{"id":25372,"date":"2023-08-23T10:13:00","date_gmt":"2023-08-23T10:13:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=25372"},"modified":"2023-09-30T11:52:38","modified_gmt":"2023-09-30T11:52:38","slug":"balance-sheet-format","status":"publish","type":"post","link":"https:\/\/businessyield.com\/accounting\/balance-sheet-format\/","title":{"rendered":"Balance Sheet Format: Best Accounting Practices with Examples (Detailed!!!)","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
This post takes you through the best format to follow when preparing a balance sheet and basically how to read one. <\/p>\n\n\n\n
Let’s dive in without further ado…<\/p>\n\n\n\n
A company’s balance sheet summarizes its financial situation. It gives an account of where a company’s funds come from and where investments go into.<\/p>\n\n\n\n
Like you know already, lenders and shareholders are the two sources of capital for businesses. The sum invested by shareholders is referred to as equity, whereas the sum borrowed from lenders is referred to as debt. Liability, on the other hand, refers to the sum of a company’s debt and other financial commitments.<\/p>\n\n\n\n
And for the most part, companies invest their own money and borrowed money into assets that help them make money. As a result, a business’s obligations and equity must be equal to its assets. This gives you the fundamental equation for deciphering a balance sheet and deciding on a format;<\/p>\n\n\n\n
\nAssets = Liabilities + Equity<\/em><\/strong><\/p>\n<\/blockquote>\n\n\n\n
But then, before we go any further into a format, let’s take a quick look at what a balance sheet is. <\/p>\n\n\n\n
Balance Sheet Definition<\/h2>\n\n\n\n
The balance sheet, commonly known as the statement of financial position, is the accounting cycle’s third general purpose financial statement. It shows the assets, liabilities, and equity of a corporation at a specific point in time. You might think of it as a snapshot of the company on that particular day in history.<\/p>\n\n\n\n
The balance sheet, unlike the income statement, does not show activities over time. The balance sheet is a snapshot of a company’s assets, liabilities, and ownership on a given day. As a result, the balance sheet is frequently regarded as less trustworthy or informative of a company’s present financial condition than the profit and loss statement. <\/p>\n\n\n\n
On the other hand, annual income statements consider performance over a 12-month period, but the statement of financial position simply considers the financial situation on a single day.<\/p>\n\n\n\n
The balance sheet is a report version of the accounting equation, often known as the balance sheet equation, in which assets equal liabilities + shareholder’s equity.<\/p>\n\n\n\n
It displays how the business’s resources (assets) are financed by debt (liabilities) or shareholder investments in this fashion (equity). The statement of financial position is used by investors and creditors to determine how efficiently a firm can utilize its resources and how effectively it can finance them.<\/p>\n\n\n\n
Balance Sheet Format : Objectives<\/h2>\n\n\n\n
The following are the primary objectives of a balance sheet:<\/p>\n\n\n\n
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- Understanding a company’s financial situation.<\/li>\n\n\n\n
- Realizing the true value of your possessions.<\/li>\n\n\n\n
- Knowing how much money you owe and what kind of debt you have.<\/li>\n\n\n\n
- Verification of a company’s ability to pay its debts.<\/li>\n\n\n\n
- Understanding the trends in asset and liability changes.<\/li>\n\n\n\n
- Recognizing the profitability or loss of a firm.<\/li>\n\n\n\n
- Knowing how to deduct depreciation from your assets.<\/li>\n\n\n\n
- Knowing how much money you have in prepaid and unpaid expenses.<\/li>\n<\/ul>\n\n\n\n
Balance Sheet Format: Types <\/h2>\n\n\n\n
Before a format is set in place, know that you’d need to understand the two types of balance sheet out there, namely; <\/p>\n\n\n\n
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- Unclassified balance sheet.<\/li>\n\n\n\n
- Classified Balance Sheet<\/li>\n<\/ol>\n\n\n\n
In other words, it is possible to present a balance sheet format in two ways:<\/p>\n\n\n\n
#1. Balance Sheet (Unclassified)<\/h3>\n\n\n\n
In the accounting process, there are various types of balance sheets.<\/p>\n\n\n\n
An unclassified balance sheet displays all assets without any classification. Similarly, liabilities are displayed without being classified.<\/p>\n\n\n\n
However, in writing, assets’ liquidity and durability are taken into account to the highest extent possible. Liabilities, on the other hand, are written with the short and long term in mind.<\/p>\n\n\n\n
Simply put, if assets are written with liquidity in mind, long-term liabilities will come after short-term liabilities.<\/p>\n\n\n
\n<\/a>Source: IEduNote <\/a>(Unclassified Balance Sheet Format)<\/em><\/figcaption><\/figure><\/div>\n\n\n #2. Classified Balance Sheet <\/h3>\n\n\n\n
The balance sheet assets are shown first in statement form. Assets are categorized as follows:<\/p>\n\n\n\n
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- Current assets<\/li>\n\n\n\n
- Property, plant, and equipment<\/li>\n\n\n\n
- Investment<\/li>\n\n\n\n
- Intangible assets (assets that are not physical)<\/li>\n<\/ul>\n\n\n\n
Liabilities are classified into current liabilities, long-term liabilities, and owner’s equity in the later phase.<\/p>\n\n\n\n
It is self-evident that the total of assets must match the total of liabilities and owner’s equity if assets, liabilities, and owner’s equity are appropriately written.<\/p>\n\n\n\n
As a result, the equation A = L + OE is established.<\/p>\n\n\n\n
In the accounting process, there are various types of balance sheets.<\/p>\n\n\n\n
A categorized balance sheet is one in which assets are categorised as current and fixed, liabilities as short term and long term, and owner’s equity is shown separately.<\/p>\n\n\n
\n<\/a>(Classified Balance Sheet Format) <\/em><\/figcaption><\/figure><\/div>\n\n\n How Do You Read a balance sheet for a business?<\/h2>\n\n\n\n
It is necessary to first comprehend the balance sheet’s structure in order to fully understand its format. A company’s balance sheet has two portions, as shown in the equation:<\/p>\n\n\n\n
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- Assets or uses of funds<\/li>\n\n\n\n
- Liabilities and equity, i.e. sources of funds<\/li>\n<\/ol>\n\n\n\n
The assets section of the balance sheet indicates what a company has, while the liabilities side shows what it owes. Assets and liabilities are classified as either long-term or short-term.<\/p>\n\n\n\n
The assets and liabilities that are long-term remain with the company for over a year. The life span of current assets and liabilities is usually less than a year.<\/p>\n\n\n\n
The sources of funds are usually the first item on the balance sheet. It displays all of the company’s current liabilities, followed by its long-term debt and other long-term liabilities.<\/p>\n\n\n\n
The next line on a company’s balance sheet is equity. It is likewise a type of obligation, but it is presented separately because shareholders, unlike creditors, are the company’s owners. They have a stronger financial stake in the company than debtors. This increases the risk of their investment while also giving them more ownership rights in the company.<\/p>\n\n\n\n
All of the company’s assets are listed in the balance sheet’s uses of funds<\/strong><\/em> section. It reports current assets first, then long-term (or fixed) assets.<\/p>\n\n\n\n