What is Balance Sheet? and Format of Balance Sheet
Balance is the statement that indicates the financial strength and financial health of a business entity. Therefore, it is also termed as “the statement of the financial position”. It is prepared on a specific date (e.g. as on December 31, 2018), usually at the end of the accounting period, to disclose the net worth of the business.
In Pakistan and several other countries, it is also known “Trading and Profit and Loss Account.”
Balance Sheet includes the ending balances of three important elements: the assets, the liabilities and the capital (owner’s equity). In other words, we can say it is an extension and comprehension of the general accounting equation.
Resources = Sources
Assets = Equities
Assets = Liabilities + Capital
Items of Balance Sheet
Assets are consist of those valuables, tangibles and intangibles, possessed by the business on the date of preparing the balance sheet. These assets are purchased with an intention to be utilized in the future business operation for generating revenues. In the balance sheet, Assets, generally, are shown in the order of their liquidity; i.e. current assets appear first followed by the fixed assets.
- i) Current Assets: Assets that are utilized within one accounting period and their benefits expire in a year are termed as current assets. For example cash, accounts receivables, office supplies, prepaid rent etc
- ii) Fixed Assets: In accounting, assets having life spend of more than one year are termed as Fixed Assets. In some countries of the wolrd they are also known as the plant assets. For example furniture, building, automobiles, plant and machinery etc
Liabilities are the amounts, which a business must pay to its creditors for the supply of goods and services or loans. For example salaries and taxes payable, bank overdrafts, mortgage payable, notes payable, debentures etc.
- i) Current Liabilities: current liabilities are those, which are borrowed with a condition to return them within one accounting period (one year). e.g. Accounts Payable, Salaries and Taxes Payable, Unearned Revenues, bank overdrafts etc.
- ii) Long-term Liabilities: Those liabilities that must be paid after one year are termed as Long-term liabilities. The settlement period of these liabilities is more than one year. e.g. Mortgage Payable, Debentures etc.
Capital refers to the amount of cash and other property which the owner invests in a business in the form of cash or other assets. Capital represents the share of the owner in the assets of the business. Therefore, they are also termed as the owner’s equity.
Note: The proper classification of the items of the balance sheet is necessary for the accurate interpretation of the final results
Format of balance sheet
Balance sheets are prepared in two main forms depending upon the nature and size of the business entity.
1. Vertical or Report Form:
In the vertical or report form balance sheet, all the items of the balance sheet appear vertically below each other.
2. Horizontal or Account Form
The accounts form or horizontal balance sheet discloses all the items of the statement horizontally. The assets are shown the left-hand side and the equities (capital and liabilities) on the right-hand side the statement.