Define: Balance Sheet

Business, Legal & Accounting Glossary

Definition: Balance Sheet


Quick Summary of Balance Sheet


A statement of the financial position of an entity showing assets, liabilities and ownership interest.



What is the dictionary definition of Balance Sheet?

Dictionary Definition


A financial report that summaries a company’s assets (what it owns), liabilities (what it owes) and owner or shareholder equity; at a given time.

The balance sheet is a statement showing the financial position of a business at a certain date – usually the end of the financial year. The idea is to have a single simple document which offers a way of measuring the financial position of the business and to judge its creditworthiness and value as an investment.

The balance sheet will show the balances of the business’s accounts separated into liabilities (capital invested, creditors, reserves for tax bills, provisions for staff pensions, etc.) and assets (land, buildings, machinery, stock, cash, investments, amounts due from debtors).


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Full Definition of Balance Sheet


Balance Sheet is one of the major financial statements, the others being the income statement, statement of changes in equity and statement of cash flows. Unlike the other financial statements, the balance sheet is accurate only at one specific moment in time, usually at the close of an accounting period.

If you are a proprietor of or a partner in a small business (especially a home business) and your business has not grown to a point where you actually need an accountant, you can construct financial statements for your business on your own to find out what your business is really worth.

A balance sheet is a snapshot of the financial position of a company. On the left side are the assets, and on the right side are the liabilities and owners’ equity. Thus the balance sheet represents the fundamental accounting equation: Owners Equity (or Net Worth) = AssetsLiabilities (or Net Assets). The assets are listed in the order they can be converted to cash; the liabilities, in the order they must be liquidated. Thus the balance sheet shows whether the company is liquid, ie, whether it can meet its short-term obligations. The balance sheet also shows the company’s leverage, ie, the ratio between capital supplied by creditors and capital supplied by owners. The balance sheet has several drawbacks, however. Some asset values on the balance sheet are historical and don’t accurately reflect current values. Moreover, not all of the company’s assets (like customer loyalty) and not all of its actual liabilities (like off-balance sheet items) are reflected in the balance sheet. Despite these negatives, a balance sheet is a primary tool for both credit and equity analysts.

The first thing you have to be careful about is to make sure that you don’t mix up your personal finances.

Assets

  1. CASH. Allocate Cash for your business and separate it from your personal Cash. If possible open a separate bank account into which you will deposit all incoming funds and from which you will pay out all disbursements.
  2. CASH EQUIVALENTS OR NEAR CASH / SHORT TERM INVESTMENTS. If you start generating oodles of cash from your business, don’t let it lie idle in a checking account. Place it in a time deposit (e.g., 30 / 60 / 90 /etc days). Keep it separated from your personal cash. If you need it for your personal expenses, record it as a withdrawal from the business’ Cash and a Drawing from the business’ Equity.
  3. ACCOUNTS RECEIVABLE. One way of growing your business is to extend credit to customers. However, be sure they are reliable and will pay on the due date.
  4. ALLOWANCE FOR BAD DEBTS or DOUBTFUL ACCOUNTS. If you happen to extend credit to somebody unreliable (e.g., has not been able to pay for as long as 90 days or more), take the amount out of ACCOUNTS RECEIVABLE and record it as an allowance in the Balance Sheet and as an EXPENSE in the Income Statement (how to construct a Small Business Income Statement will be discussed in later posts).
  5. INVENTORIES. In this account, list the cost of all goods (not the selling price) already produced and ready for sale.
  6. PREPAID EXPENSES or SUPPLIES. Into this account goes payments of expenses in advance (e.g., insurance) and supplies not yet consumed (e.g., raw materials not yet turned into finished products).
  7. LONG TERM INVESTMENTS. Consider placing your surplus cash in long term financial instruments (bonds, stocks, etc). Some bonds (held for 5 or more years) are tax-free.
  8. LAND / BUILDING. Consider owning your own place of business.
  9. FURNITURE & FIXTURES / EQUIPMENT. Consider improving your business premises (impressive reception area, customers’ lounge, etc) and upgrading your equipment.
  10. ACCUMULATED DEPRECIATION. Depreciation can be a useful tax shield, depending on the treatment (please refer to UNDERSTANDING ACCOUNTING TALK 8: Balance Sheet Assets).
  11. INTANGIBLE ASSETS. Spend some of your surplus cash in building a brand name (catchy & memorable corporate / product logo, mascot, high profile endorser, etc). More in UNDERSTANDING ACCOUNT TALK 9: Noncurrent Assets.

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Examples of Balance Sheet in a sentence


Mercedes needed a strong balance sheet.

Draw up a balance sheet and profit and loss account for Google.

Companies need to focus on both sides of the balance sheet: spending and earning, debits and credits.



Cite Term


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https://payrollheaven.com/define/balance-sheet/
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Balance Sheet. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. April 05, 2020 https://payrollheaven.com/define/balance-sheet/.
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Balance Sheet. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/balance-sheet/ (accessed: April 05, 2020).
American Psychological Association (APA):
Balance Sheet. PayrollHeaven.com. Retrieved April 05, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/balance-sheet/

Definition Sources


Definitions for Balance Sheet are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 23rd March, 2020