The Balance Sheet

Even if we are not in finance, being familiar with the balance sheet as one of the main financial statements showing a financial status of a company can be very useful.

A company’s balance sheet is a picture of a company’s financial condition at a single point in time, usually the 12-month period of its financial year. The information it gives is divided into details about its assets and liabilities which will be explained below.

To put it simply, an asset is everything that a company owns and that has the power to earn money for a business. According to how quickly they can be turned into cash, assets are divided into:

• Current assets: cash, securities, stock (materials, unfinished and finished goods), accounts receivable or debtors (money from sales the company has not yet received).

• A company’s fixed assets are equipment, machinery, buildings or land it owns.

Intangible assets are not physical in nature and are therefore difficult to value. They involve things such as goodwill: a company’s good reputation with existing customers, patents, licenses, concessions and so on.

All fixed assets (except land) are shown on the balance sheet at original cost minus any depreciation. Depreciation is accounting practice which takes into consideration the fact that some assets, such as machinery or equipment lose value over time because they wear out and become obsolete. The value of the equipment is written down each year and written off completely at the end. The value of the asset at any time is its book value. This may or may not be its market value, i.e. the amount that it could be sold for at any time.

Everything that a business owes are its liabilities. In other words, liabilities are company’s debts to suppliers, lenders, bondholders, the tax authorities etc.

Current liabilities (or short-term liabilities) are debts that have to be paid within a year:

• Accounts payable or creditors is the amount a company may owe to suppliers

• Overdrafts

• Interest payments

• Tax payable

Long-term liabilities are debts that have to be paid in more than a year from the date of the balance sheet, for example bank loans and bonds.

Companies which have their shares listed on the stock exchange need to include one more item in their balance sheet: shareholder’s equity. It is a net worth of the business after all of its obligations have been met. It includes the capital they have invested (share capital or equity) and the profits that have not been paid out in retained earnings to shareholders over the years, but have been kept by the company as provisions, also called reserves.

Exercise 1: Fill in this simple balance sheet with the following terms: stock, goodwill, retained profit, raw materials and stock, vehicles and equipment, creditors, debtors, investments, cash, tax payable, amount set aside for future liabilities, share capital, land and buildings, accrued expenses.