets is normally longer than one year. The cost of fixed assets will allocate into the entity income statement through depreciation.

Here is the example of non-current assets:

  • Land: indefinite useful life
  • Building: usually has 50 years
  • Property: More than one year
  • Computer equipment: More than one year
  • Long term investment: Longer than one year

However, for the assets that normally use less than one year or the conversion period less than one year, those assets are normally treated as current assets. For example, inventories, account receivable as well as cash.

Here is the example of current assets:

  • Cash in bank
  • Cash on hand
  • Cash advance
  • Petty cash
  • Inventories
  • Account Receivables
  • Prepaid expenses
  • Goodwill
  • Short term investment
  • and other assets that meet the definition of assets above.

#2 Liabilities:

Liabilities refer to the amount that the entity owes to others. Liability is the second main element of the balance sheet. And the official definition of liabilities is defined by IASB’s Framework for preparation and presentation of financial statements are the present obligations arising from the past events, the settlement of which is expected to result in an outflow from entity resources embodying economic benefit.

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For example, if the entity purchases a car from the supplier without making payments. The entity will record this as account payable which is under liability categories. Liabilities also include the loan or overdraft that an entity borrows from banks.

We can say that the sub-element of liability in the balance sheet contains two elements. They are the current liability and non-current liability.

Current liability normally refers to the liability that expects to be paid in less than one year from the recording date.

For example, if the entity purchases the car in June 2016 and is expected to pay in December 2016. This payable should be recorded into a current liability.

However, if the payable is expected to be paid in more than one year. It should record under non-current liability. This is because the resource that outflows from the entity is more than one year.

Here is the example of Liabilities in a financial statement:

  • Bank Loan
  • Overdraft
  • Interest payable
  • Tax payable
  • Account payable
  • Noted payable
  • Borrowing from parent company
  • Intercompany account payable
  • Salary payable

#3 Equity:

Equity is the third element of the balance sheet and it is the residual interest of assets and liabilities.

The increase or decrease of equity is depending on the fluctuation of assets and liabilities over the period.

Equity contains the resources that are contributed or are willing to contribute to the entity by the shareholder, and the retain earning or loss ( residual interest)  of the company.

For example, if the assets increase as the result of the company generating profit while the amount of liability is stable or decrease, then the equity will increase.

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The items that recorded in equity are:

  • Share capital
  • Retain earning or retain the loss
  • Revaluation gain
  • Dividends payment

Conclusion:

The element of the balance sheet contains three important elements that each of the records and presents different information. Assets record the entity resources, liabilities record the entity debt while equity presents the residual of the other two elements.