3.2. The balance sheet

The balance sheet states a company’s assets, liabilities and shareholders’ equity at a given moment, offering a clue of what the company owns and owes, along with what has been invested by the equity holders.

If the income statement provides a perspective of how the company has evolved in the past period, the balance sheet gives a static perspective of the company’s finances and value. The balance cannot demonstrate the trends and performance of the company (other than stating the year’s net income). To understand where the company is standing, the balance sheet should only be compared with those of other businesses in the same industry at the same period.

The Balance sheet is divided into three main groups of accounts:

  • Assets: items (or rights) owned by the company that are regarded to having an economic value. As resources with economic value, assets can be used to meet the company’s debts and other commitments.
  • Equity: value that can attributable to a business’ owners, the equity holders. It is also known as “net assets,” because it is equivalent to the total assets of a company deducted from all liabilities.
  • Liabilities: lists what a company owes to thirds parties. It includes bills to suppliers, bonds, bank debt, among other creditors.

As the name indicates, the balance sheet must balance out, meaning that the following must be always true:

This equation means that assets the company holds must equal the financing of those assets.

As in the income statement, the elements of the balance sheet are subdivided into several smaller accounts. The accounts may vary according to the industry and specific national accounting rules, although most general rules of accounting are similar amongst the different national regulation.

CASFLO’s Balance sheet

This is how CASFLO APP Balance sheet looks like:

 Account Type Example 
ASSETS    
Tangible asset + 337.250,00
Intangible asset + 872.583,33
Other noncurrent assets + 250,00
Noncurrent assets = 1.210.083,33
Inventories + 9.668,50
Clients + 161.718,99
Government receivables + 0,00
Other current assets + 1000,00
Cash and deposits + 194.305,21
Current assets = 366.692,69
TOTAL ASSETS = 1.576.776,03
EQUITY
Issued capital + 500.000,00
Other equity instruments + 39.900,00
Other equity changes + 3.000,00
Retained earnings + 576.496,78
Net income + 258.686,29
TOTAL EQUITY = 1.378.083,08
LIABILITIES
Debt + 10.833,33
Other noncurrent liabilities + 1.750,00
Noncurrent liabilities = 12.583,33
Suppliers + 9.889,66
Shareholders + 39.000,00
Government payables + 111.659,00
Other accounts payables + 22.210,96
Other current liabilities + 3.350,00
Current liabilities = 186.109,62
TOTAL LIABILITIES = 198.692,95
EQUITY + LIABILITIES = 1.576.776,03

Notice on the example how the Total Assets are equal to the EQUITY + LIABILITIES.

Assets

An asset can be:

  • Physical item, such as cash, machinery, inventory, land and buildings or other things that the company holds.
  • Financial assets, such as investments in equity of other companies, bank deposits or another type of financial security.
  • A right or enforceable claim against others to receive some form of economic value (commonly cash), such as accounts receivable.
  • Right on an intangible property, such as copyright, patent, trademark, or goodwill.

The accounts of Assets are listed by their order of liquidity, which is the amount of time it would usually take to convert an asset into cash (the most liquid asset).

The ordering of the assets on a balance sheet is different between the two main families of accounting standards:

  • Companies using U.S. GAAP order accounts from most liquid to the least liquid.
  • Companies using IFRS order information from least liquid to the most liquid.

Do not confuse: The order of liquidity is not used for the revenues or expenses in the income statement, since the liquidity concept does not apply to them.

Equity

Equity is the net amount of funds that were invested by the equity holders, plus accumulated net income (that has not been converted into dividends) and other adjustments. It can be calculated as the difference between assets and liabilities. Hence, from an accounting perspective, equity is the book value that the company holds for its equity holders.

Liabilities

Liabilities reflect what the company owes to third parties. It includes:

  • Loans
  • Accounts payable
  • Salaries related debts
  • Taxes and other government related debt
  • Other accounts payables

Similarly to assets, liabilities are categorized by the predicted due term:

  1. GAAP: orders liabilities from short-term to long term.
  2. IFRS: orders liabilities from long-term to short term.

Example Case: Dutch Fabric Innovations

The DFI business case simulation in CASFLOAPP provides the following balance sheet:

Assets 2020 2021 2022 2023 2024
Tangible assets 23 551 17 770 217 744 243 565 200 485
Intangible assets 149 108 138 398 127 688 116 978 106 268
Other noncurrent assets 0 0 0 0 0
Noncurrent assets 172 658 156 168 345 431 360 542 306 753
Inventories 0 179 544 387 714 742 032 1 162 837
Clients 0 246 728 537 454 1 007 275 1 585 266
Government receivables 5 410 0 0 0 0
Other current assets 0 0 0 0 0
Cash and deposits 142 722 600 068 1 396 164 3 119 924 6 372 876
Current assets 148 131 1 026 340 2 321 331 4 869 231 9 120 978
Total assets 320 789 1 182 507 2 666 762 5 229 773 9 427 731
Equity 2020 2021 2022 2023 2024
Issued capital 100 000 200 000 300 000 300 000 100 000
Other equity instruments 100 000 50 000 0 0 0
Other equity changes 0 0 0 0 0
Retained earnings 0 -72 721 14 403 574 089 2 081 535
Net income -72 721 87 125 559 685 1 507 446 2 918 994
Total equity 127 279 264 403 874 089 2 381 535 5 100 529
Liabilities 2020 2021 2022 2023 2024
Bank loans 0 117 000 105 000 93 000 81 000
Other noncurrent liabilities 0 0 0 0 0
Noncurrent liabilities 0 117 000 105 000 93 000 81 000
Supliers 40 189 535 204 1 082 648 1 999 618 3 060 107
Shareholders loan 100 000 225 000 325 000 175 000 115 000
Government payables 0 40 900 213 349 560 451 1 071 096
Other accounts payables 53 322 0 66 677 20 169 0
Other current liabilities 0 0 0 0 0
Current liabilities 193 511 801 104 1 687 674 2 755 238 4 246 202
Total liabilities 193 511 918 104 1 792 674 2 848 238 4 327 202
Equity + Liabilities 320 789 1 182 507 2 666 762 5 229 773 9 427 731

Example case: Golden Days

The Golden Days business case simulation in CASFLOAPP provides the following balance sheet:

Assets 2019 2020 2021 2022 2023
Tangible assets 5 142 24 320 17 200 26 645 18 406
Intangible assets 0 0 0 0 0
Other noncurrent assets 50 000 50 000 50 000 50 000 50 000
Noncurrent assets 55 142 74 320 67 200 76 645 68 406
Inventories 0 0 0 0 0
Clients 0 59 116 117 822 145 052 162 370
Government receivables 0 0 0 0 0
Other current assets 0 0 0 0 0
Cash and deposits 132 602 310 114 652 934 871 882 1 155 554
Current assets 132 602 369 230 770 756 1 016 934 1 317 923
Total assets 187 744 443 550 837 956 1 093 579 1 386 329
Equity 2019 2020 2021 2022 2023
Issued capital 200 000 400 000 500 000 500 000 500 000
Other equity instruments 0 0 0 0 0
Other equity changes 0 0 0 0 0
Retained earnings 0 -36 968 -15 585 150 951 368 272
Net income -36 968 21 383 166 536 217 321 249 310
Total equity 163 032 384 415 650 951 868 272 1 117 583
Liabilities 2019 2020 2021 2022 2023
Bank loans 0 0 0 0 0
Other noncurrent liabilities 0 0 0 0 0
Noncurrent liabilities 0 0 0 0 0
Supliers 13 808 25 533 75 419 88 503 101 899
Shareholders loan 10 000 20 000 40 000 40 000 60 000
Government payables 0 9 164 71 373 93 138 106 847
Other accounts payables 904 4 438 214 3 666 0
Other current liabilities 0 0 0 0 0
Current liabilities 24 712 59 136 187 005 225 307 268 747
Total liabilities 24 712 59 136 187 005 225 307 268 747
Equity + Liabilities 187 744 443 550 837 956 1 093 579 1 386 329

Next Section: 3.2.1. Tangible assets