Definition: Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time. Balance sheet includes assets on one side, and liabilities on the other. For the balance sheet to reflect the true picture, both heads (liabilities & assets) should tally (Assets = Liabilities + Equity).
Description: Balance sheet is more like a snapshot of the financial position of a company at a specified time, usually calculated after every quarter, six months or one year. Balance Sheet has two main heads –assets and liabilities.
Let’s understand each one of them. What are assets? Assets are those resources or things which the company owns. They can be divided into current as well as non-current assets or long term assets.
Liabilities on are debts or obligations of a company. It is the amount that the company owes to its creditors. Liabilities can be divided into current liabilities and long term liabilities.
Another important head in the balance sheet is shareholder or owner’s equity. Assets are equal to total liabilities and owners’ equity. Owner’s equity is used when the company is a sole proprietorship and shareholders’ equity is used when the company is a corporation. It is also known as book value of the company.
Let’s understand reporting of a transaction on a balance sheet. If a company XYZ takes a five-year loan from public sector banks for an amount of Rs 5,00,000, it means that the bank will pay the money to XYZ Ltd.
The accounts department will increase the cash component by 5,00,000 on the assets front, and at the same time increase the long term debt account with the same amount, thus balancing both the sides.
If company raises Rs 10,00,000 from investors, then its assets will increase by that amount, as will its shareholder’s equity.
