Question: What is Balance Sheet? What are elements of Balance Sheet? Explain.

Balance Sheet

Balance Sheet is one of four financial statements each and every business organization has to prepare. Unlike other financial statements, Balance Sheet is prepared for any specific date. So, it tells about company’s financial position in a specific date. But the other three financial statements are prepared for a specific period of time. The main concept of balance sheet came from basic accounting equation.

That is – 

Assets= Liabilities+ Owner’s Equity/ Stockholder’s Equity.

So, Balance Sheet is an important financial statement that sums up a business organization’s assets, liabilities and owner’s equity and is prepared for a specific date. These three elements of balance sheet give all the stakeholders of a company an understanding as to what that company owes and owns as well as the amount of stockholder’s equity.

Balance Sheet

The reason it is called “Balance Sheet” is two sides of this financial statement balance out as a business organization has to pay all its assets to either third parties (liabilities) or to stockholders (owner).

Elements of Balance Sheet

From the definition of Balance Sheet, it is clear that a balance sheet has two sides but three elements. Assets goes to right hand side and liabilities along with Owner’s Equity or Stockholder's Equity goes to left hand site.

Following are detailed descriptions of these three elements- 

Assets-

Assets that are included in the Balance Sheet are divided into two types; Current Assets and Non-current/long term/fixed assets.

Only four things come as Current Assets- Cash and Cash Equivalents, Accounts Receivable, Inventories and Prepaid Expenses. These are called as current assets because all these can be liquidated in the short term to meet short term liabilities. Cash and Cash Equivalents refer to cash held in hand and in bank. Accounts Receivables can be collected in a short period of time. So, that is almost liquid too. Inventories would soon be converted into product and selling the products, the firm can have cash and finally Prepaid Expenses are included as Current Assets as the firm won’t have to pay those expenses again.

Non-current/ long term/ fixed assets include lot of things. Firstly Property, Plants and Equipments that the firm owns such us Land, Machinery, Buildings, Motor Vehicles, Office Equipments, Computers etc. are stated. After that Investment comes into the sequence. Investment includes land held for real estate purposes, long term securities etc. After that Intangible Assets such as Goodwill, Patent, Trademark, Copyright are stated in the balance sheet. This sequence is maintained in a formal Balance Sheet. 

Liabilities

Liabilities refer to obligation of an organization arising from past events or transactions. Liabilities too are two types; Long Term Liabilities and Short Term Liabilities. But there is no specific rule about the sequence that must be followed in mentioning liabilities in Balance Sheets.
Liabilities include Accounts Payable- an oral promise, Notes Payable- a written promise, Interest Payable, Salaries Payable, Unclaimed Dividend, Short/ long  Term Loan etc.

A liability has to be paid within a year to be regarded as Short Term or Current liability. That means the liabilities that are promised to pay within a year are called as Short Term Liabilities. On the other hand, Liabilities that can be paid after a year are regarded as Long Term Liabilities. Thus, Long Term Bonds, Leases, Pension Obligations and Notes Payable are regarded as Long Term Liabilities.

Owner’s Equity/ Stockholder’s Equity

Owners and stockholders invest their hard earn money to a business. Every single asset that is left after paying liabilities is regarded as Owner’s Equity or Stockholder's Equity. In calculating owner’s equity, net profit is added with owner’s investment or net loss is deducted from the investment. In a private or public limited company, values of common stock, preferred stock, paid-in capital in excess of par value, paid in capital from treasure stock, retained earnings etc are included in Stockholder's Equity.

So, Balance Sheet is an important financial statement for every business organization which describe financial picture of a business at a specific date. As a business owner, business student, or an employee of an organization, you need to have a complete understanding of Balance Sheet.