Balance Sheet

What is the Balance Sheet?

Balance sheet is one of the financial statements of the company which presents the shareholders’ equity, liabilities and the assets of the company at a particular point of time and is based on accounting equation which states that the sum of the total liabilities and the owner’s capital is equal to the company’s total assets.

Balance Sheet is the “Snapshot” of a company’s financial position at a given moment and reports the amount of a company’s

  • Assets – Current assets/Long-term assets
  • Liabilities – Current Liabilities/Long-term liabilities
  • Stockholders’ (or owner’s) equity – Common stock / Retained earnings
Balance Sheet Format

Remember the most important equation while forming the Balance Sheet –

Assets = Liabilities + Shareholders’ Equity

Let’s get started.

Balance Sheet Structure

Balance Sheet

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Source: Balance Sheet (wallstreetmojo.com)

Assets are arranged on the left-hand side, and the liabilities and shareholders’ equity EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more would be on the right-hand side. However, in most cases, companies put the assets first, and then they set up liabilities and at the bottom shareholders’ equity. The total assets should be equal to the total liabilities and total shareholders’ equity.

Assets = Liabilities + Shareholders’ Equity

Balance Sheet Format is as follows –

  1. Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more
  2. Current Liabilities
  3. Long Term Assets
  4. Long Term LiabilitiesLong Term LiabilitiesLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). read more
  5. Shareholder’s Equity
Balance Sheet Format

#1 – Current Assets

Current assets are expected to be consumed, sold, or converted into cash either in one year or in the operating cycleOperating CycleThe operating cycle of a company, also known as the cash cycle, is an activity ratio that measures the average time required to convert the company's inventories into cash.read more, whichever is longer. An operating cycle is an average time it takes to convert investment in inventory back into cash. Current assets are presented in order of liquidityOrder Of LiquidityThe presentation of various assets in the balance sheet with the time it takes for each to be converted into cash is known as the order of liquidity. Cash is considered a most liquid asset, followed by cash equivalents, marketable securities, account receivables, inventories, non-current investments, loans and advances, fixed assets.read more

Assets are arranged on the basis of how quickly they can be converted into cash (means how liquid they are). That means, in the balance sheet, the first things we will put in our current assets. Under current assets, these are the items you can consider –

Other current assets also include Derivative Assets, Current Income Tax Assets, Assets Held for Sale, etc.

Current Assets will look like following –

ParticularsX (in US $)Y (in US $)
Cash 100003000
Cash Equivalent1000500
Accounts Receivable10005000
Inventories5006000
Total Current Assets1250014500

#2 – Current Liabilities

Current Liabilities are probable future payments of assets or services that a firm is obligated to make as a result of previous operations. These obligations are expected to require the use of existing current assets or the creation of other current liabilities.

Balance Sheet - Current Liabilities

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“Current Liabilities” generally include the following –

Other than that, current liabilities also include accounts payable, sales taxes payable, income taxes payable, interest payableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company's balance sheet.read more, bank overdrafts, payroll taxes payable, customer deposits in advance, accrued expenses, short-term loans, current maturities of long-term debt, etc.

Current Liabilities will look like following –

ParticularsX (in US $)Y (in US $)
Accounts Payable40003000
Current Taxes Payable50006000
Current Long-term Liabilities110009000
Total Current Liabilities2000018000

#3 – Long Term Assets

Long term assets are typically physical assets that the company owns and are employed in the production process of the firm and have a useful life greater than one year. Long term assets are not for sale to the firm’s customers (they are not inventory!)

Long-term assets can be classified into three main categories

  1. Tangible Assets: These assets have a physical existence. Assets like Real Estate, Buildings, Offices, Machinery, Furniture, Telephone belong to this category. The process of allocating the cost of tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more over the useful life is called “depreciation” (we will discuss this later)
  2. Natural Resources: These assets have an economic value derived from Earth and used up over time. Examples include Oil fields, mines, etc
  3. Intangible Assets: These assets have no physical existence, and they cannot be felt or touched or seen. Examples include trademarks, copyrights, patents, franchises, and goodwill. The cost of intangible assets is allocated to periods over which it provides benefits through a process called amortization (have a look at this detailed article on GoodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more)

Long term assets are generally reported at their carrying valueCarrying ValueCarrying value is the book value of assets in a company's balance sheet, computed as the original cost less accumulated depreciation/impairments. It is calculated for intangible assets as the actual cost less amortization expense/impairments.read more or book value. If the asset has lost its revenue-generating ability it may be written down (asset impairment) amount of written down is recorded as a loss

#4 – Long Term Liabilities

Long-Term Liabilities are obligations that are not expected to require the use of current assets or not expected to create current liabilities within one year or the normal operating cycle (whichever is longer).

#5 – Shareholder’s Equity

Stockholders’ Equity is the residual interest of the stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more in the assets of the corporation. There are two primary sources of Equity – Paid-in Capital and Retained Earnings

Balance Sheet - Shareholder's Equity

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Each share of common stock conveys certain rights to the

Shareholder’s Accounts need to be maintained for

Preferred stock has certain preferences or features not possessed by common stock

How to read the Balance Sheet?

As an investor, you need to know how to read the Balance SheetHow To Read The Balance SheetReading and understanding the balance sheet of the company includes consideration of the accounting equation, knowing different types of assets, shareholders equity and liabilities of the company and analyzing the balance sheet using ratios.read more to be able to extract the most of it.

These are the steps that can help you read it  –

Balance Sheet Example (Colgate Case Study)

# 1 – Current Assets

Balance Sheet - Colgate - Current Assets
Colgate Inventory Breakup

# 2 – Current Liabilities

  • Colgate’s Accounts payable stands at $1110 million in 2015 and $1231 million in 2014
  • Current Portion of Long-term debt was at $298 million in 2015 and $488 million in 2014.
  • Accrued Income Taxes was at $277 in 2015 and $294 million in 2014.
Colgate - Current Liabilities
  • Other accruals are close to 50% of the Total Current Liabilities.
Colgate Other Accruals

#3 – Long Term Assets

#4 – Long Term Liabilities

  • Long-Term Liabilities in Colgate’s BS include the Long Term Debt, Deferred Income Taxes, and Other liabilities.
  • The weighted average interest rate on the Long-term debt is approximately 2.1%
  • Colgate’s Long Term Debt (including the current portion) increased to $6567 million in 2015 as compared to $6132 million in 2014.
  • Other liabilities primarily include Pension and other retiree benefits and restructuring accrual
Colgate - Long Term Liabilities

#5 – Shareholder’s Equity

Colgate - Shareholders Equity

Also, you can check that Colgate’s Assets = Liabilities + Shareholders’ Equity.

Balance Sheet Example – Vertical Analysis

For understanding Colgate’s Balance sheet trends over the period of time, we can perform Vertical AnalysisVertical AnalysisVertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in percentage of the base figure. The formula is: (Statement line item / Total base figure) X 100read more. Vertical Analysis normalizes the Balance Sheet and expresses each item in the percentage of total assets/liabilities. It helps us to understand how each item sheet has moved over the years.

Vertical Analysis - Colgate Asset
Vertical Analysis - Colgate

Conclusion

Learning to read a balance sheet is important if you want to be successful as an investor. And it starts with pulling out a balance sheet of a company and reading it through and through. If it’s your first annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more reading, then please do not get intimidated. Stay put. You will master the financial analysis over a period of time.

Video on Balance Sheet

 

Recommended Articles

This has been a guide to What is Balance Sheet? Here we discuss balance sheet structure, Assets = Liabilities + Equity, Balance Sheet Analysis using practical examples of Colgate, etc. You may learn more about accounting from the following articles –