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The Balance Sheet: Statement of Financial Position Explain

June 29, 2015 by Ed Becker

In part one of this series, we talked about what the financial statements are and what purpose they have in businesses. We also discussed the trial balance being an important part of the process of preparing the financial statements, but not actually being a statement. Here we will discuss in depth the Statement of Financial Position or the Balance Sheet.

The Balance Sheet is more accurately described as the Statement of Financial Position, the new title just has not completely converted. What the information on the balance sheet shows is the financial position and stability of a company on a specific date. It allows reviewers of the statement to assess the financial risks, credit risks and overall business risks of the company. Key Elements of The Balance Sheet: Assets An asset is something owned or controlled by the company that will benefit the company. Assets will be classified as current or non-current according to the time frame that it will deliver economic benefits. This is usually defined by one year or one accounting period. Assets are also classified on the balance sheet by type.

  • Tangible- Something physical that can be touched: land, equipment, buildings
  • Intangible- No physical traits: Goodwill
  • Inventories- Goods held for sale, raw materials and even works in progress
  • Receivables- Amounts owed to the company
  • Cash and equivalents- Cash on hand or short term investments that can be quickly liquidated

Liabilities In its simplest definition a liability is a debt. It is an obligation to pay or settle with other resources. Liabilities are also classified as current and non-current according to the time frame that they are deemed payable, again usually one year or one accounting period. Liabilities are also classified by the type.

  • Payables- Monies owed, usually to suppliers and contractors
  • Short term debt- debt that will be paid off in less than one year or accounting period
  • Long-term debt- Debt that will not be paid off within a year or one accounting period
  • Current taxes payable- This is any taxes that are due or will be due within the accounting period

EquityIs the ownership amount, the amount the company owes to its owners. The amount of equity is figured by subtracting total liabilities from total assets. So basically equity is what is left after the liabilities would be paid from the assets. Equity is listed in the following categories:

  • Share capital- Amounts invested by the owners of the company
  • Retained Earnings- net of profit or loss retained in the business after dividends
  • Revaluation Reserve- net surplus from revaluation, recognized directly in equity

The balance sheet is structured so that it is balanced. If this balance sheet does not equal zero, it indicated there was a mistake that should be fixed. The formula for balancing is assets-liabilities=equity. By reviewing and comparing the balance sheet from one accounting period to the next it is likely that trends can be seen as well as determining risk and potential problems. Next in the series the Income Statement will be discussed in depth.

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