Finance for Newbies: The Balance Sheet

The Balance Sheet is a statement of what the company owns and what it owes. It is a snapshot of a company's assets and liabilities on a particular date. Note that the balance sheet, unlike the income statement, applies to a single point in time. You always have a balance sheet as of say, 31 March 2007. The income statement, on the other hand, would read as say, from 31 January 2007 to 31 March 2007.

Now, whatever the company owns are called Assets. This may include building, machinery, cash, receivables, etc.

Whatever the company owes others are called Liabilities. This includes bonds, debentures, bank loans, etc.

The other important component of the balance sheet is Shareholder's Equity which represents the total equity capital and other reserves of the company. In fact shareholders' equity can be represented as follows:

Shareholders' equity = Total assets - Total liabilities

Irrespective of the format used, here's what a balance sheet looks like:

ASSETS
---------
Current Assets (short-term, liquid assets)
Accounts Receivable (debtors)
Cash at hand and in Bank
Inventory (raw material/work-in-progress)

Fixed Assets
Plant, Machinery, Building (less depreciation)
Goodwill
Investments (long term)
Deferred taxes

LIABILITIES
----------------
Current Liabilities (short term liabilities)
Accounts Payable (creditors)
Short term Loans
Provisions for Taxes

Long Term Liabilities
Debt Securities (debentures/notes/bonds)
Bank Loans

SHAREHOLDERS' EQUITY
-------------------------------
Share Capital
Retained Earnings
Capital Reserves
Other Reserves

Here's a link to a sample balance sheet.