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Balance Sheet (Statement of Financial Position)
A balance sheet, also referred to as Statement of Financial Position, is a statement
that exhibits the assets and liabilities of a business enterprise prepared at a
particular date. Since even a single transaction will make a difference to some
of the assets or liabilities, the balance sheet is true only at a particular point
in time. This is the significance of the word “as at”. At end of each accounting
period, every business enterprise prepares a balance sheet to have a clear understanding
of its assets and liabilities, which indicate the financial position of the concern.
It depicts the financial position of an enterprise in a snapshot.
Balance sheet is prepared from the point of view of the business (as a separate
entity, distinguished from its owners). Another way to understand the balance sheet
is to consider it as a statement of sources of funds (i,e liabilities) and utilization
of funds (i,e assets). Of all the elements of financial statements, balance sheet
is the only element that is prepared as at a particular date as opposed to a particular
period. A balance sheet comprises of three parts viz. Assets, Liabilities and Owner’s
Equity.
The three main characteristics of a balance sheet are:
- It is prepared at a particular date and not for a period
- The balance sheet is always prepared after the income statement
- Since capital always equals the difference between assets and liabilities, the two sides of the balance sheet must have same totals. If it is not so, there is certainly an error somewhere.
One of the major limitations of a balance sheet is that it is considered a static
document as it reflects the position of the enterprise at a moment of time. The
real position of the enterprise may be changing from day to day and the same is
not captured in the balance sheet.
Like income statement, a balance sheet can also be presented in horizontal or vertical
form. Off late, the vertical form of presentation of balance sheet and income statement
is more prevalent as opposed to the horizontal or ‘T’ form of presentation. The
example below depicts the vertical form of balance sheet.
BALANCE SHEET
As at 31 December 2009
As at 31 December 2009
| ASSETS | |
| Fixed Assets: | |
| Intangible assets | $10,000 |
| Property, plant and equipment | $25,000 |
| Investments | $20,000 |
| Loans and advances | $10,000 |
| Total fixed assets | $65,000 |
|
|
|
| Current Assets: | |
| Cash and cash equivalents | $12,000 |
| Accounts receivable | $ 8,000 |
| Inventories | $ 5,000 |
| Prepaid expenses | $ 3,000 |
| Investments held for trading | $11,000 |
| Other current assets | $ 6,000 |
| Total current assets | $ 45,000 |
|
|
|
| Total assets | $ 110,000 |
|
|
|
| LIABILITIES AND SHAREHOLDERS' EQUITY | |
| Long-term liabilities | |
| Bonds | $20,000 |
| Debentures | $20,000 |
| Bank loans | $10,000 |
| Total long-term liabilities | $50,000 |
|
|
|
| Current liabilities | |
| Accounts payable | $10,000 |
| Provisions | $ 5,000 |
| Other payables | $ 5,000 |
| Total current liabilities | $20,000 |
|
|
|
| Total liabilities | $70,000 |
|
|
|
| Shareholders' equity | |
| Share capital | $20,000 |
| Reserves | $10,000 |
| Retained earnings | $10,000 |
| Total shareholders' equity | $40,000 |
|
|
|
| Total liabilities and shareholders' equity | $110,000 |
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