Balance sheet

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The balance sheet is a statement showing a business’s financial position at the end of an accounting
period. It portrays the financial position of the organization at a particular point in time.
The balance sheet lists all the assets, liabilities,and owner’s equity of an entity as of a specific
date. It is classified into major groupings of assets and liabilities in order to facilitate analysis, for
example, current assets, fixed assets, current liabilities,non-current liabilities. The balance sheet
is like a snapshot of the entity. For this reason it is also called the statement of financial position.
The balance sheet is useful to financial statement users because it indicates the resources the entity
has and what it owes.A simple example of a business’s balance sheet is given below:
SUNSET RESTAURANT
Balance Sheet as at 30 June 200X, in
pounds sterling
Current assets
Cash at bank 12,376
Beverage (non-alcohol) inventory 4,135
Alcohol inventory 11,351
Food inventory 8,120
Other stocks inventory 540
Accounts receivable 2,375
Total current assets 38,897
Non-current assets
Restaurant building 523,000
Less building write-off (98,000)
Equipment 328,540
Less accumulated depreciation (35,800)
Total non-current assets 717,740
Total assets 756,637
Current liabilities
Interest payable 7,846
Accounts payable 10,749
Total current liabilities 18,595
Non-current liabilities
Bank loan 535,000
Total non-current liabilities 535,000
Total liabilities 553,595
Net assets 203,042
Owner’s equity
Capital 110,000
Retained earnings 93,042
Total owner’s equity 203,042
Owner’s equity 203,042
Within the balance sheet, important terms are: current assets; fixed (or non-current) assets;
current liabilities; long-term liabilities; working capital and owner’s equity.
Current assets normally have a life of one year or less and represent future economic benefits
controlled by the business as a result of past transactions or other events and are not intended
for continuing use in the business. Current assets include cash and inventory (stock) that will be
converted to cash or consumed. Current assets also include prepayments and marketable securities.
The conversion to cash or consumption is expected to occur within one year or the normal
operating cycle of the entity, whichever is longer.A fixed asset is an item that has physical substance
and a life in excess of one year. Fixed assets are intended to be retained in the business
beyond the period of current operations and for the purpose of earning revenue and are not
intended for resale to customers in the ordinary course of business. Fixed assets are those assets
that are intended for use on a continuing basis for the purpose of the business’s activities. Fixed
assets are usually referred to as property, plant,and equipment.Current liabilities are obligations payable
within one year or the normal operating cycle of the business. A current liability requires payment
out of a current asset, or the incurrence of another short-term obligation. Current liabilities
are obligations that are expected or could be required to be discharged on demand or within
one year. Examples are accounts payable, such as telephone and bank interest payments, and
accrued expenses payable, such as salaries and taxes.
Long-term liabilities are amounts that fall due after the expiration of the next normal operating
cycle, that is, typically after one year. They can also be described as an obligation payable in
money, goods or services for a period in excess of one year. Long-term liabilities are presented
under non-current liabilities in the balance sheet.They are liabilities that do not need to be discharged
within 12 months of the balance date.For example, if a loan has been taken out over
10 years, that portion not due within the first year is included in long-term liabilities.
Working capital is described as current assets less current liabilities, properly called net working
capital. Working capital is a measure of the long-term investment required to finance the
day-to-day operations at a given level of activity;current assets minus current liabilities. Working
capital is also seen as a measure of a business’s liquidity.Sources of working capital are net income,
increases in non-current liabilities, increases in shareholder’s equity, and decreases in noncurrent
assets.
Owner’s equity is the financing provided by the owner (or owners) and the operations of the
business. It is the interest of the owner(s) in the assets of the business represented by capital contributions
and retained earnings. Owner’s equity is the residual interest of the owner(s) in the net
assets (assets less liabilities) of the entity, and may be thought of as the owner’s residual claims
against the net assets of the entity. Thus owner’s equity is a residual claim or interest – a claim to
the assets remaining after the debts to creditors have been discharged.

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