INTRODUCTION TO BALANCE SHEET
Balance sheet depicts the financial position of a business entity at a specified moment in time (instead of for a period). It reflects the asset and the equity (liability & shareholders’ equity) holdings of an entity at an instant of time. At times, it is also referred to as statement of financial position.
It is governed by the equation –
ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY (or, OWNERS' EQUITY)
These equations lay the foundation of balance sheet and the double entry system of accounting.
DOUBLE ENTRY SYSTEM OF ACCOUNTING
Double entry system of accounting is a direct derivation of the Dual aspect principle. The principle ensures that every financial transaction recorded in books has an equal & opposite effect in at least two different accounts.
Example. XYZ Corporation uses its cash to purchase an equipment for its new manufacturing unit.
In this case, cash (an asset account) would be credited and equipment (another asset account) would be debited by the same amount. Thus keeping accounting equation balanced.
Example. Similarly, if the XYZ Corporation goes for a short term debt; its cash (an asset account) would be debited and short term debt (a liability account) would be credited by the debt amount. Thus keeping the accounting equation balanced again.
Example. If the Corporation XYZ earns sales revenue, an asset account (cash or accounts receivable) would debit and retained earnings account (stockholders’ equity) would credit.*
*Increase in sales revenue will increase the net income for the company and an increase in net income would cause an increase in retained earnings.
BALANCE SHEET FORMAT
Various accounting heads as captured on a balance sheet are highlighted as below –
Each balance sheet is accompanied by additional information under the section “Notes to Financial Statement”. It captures the necessary disclosures and information about the methodologies and assumptions under which the balance sheet is prepared.
A full fledged balance sheet for Krishna Corporation (for year ending 2020) is captured as below for reference –
Various components as captured on balance sheet can be summarized as below –
- Assets
- Current assets
- Property, Plant & Equipment (Fixed Assets)
- Intangible assets
- Investments
- Other assets
- Liabilities
- Current liabilities
- Long term liabilities
- Commitments
- Contingent Liabilities
- Shareholders’ Equity
- Paid-in Capital
- Additional Paid-in Capital
- Retained Earnings