How does a business identify its financial position at any one time? This is why we have
the balance sheet!
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at the balance sheet.
As we have seen on the previous videos on the income statement, the income statement
reports the profit or loss in a given period.
The income statement is one report within a group of financial statements that will
be produced by a company for each period.
Another financial statement which is fundamental and goes hand in hand with the income statement,
is the balance sheet.
The balance sheet, which is also known as the statement of financial position, shows
a summary of the businesses assets, liabilities and shareholders’ equity at a given time.
In other terms, the balance is a snapshot of what a company owns and owes, and the amount
invested by shareholders.
The balance sheet can be split into three main sections and they are assets, liabilities
and equity.
The difference between the total value of assets and total value of liabilities equals
to the equity of the business. Equity can also be known as net assets, net worth or
capital.
The structure of the balance sheet closely follows the layout and function of the accounting
equation.
You can extend your knowledge and look at this in more depth in our video on “What
is The Accounting Equation”.
Let’s now have a look at how the balance sheet looks.
At the top we have the title as The Balance Sheet for ABC Ltd for y/e 31/12/2017
The title is followed by the assets section and this can be split further into non-current
assets and current assets.
Non-current assets are assets that will be in the business for the long term and usually
more than one year. For example, property, equipment and motor vehicles.
And we have current assets which will be the short term assets which are likely to be in
the business for less than one year.
The current assets are usually listed in terms of how “liquid” they all are. This looks
at how easily or quickly the asset is or can be turned to cash.
The most liquid asset is placed at the top of the current asset section and most of the
time the current assets will be listed in terms of liquidity on the balance sheet as
cash, debtors, inventory and prepayments.
We then have the liability section which is broken down into non-current liabilities and
current liabilities.
Non current liabilities are in the business for more than one year and consist of mortgages
and long term loans. And current liabilities are in the business for less than a year and
these consist of creditors, short terms loans like bank overdrafts and accruals.
Finally, we have the equity section which consists of the owners’ equity and retained
earnings.
Then the net assets values should equal or balance to the equity of the business.
So that was the explanation of the balance sheet. If you enjoyed it, press the like button.
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