Chapter 6 Balance Sheet
1. Explain the nature and purpose of balance sheet
2. Prepare a classified balance sheet
1. The purpose of balance sheet
A balance sheet is a snapshot of a business’ financial condition at a specific moment in time, us ually at the close
of an accounting period. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets
and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money
market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. An asset is
anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of
A balance sheet helps a small business owner quickly get a handle on the financial strength and capabilities of
the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs
and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?
Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Is the
receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectible? Has
the business been slowing down payables to forestall an inevitable cash shortage?
2. Classification of the statement
2.1 Title section
(a) Name of owner As with the profit and loss statement, a balance sheet must show the name of the owner
and, where applicable, the business name.
(b) Date of report A balance sheet is prepared at a particular time rather than over a period of time as in the
case of a profit and loss statement. For this reason, it is important to include the words 'as at' before the
appropriate date, which also must be shown on the report.
2.2 Assets section
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for
obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery,
are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.
(a) Current assets
Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current
assets would be checking or money market accounts, accounts receivable, and notes receivable that are due
within one year’ time.
Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
This is money owed to the business for purchases made by customers, suppliers, and other vendors.
Notes receivables that are due within one year are current assets. Notes that cannot be collected on within
one year should be considered long-term assets.
(b) Non-current assets—these are assets which normally assist in generating revenue for the
business. The benefits from these assets usually extend over several accounting periods. Non-
current assets fall into three main categories:
• Fixed These are normally non-current assets of a physical nature.
Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered
an asset that never wears out.
Buildings are categorized as fixed assets and are depreciated over time.
This includes office equipment such as copiers, fax machines, printers, and computers used in your
This figure represents machines and equipment used in your plant to produce your product. Examples of
machinery might include lathes, conveyor belts, or a printing press.
This would include any vehicles used in your business.
Total fixed assets
This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.
• Intangible These are normally non-current assets of a non-physical nature, for example, a
franchise (a right to trade in a certain area) or goodwill (in simple terms, the value placed on
the good trading name of a business).
• Investments This section includes such items as investments in shares, long-term loans made to
persons and organizations, long-term deposits in banks and other financial institutions.
This figure represents the total dollar value of both the short-term and long-term assets of your business.
2.3 Liabilities section
This comprises the following amounts owed by the business to outside parties:
(a) Current liabilities—these include all liabilities which are due and payable within 12 months.
Examples include creditors, bank overdrafts and sales tax payable.
This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other
vendors. Accounts payable can include supplies and materials acquired on credit.
This represents money owed on a short-term collection cycle of one year or less. It may include bank notes,
mortgage obligations, or vehicle payments.
Accrued payroll and withholding
This includes any earned wages or withholdings that are owed to or for employees but have not yet been
Total current liabilities
This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time
(b) Deferred liabilities—these are liabilities which are not due and payable within a 12-month
period. Examples include mortgages and long-term loans.
These are any debts or obligations owed by the business that are due more than one year out from the
Mortgage note payable
This is the balance of a mortgage that extends out beyond the current year. For example, you may have paid
off three years of a fifteen-year mortgage note, of which the remaining eleven years, not counting the
current year, are considered long-term.
2.4 Owners' equity
Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up of the initial investment in the
business as well as any retained earnings that are reinvested in the business.
This is stock issued as part of the initial or later-stage investment in the business.
These are earnings reinvested in the business after the deduction of any distributions to shareholders, such
as dividend payments.
Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the
remaining monies that are owed to shareholders, including retained earnings reinvested in the business. 3.
Sample balance sheet
December 31, 2005
Current Assets Current Liabilities
Cash $ 2,100 Notes Payable $ 5,000
Petty Cash 100 Accounts Payable 35,900
Temporary Investments 10,000 Wages Payable 8,500
Accounts Receivable -
40,500 Interest Payable 2,900
Inventory 31,000 Taxes Payable 6,100
Supplies 3,800 Warranty Liability 1,100
Prepaid Insurance 1,500 Unearned Revenues 1,500
Total Current Assets 89,000 Total Current Liabilities 61,000
Investments 36,000 Long-term Liabilities
Notes Payable 20,000
Property, Plant & Equipment Bonds Payable 400,000
Land 5,500 Total Long-term Liabilities 420,000
Land Improvements 6,500
Equipment 201,000 Total Liabilities 481,000
Less: Accum Depreciation (56,000)
Prop, Plant & Equip - net 337,000
Intangible Assets STOCKHOLDERS' EQUITY
Goodwill 105,000 Common Stock 110,000
Trade Names 200,000 Retained Earnings 229,000
Total Intangible Assets 305,000 Less: Treasury Stock (50,000)
Total Stockholders' Equity 289,000
Other Assets 3,000
Total Liabilities & Stockholders'
Total Assets $770,000 $770,000
The notes to the sample balance sheet have been omitted.