Understanding Balance Sheet
A balance sheet is one of the main financial statements businesses use to understand their financial position at a specific time. It tells you what a company owns (assets), what it owes (liabilities), and the difference between them (equity). This balance sheet is a critical tool for managers, investors, and anyone interested in understanding how well a business is doing financially.
In this blog, we’ll explain each part of the balance sheet with calculations, formulas, and examples so that students can grasp the concepts easily.
What is a Balance Sheet?
A balance sheet has three main sections:
1. Assets – What the company owns.
2. Liabilities – What the company owes.
3. Equity – The difference between what the company owns and owes (also called shareholders’ equity).
Assets
Assets are what the business owns, and they are divided into Current Assets and Non-Current Assets.
Current Assets
These are assets that are expected to be converted into cash or used up within one year. Let’s go through each item.
• Cash and Cash Equivalents: This represents the money the business has available right now, including cash on hand and money in the bank.
• Accounts Receivable: This is the amount customers owe the business for cars they’ve bought but haven’t paid for yet. The business expects to receive this payment in the near
future, typically within a year.
• Inventory: This includes raw materials, work-in-progress (partially built cars), and finished goods (completed cars ready for sale). It’s the value of the products the business holds
that it plans to sell.
• Prepaid Expenses: These are payments the company has made in advance for things like insurance or rent. These payments will be used up over the next year.
• Other Current Assets: This could include other short-term items like deposits or advances made to suppliers or other small assets that are expected to be used or converted to
cash within a year.
Now, let’s calculate the total of Current Assets:
• Cash and Cash Equivalents: 1,251,890
• Accounts Receivable: 3,540,000
• Inventory: 1,000,000
• Prepaid Expenses: 542,600
• Other Current Assets: 8,791,300
Total Current Assets = 1,251,890 + 3,540,000 + 1,000,000 + 542,600 + 8,791,300 = 15,125,790
So, Total Current Assets = 15,125,790.
Non-Current Assets
These are assets the company expects to use for more than one year. They are longer-term investments.
• Property, Plant, and Equipment (PPE): This includes physical assets like the factory building, machinery, and vehicles used in production. These are long-term investments and aren’t meant to be sold.
• Vehicles: These are non-physical assets like company’s transport vehicle, etc.
• Intangible Assets(Patents, Licenses): These are non-physical assets like patents, trademarks, or goodwill. They have value but can’t be touched or seen.Now, let’s calculate the total of Non-Current Assets:
• Property, Plant, and Equipment (PPE): 7,657,000
• Intangible Assets: 2,645,300
• Long-Term Investments: 5,658,902
Total Non-Current Assets = 7,657,000 + 2,645,300 + 5,658,902 = 15,961,202
So, Total Non-Current Assets = 15,961,202.
Total Assets
To find the Total Assets, we add together the Total Current Assets and Total Non-Current Assets:
• Total Current Assets = 15,125,790
• Total Non-Current Assets = 15,961,202
Total Assets = 15,125,790+ 15,961,202= 3,086,992
Liabilities
Liabilities represent the debts and obligations the business owes to others. These are divided into Current Liabilities and Non-Current Liabilities.
Current Liabilities
These are debts the company needs to pay within one year.
• Short-Term Loans: This is any loan the company must pay back within the next year. These loans may have been taken for operational expenses.
• Suppliers Payable: This represents the money the business owes to suppliers for raw materials and other goods it has purchased but not yet paid for.
• Accrued Expenses: These are expenses the business has incurred but hasn’t yet paid. This could be wages, taxes, or utilities.
Now, let’s calculate the total of Current Liabilities:
• Accounts Payable: 304,000
• Short-Term Loans: 1,159,000
• Accrued Expenses: 85,000
• Warranty Provisions: 1,000,000
Total Current Liabilities = 304,000 + 1,159,000 + 85,000 + 1,000,000 = 2,548,000,
So, Total Current Liabilities = 2,548,000.
Non-Current Liabilities
These are long-term debts the business will pay off over a period longer than one year.
• Long-Term Loans: This is the money the business owes on long-term loans, which it won’t have to pay off immediately but will over several years.
• Equipment Liabilities: These are the equipment loans which are taken to but machinery and vehicles for business.
Now, let’s calculate the total of Non-Current Liabilities:
• Long-Term Debt: 3,456,859
• Deferred Tax Liabilities: 400,000
Total Non-Current Liabilities = 3,456,859 + 400,000 = 3,856,859
So, Total Non-Current Liabilities = 3,856,859.
Total Liabilities
To find the Total Liabilities, we add together the Total Current Liabilities and Total Non-Current Liabilities:
• Total Current Liabilities = 2,548,000
• Total Non-Current Liabilities = 3,856,859
Total Liabilities = 2,548,000 + 3,856,859 = 6,404,859
Equity
Equity represents the ownership interest in the business. It’s the difference between total assets and total liabilities.
• Common Stock: This is the value of shares issued to the owners (shareholders) of the business. It represents the owners’ investment in the company.
• Additional Paid-In Capital: These are the extra stocks and shares invested in the business by shareholders.
• Retained Earnings: These are the profits the company has earned over the years and retained in the business instead of distributing them as
dividends. This amount increases as the company makes profits.
Now, let’s calculate the total of Equity:
• Common Stock: 1,145,559
• Additional Paid-In Capital: 250,745
• Profit from Previous Year: 198,820
• Retained Earnings: 2,145,000
Total Equity = 1,145,559 + 250,745 + 198,820 + 2,145,000 = 3,740,124
So, Total Equity = 3,740,124.
Total Liabilities & Equity
Finally, we find the Total Liabilities & Equity
• Total Liabilities = 6,404,859
• Total Equity = 3,740,124
Total Liabilities & Equity = 6,404,859 + 3,740,124 = 10,144,983
Conclusion
A balance sheet is a financial snapshot of a company at a specific moment, showing what it owns (assets), what it owes (liabilities), and the difference between the two (equity). It helps stakeholders understand the financial health of the business. The balance sheet is divided into two main parts: assets, which are things the company owns, and liabilities, which are debts the company owes. The difference between these is the company’s equity, representing the owners’ stake in the business. This simple structure helps managers, investors, and others assess the company’s financial position.
