Balance Sheet never been that easy to understand

Balance Sheet/Statement of Financial Position

Balance Sheet is financial statement that represents company’s assets, liabilities and shareholders’ equity at specific point in time. It is the snapshot of what company owns, owes and worth. The easiest way to understand this concept is shown in the table below.

The Balance sheet itself only shows the company’s finances at a moment in time. In order to look trends over period of time, we have to refer to Profit and Loss Statement and Cash Flow Statement.

Assets

Assets are what business acquired and have at them at the specific period of time. They are divided in to current and non-current assets and consist of the following:

Liabilities

Liabilities of the company is the amount that company liable to the third parties at the specific period of time, whether it is to debtors, suppliers, or advances received from clients for the product or services that have not been yet provided. They are all so divided into current and non-current liabilities and comes in the order as stated below.

Shareholders’ Equity

Shareholders’ Equity is difference between assets and liabilities. It is how much the shareholders would get if they were to sell all the assets and pay all the liabilities owed with that money. It consists of the followings:

Shares capital — the value of funds invested by the shareholders to the business.

Retained earnings — the total amount of net profit the company decides to keep in the business. It consists of the Net Profit from previous periods retained in the business and Net Profit made this period.

It is important to note that balance sheet adheres to this equation and following examples makes easy to understand it:

Assets-Liabilities=Shareholders’ Equity

If the company to take loan from bank for the amount of 3,000$:

Assets: Cash and Cash Equivalent increases in the amount of 3,000$

Liabilities: Short Term Debt/Long Term Debt owed also increases by 3,000$

If the Shareholders invest 10,000$ to the company:

Assets: Cash and Cash Equivalent increases in the amount of 10,000$

Shareholders’ equity: Share Capital also increases by 10,000$

In order to understand link between other balance sheet accounts and link between Balance Sheet and Profit and Loss account, please see my Article on Profit and Loss Statement.