Balance Sheet:
The balance sheet measures the financial position of the business at a particular point in time. It is also called Statement of Financial Position.
The balance sheet is a statement of assets, liabilities and owner's equity. The balance sheet shows what a business owns versus what the business owes.
Simply put, the balance sheet follows the fundamental accounting equation of:
ASSETS = LIABILITIES + OWNERS EQUITY
Assets can be described as what the business has under its control. Liabilities are what the business owes to parties outside of the business (creditors, banks). Owner's equity is the portion of the values of assets not covered by the value of the liabilities.
Consider your house. It is an asset, owned by you and financed partly by a bank via a mortgage.
If the house is worth $450,000 and the outstanding balance of the housing loan was $250,000, your balance sheet would look as follows:
ASSETS ($450,000) = LIABILITIES ($250,000) + OWNER'S EQUITY ($200,000)
Some terminology used in the context of the balance sheet includes:
- Current Asset: a short term asset available to be used by the business generally at no longer than 12 months notice. Examples include cash at bank.
- Non-Current Assets: a long term asset. Generally cannot be turned into cash within 12 months. Examples include buildings that the business owns or plant and equipment.
- Current Liabilities: short term liabilities, usually payable within 12 months. Examples include trade debts (accounts payable), short term borrowings.
- Non-current Liabilities: long term liabilities generally not payable within 12 months. Examples include long term debt (such as mortgage finance to purchase property).
- Capital: the amount invested in the business by the owner. This amount, in effect, is owed by the business to the owner.
A typical balance sheet could look as follows:
Brown Partner's Real Estate
Balance Sheet as at 30 June 2008
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Assets ($)
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Liability and Owner's equity
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Cash 100,000
Debtors 20,000
Deposits 6,000
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Creditors 20,000
Bank Overdraft 5,000
Other 12,000
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Total Current Assets 126,000
Equipment/Fit out 80,000
Motor Vehicle 20,000
Total Non-Current Assets 100,000
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Total Current Liabilities 37,000
Bank Loan 25,000
Total Non-Current Liabilities 25,000
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Capital 84,000
Profit YE 30/6/08 80,000
Owner's Equity 164,000
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Total Assets 226,000
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Total Liabilities & Equity 226,000
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