Example of a Balance Sheet
In order to put these notions into practice, here is a concrete Example of a balance sheet. The example comes from TOYO Co, and the balance sheet is taken from their most recent annual report:
Public enterprises, those that offer their shares to investors on a stock market, must compulsorily produce several financial statements within their annual report. The financial statements provide information that is very important to investors, and it will also allow for easy comparison from one year to another or between two companies in the same sector.
Several financial statements are required including the financial statement, also called the statement of financial position. This document shows the company’s situation on a specific date, usually at the end of its fiscal year. This financial statement is divided into 3 sections:
- Active
- Passive
- Shareholders’ equity
This introductory article will be used to present each section. The names given to the sections may vary from one company to another, but the fundamental concept behind this process remains the same.
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Active
This first section lists all the company’s assets. It is, therefore, a list of the assets over which the company exercises control in order to generate a profit. To consider that a property can be displayed in this section, you have to ask yourself 3 questions:
- Will the property provide benefits to the business?
- Is the company the only one who can use the property?
- Is the property owned by the company with documentation and supporting invoices?
The following is a non-extensive list of items that are often found in the assets of a business:
Cash
Cash is generally the first item indicated. This section demonstrates the amount of money available in the company’s bank accounts, hence the amount of cash.
Investments Bank
accounts are not very profitable in terms of returns, so it is common practice to invest surplus cash in financial products to obtain additional returns. A specific section of the balance sheet displays the investments of the company, and it can be divided into two; Short-term investments and longer-term investments.
Accounts
Receivable When a business renders a service to a customer or sells an asset, it often sends an invoice in order to receive the amount of money requested in return. Pending receipt of the settlement, an item generally called “accounts receivable” appears in the asset to inform readers of the amount of money receivable from customers. When the money is received, the accounts receivable section will decrease and that of cash will increase accordingly.
Inventory
This asset displays the inventory or inventory of merchandise that the company has until it is disposed of. This includes ready-for-sale goods, products in process, and the raw material needed for future product manufacture.
Supplies
This item provides information on the office supplies that the business has in order to continue operations on a daily basis. Even if the supplies are not connected to the company’s primary activity, the administrative work supports its operation and in addition, these supplies can be resold in the event of closure.
Prepaid Accounts
A business may prepay certain expenses, such as rent, for example. Since the services for which payment was made have not been received, prepaid accounts can not be considered as expenses. A number of prepaid accounts, therefore, appears in the assets of the balance sheet until the service is received.
Hardware
The next item displays all equipment used in the operation of the business such as rolling stock or computer equipment for example.
Buildings
This is often the biggest asset on the balance sheet; The value of warehouses, buildings and other real estate held by the enterprise. It should be noted that the value shown on the balance sheet is the price paid for the purchase of the property, not the current value of the property. This concept will be developed in a future article.
Land
In addition, the value of land owned by the business must also be accounted for. The land is separated from the buildings on the balance sheet because the buildings are depreciated annually, while the land does not lose value. The concept of depreciation will also be explained in an upcoming article.
Intangible property
this category includes all goods that are rather virtual. Since these products have value, they appear on the company’s balance sheet. Examples of intangible assets include:
- Copyright
- Patents
- Trademarks
- Goodwill (also known as goodwill)
- Franchises
However, putting a dollar amount as a value for these assets can be very difficult, as it is very subjective. How much is a patent worth for an invention? How much does the exclusive right to obtain a deductible cost? It is necessary to analyze the source of a firm’s value to intangible assets to ensure that it is not exaggerated.
Passive
The liabilities section represents the debts of the company, so what it owes. It will then be easy to compare with assets to calculate the net worth of the business. To be considered as a liability and displayed on the balance sheet, an item must meet three criteria:
- A company has made a commitment to repay this debt
- A contract exists to confirm the terms of the refund
- The company cannot relieve itself of this legal obligation of repayment without consequences
Below is a list of the items generally contained in the liabilities section:
Accounts payable
A company that has received a service for which it has not yet paid will have a liability on the balance sheet. For example, if a mechanic repairs equipment, but the invoice is only due next month, the amount of the invoice will be added to the “accounts payable” until the payment date.
Bank
indebtedness a business must sometimes borrow to expand, and the remaining amount of debt is shown as a liability. Debt is generally split in two; the portion of debt that will be paid in the near future (in the next year), and long-term debt (which is repayable in more than one year).
Suppliers
this item includes the debts the company has accumulated from its suppliers. On the other hand, this is in the normal nature of the operations because the suppliers produce invoices which must be settled at the maximum 3-4 weeks after their shipments.
Prepaid
Receipts this item displays the money that was received from customers but where the product of the business has not yet been delivered. Some clients pay in advance, but the money does not belong to the company until the final product is delivered in return.
Shareholders ‘equity Shareholders
‘ equity can be described as the net assets of the company listed on the stock exchange. If the company sells all its assets and pays all liabilities, it will remain the equity. This category is often composed of the following elements; unrecognized profits, share capital and the contribution of the owner. Shareholders’ equity is linked to other financial statements, so a separate item will be reserved exclusively for that party.
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