Basic Balance Sheet Statement

Introduction to the Balance Sheet

The basic balance sheet is one of the main accounting statements. The statement shows a snapshot of the assets, liabilities and equity of the business at a specific point in time, usually at the end of an accounting period.

The balance sheet is sometimes referred to as the ‘Statement of Financial Position’.

Balance Sheet Layout

The statement can be shown in either a vertical balance sheet format or a horizontal balance sheet format as indicated in the diagram below.

basic balance sheet layout

In the vertical layout assets are shown above liabilities and equity, in the horizontal layout assets are shown on the left and liabilities and equity on the right. The statement must always balance and satisfy the basic accounting equation:
Assets = Liabilities + Equity

Statement Format

The layout of a simple statement of financial position for a company for annual reporting purposes is legally defined. However, for management account purposes the layout should be in the format most useful for managing the business. The example below shows a typical and useful format for management purposes.

Example Basic Balance Sheet at 31 December 2018
Cash 30,000
Accounts receivable 300,000
Inventory 20,000
Current assets 350,000
Long term assets 450,000
Total assets 800,000
Accounts payable 160,000
Other liabilities 75,000
Current liabilities 235,000
Long-term debt 165,000
Total liabilities 400,000
Capital 150,000
Retained earnings 250,000
Total equity 400,000
Total liabilities and equity 800,000

Notice how the statement is at a specific date (in this case 31 December 2018), and satisfies the accounting equation, total assets (800,000) of the business are equal to the liabilities (400,000) plus the equity (400,000) in the business.

Basic Balance Sheet Example

As an example, the Annual Report for Apple below shows a typical basic statement of financial position format for a listed company.

apple basic balance sheet
 

What the Balance-Sheet does not show

The balance-sheet does not show the market value of the business. For example, the assets, particular the long term assets are normally shown at cost or revaluation at a point in time, they do not show the current market value of those assets.

Items such as intangibles, for example the value of the knowledge and skills of employees, are not reflected in the balance-sheet position.

The Need to Understand the Statement of Financial Position

Most businesses tend to concentrate on the income statement and fail to get to grips with the statement of financial position.

The basic balance sheet is important for many reasons:

  • Management should use the financial statement to help identify whether the need for working capital (inventory plus accounts receivable less accounts payable) is growing, and how that need is being funded (equity, overdraft, loans etc).
  • Suppliers use the statement of financial position to identify the net assets and cash position of the business to decide whether to supply on credit terms.
  • Bank managers utilise the statement, as they base their lending ratios on certain aspects of it, for example the current ratio = current assets / current liabilities is used to determine liquidity and the risk of non repayment of a debt.
  • Investors use the balance sheet to decide whether to invest or not and at what price. For example they will look at the debt / equity ratio to determine the level of risk involved.

Any number of people could be using your statement of financial position to make decisions about your business. It is important that you have an understanding of what information the balance-sheet position is providing and what that information is telling you.

Last modified April 2nd, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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