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.

Next Section: 3.2.1. Tangible assets