The Balance Sheet is the financial statement
that reports the assets, liabilities and net worth of a company
at a specific point in time. Assets represent the total
resources of a company, which may shrink or increase depending
on the results of operations. Assets are listed in liquidity
order - ease of converting into cash. Typical assets include:
cash, accounts receivable, notes receivable, inventory, fixed
assets and a number of miscellaneous assets classified as other.
Liabilities include what a company owes: accounts and notes
payable, bank loans, deferred credits and miscellaneous other.
All businesses divide assets and liabilities into two groups:
current (convertible to cash within a year) and noncurrent. Net
worth is the owner's investment (in the case of a proprietorship
or partnership) or capital stock (original investment) plus
earned surplus (earnings retained in the business) in the case
of a corporation.
Current assets include cash, trade receivables
and inventory. These are items that can be converted to cash
within one year or in the normal operating cycle of a business.
Also included in this category are any assets held that can be
readily turned into cash with little effort, such as government
and marketable securities.
Cash refers to cash on hand or in banks,
checking account balances, and other instruments such as checks
or money orders. A rule of thumb is that cash position is
generally strongest after the peak selling season.
Marketable securities are found on many balance
sheets. Marketable securities can include government bonds and
notes, commercial paper, and/or stock and bond investments in
public corporations. Marketable securities are usually listed at
cost or market price, whichever is lower. When marketable
securities appear on a statement, it frequently indicates
investment of excess cash.
Accounts receivable indicate sales made and
billed to customers on credit terms. A retailer, such as a
department store, may show its customer charge accounts billed
and unpaid in this category. In many businesses, accounts
receivable are frequently the largest item on the balance sheet.
A company's health often depends upon timely collection of
Notes receivable represent a variety of
obligations with terms coming due within a year. Notes
receivable may be used by a company to secure payments from
past-due accounts, or for merchandise sold on installment terms.
Inventory includes different items depending on
whether a business is a manufacturer, wholesaler or retailer.
Retailers and wholesalers will show goods that are sold "as is"
with no further processing or supplies required in shipping. On
the other hand, many manufacturers will show three different
classes of inventory: raw materials, work-in-progress and
finished goods. As a company's sales volume increases, larger
inventories are required; however, problems can arise in
financing their purchase unless turnover (number of times a year
goods are bought and sold) is kept in balance with sales. A
sales decline could be accompanied by a decrease in inventory in
order to maintain a healthy condition.
Other current assets include prepaid insurance,
taxes, rent and interest. Some conservative analysts consider
prepaid items as noncurrent because they cannot be converted to
cash to pay obligations quickly, and therefore have no value to
Noncurrent assets are items a business cannot
easily turn into cash and are not consumed within the business
cycle activity. Noncurrent assets are defined as assets that
have a life exceeding a year.
Fixed assets are materials, goods, services and
land used in the production of a company's goods. Examples
include real estate, buildings, plant equipment, tools and
machinery, furniture, fixtures, office or store equipment and
transportation equipment. All of these would be used in
producing products for a company's customers. Land, equipment or
buildings not used in the production of customer goods would be
listed as other noncurrent assets or investments. Fixed assets
are carried on the company's accounting books at the price they
cost at the time of purchase. All fixed assets, except for land,
are regularly depreciated since they eventually wear out.
Depreciation is an accounting practice that reduces the fixed
asset's carrying value on an annual basis. The reductions are
considered a cost of doing business and are called depreciation
expense. Normally, the accounting procedure is to list the fixed
asset cost on the balance sheet less accumulated depreciation.
Not all companies are comparable on this item as some rent their
equipment and premises. If a company rents, its fixed asset
total will be smaller compared with other balance sheet items.
Other noncurrent assets may include
investments, advances to and receivable from subsidiaries, and
receivables from officers and employees.
Intangible assets are those that may have great
value to an operating company but limited value to creditors.
Analysts tend to discount these items or value them very
conservatively. Intangible assets include a company's goodwill,
copyrights and trademarks, development costs, patents, mailing
lists and catalogs, treasury stock, formulas and processes,
organization costs and research and development costs.
Current liabilities are obligations that a
business must pay within a year. Generally they are obligations
that are due by a specific date, usually within 30 to 90 days of
fulfillment. To maintain a good reputation and successful
operations, most businesses find they must have sufficient funds
available to pay these obligations on time.
Accounts payable represent merchandise or
material requirements purchased on credit terms and not paid for
by the balance sheet date. Most current liabilities of small
companies generally fall into the accounts payable line.
Suppliers dealing in good faith expect their invoices to be paid
according to the terms of sale. These can range from net 30 to
60 days (after invoice date) plus discount incentives of 1
percent or more if payments are made by a specified earlier
Notes payable may include a company's borrowing
from other firms and individuals.
Other current liabilities may include wages and
salaries due employees for time between the last payday and
balance sheet date, taxes due and payable and other expense
incurred and unpaid at the time the balance sheet is prepared.
Long-term liabilities are items that mature in
excess of one year from the balance sheet date. Maturity dates
(when payment is due) may run up to 20 or more years, e.g., a
real estate mortgage.
Net worth represents the owner's share of the
assets of the business - total assets minus total liabilities
equals net worth. The net worth of companies owned by
individuals includes original investment of owners plus
additional investments they have made plus accumulated or
retained profits less whatever losses have been sustained less
any withdrawals by the owners. On corporate balance sheets, net
worth may be broken down into capital stock (issued or unissued
shares of common or preferred stock), paid-in or capital surplus
(money or other assets contributed to the business, but for
which no stock or owner's rights have been issued, e.g., funds
that exceed the stock's value) and earned surplus or retained
earnings - the amount of earnings retained in the corporation
and not disbursed in dividends.
Example balance sheets
The Business Plan Store will prepare detailed
financial statements for your business plan that express your
vision in terms of dollars and units of time, and in a format
that is easily understandable to all people in the lending
We write business plans! To get started on yours,
contact us here.