A balance sheet shows what a company owns (assets) and owes (liabilities) at a specific point in time. It typically includes sections describing all assets, including short-term items like cash and accounts receivable, and long-term assets such as property, plant and equipment. It also includes a section for all liabilities and another for shareholder equity.
Assets
Assets include everything that a company owns that adds value to the business, such as cash, property and accounts receivable. It also includes intangible assets such as intellectual property and goodwill. Liabilities include what a company owes to others, such as taxes, payroll and mortgages. It also includes long-term debt and shareholders’ equity.
Assets are typically grouped into current and noncurrent assets on a balance sheet. Current assets are those that can be turned into cash within a year and include marketable securities, inventory and accounts receivable. Noncurrent assets are those that can’t be converted into cash in a year or less, such as property and equipment.
Regardless of how they are grouped, all assets are reported on a company’s balance sheet at cost, not market value. This is because costs are typically more accurate and less biased than market values. However, there are some areas where professional judgement may affect the figures posted to a balance sheet. For example, depreciation and inventories are subject to subjective interpretation and estimation.
Liabilities
The liabilities section of a balance sheet explains everything that your company owes to others. It can include a future sacrifice of economic benefits or an unsettled obligation from previous transactions. These include short-term and long-term debt, as well as contingent liabilities.
Current liabilities are those that will need to be paid back within one year, and they usually consist of accounts payable, taxes and a number of other items your business needs to run its operations. Larger companies might also list bank debt that will mature in a few years under this line item, as a way to finance part of their ongoing long-term operations.
Contingent liabilities are future pay-outs, such as a lawsuit or product warranties that might have to be settled at some point in time. This is not required under IFRS but is likely to be common for privately held companies. It’s also common for leased assets to be recorded as both an asset (Right of Use) and liability (present value of future lease payments). The total of all liabilities is calculated by adding up all short-term and long-term liabilities, as well as any contingent liabilities.
Shareholders’ Equity
Shareholder’s equity represents the residual value of assets that remain after subtracting liabilities. It is one of three critical balance sheet items along with the statement of cash flow and the statement of retained earnings. This concept is important when making investment decisions and determining whether the company has enough stability to take on additional debt. A positive stockholder’s equity is indicative of growth and profitability if the company does not carry too much debt. A negative stockholder’s equity, however, could indicate a bankruptcy in the future.
The shareholder’s equity is calculated as total assets minus total liabilities, and can be found on the balance sheet in the capital section. It consists of contributed capital, common stock and retained earnings less treasury shares. Contributed capital includes the initial investments in the business. Retained earnings represent accumulated profits from previous years, minus dividends paid to shareholders. Treasury shares are repurchased shares and must be deducted from the shareholders’ equity to reveal the true residual ownership in the business. Bilanz Hattingen
