Balance Sheet

In accounting, a Balance Sheet—also known as a Statement of Financial Position—is one of the main financial statements that presents a snapshot of a company's financial condition at a specific point in time.

The balance sheet shows a company’s assets, liabilities, and equity as of the reporting date. This report follows the fundamental accounting equation, where total assets must always equal the sum of total liabilities and equity.

This article will walk you through what a balance sheet is, its structure, types, and examples. Read on to learn more.

What Is a Balance Sheet?

A balance sheet is a key component of a company’s financial statements. It details the value of a company’s assets, liabilities, and equity at a specific moment in time. This report is essential for all types of businesses—from service-based to manufacturing—as it helps in managing the financial health of the company.

Balance sheets are commonly presented in two main formats: the horizontal format (also called "account form") and the vertical format ("report form"). The equity figures in the balance sheet are consistent with those in the statement of changes in equity, as both are derived from the net income and expenses listed in the income statement.

Key Components of a Company’s Balance Sheet

A typical balance sheet is divided into two sections. The left side lists the company’s assets—both current and non-current—while the right side includes liabilities and equity.

Here are the main components:

1. Assets

Assets are resources owned by the company, used to support its operations. Assets are categorized into current and non-current based on their expected usage period.

• Current Assets: These are assets expected to be converted into cash or used up within one year. Examples include cash and equivalents, accounts receivable, inventory, and short-term payables.
• Non-Current Assets: These are long-term assets with a useful life of more than a year. Examples include buildings, equipment, and intellectual property such as patents and copyrights. Non-current assets are typically presented net of accumulated depreciation.

2. Liabilities

Liabilities represent the company’s obligations to third parties, either short-term or long-term. These include trade payables, deferred revenue, and accrued expenses.

• Current Liabilities: Obligations due within one year. Examples include trade payables, wages, taxes payable, and notes payable within one year.
• Long-Term Liabilities: Obligations due beyond one year. Examples include long-term loans and bonds payable.

3. Equity

Equity represents the ownership interest in the company and is calculated as total assets minus total liabilities.

• Paid-In Capital: The amount of capital contributed by shareholders. This capital can be used for operational needs or asset purchases.
• Retained Earnings: Profits not distributed as dividends and accumulated over time. Retained earnings form a crucial part of equity.

Balance Sheet Formula and Structure

The basic formula of a balance sheet is:

Assets = Liabilities + Equity

This formula helps determine the normal position of accounts. For example, when capital is injected, cash increases (debit), and equity increases (credit). Conversely, if debt is repaid using cash, liabilities decrease (debit), and cash decreases (credit).

It’s critical to ensure the balance sheet is always balanced—total assets must equal total liabilities and equity.

Read also: Understanding the Annual Report: Purpose and Contents

Examples of Balance Sheet Formats

Balance sheets are generally presented in two formats: account form (horizontal) and report form (vertical).

Example: Account Form Balance Sheet

The account form presents assets on the left side, and liabilities and equity on the right side. Below is an example of the account form layout:

PT TUAN JUJUR
As of October 31, 2023

Assets are shown on the left, while liabilities and equity are on the right. This format offers a side-by-side view of financial position and funding sources.

Example: Report Form Balance Sheet

The report form (staffel) presents balance sheet items in a top-down layout, starting with assets, followed by liabilities, and ending with equity.

PT TUAN JUJUR
As of October 31, 2023

Large companies often prefer the vertical format for its scalability, while the horizontal format is easier to interpret for businesses with fewer accounts.

Steps to Prepare a Balance Sheet

Creating a balance sheet involves the following steps:

1. Gather Transaction Data: Collect all financial transactions during the accounting period.
2. Reconcile Accounts: Ensure all accounts are accurate and updated.
3. Classify Accounts: Categorize accounts into assets, liabilities, and equity.
4. Calculate Ending Balances: Ensure total assets equal total liabilities plus equity.
5. Prepare the Balance Sheet: Choose either the vertical (report) or horizontal (account) format.
6. Review and Adjust: Double-check for errors and make necessary adjustments.
7. Finalize Report: Present the final balance sheet to internal or external stakeholders.
8. Audit (if necessary): Some balance sheets may require external auditing for validation.

Ensure your balance sheet complies with applicable accounting standards and accurately reflects your business’s financial position.

That’s a complete overview of the balance sheet: definition, structure, types, and real-world examples. While preparing one can be time-consuming, don't worry—Opaper offers free tools to help you create a professional business balance sheet with ease. Download our free Excel balance sheet template specifically designed for restaurant businesses to monitor cash flow efficiently using our zero-cost spreadsheet tool.