Balance sheet
The balance sheet is also called the statement of financial position.
It reports the corporation’s assets, liabilities and equity as at the end of the reporting period. The ‘reporting period’ might be a month, a quarter, or the financial year. The balance sheet will say what the reporting period is.
The balance sheet shows a point in time. It’s an ‘on this date’ financial statement.
The balance sheet is based on the accounting equation:
Assets = Equity + Liabilities
OR
Equity = Assets – Liabilities
Example
A corporation buys a house (an asset) for $500,000. It uses $50,000 from the corporation’s bank account for the deposit and borrows $450,000 from the bank for the rest.
Value of the house (asset) = Deposit (equity) + Bank loan (liability)
$500,000 = $50,000 + $450,000
Five years later the value of the house has gone up to $600,000 and the corporation has paid $50,000 back to the bank. The increase in the value and the money repaid to the bank become part of the equity. The equation still balances.
New value of the house (asset) = Deposit (equity) + Increase in value (equity) + Money repaid to the bank (equity) + Bank loan (liability)
$600,000 = $50,000 + $100,000 + $50,000 + $400,000
Or more simply, the equity is the new value of the house minus what the corporation still owes the bank.
Equity = New value of the house – Money still owing to the bank
$200,000 = $600,000 - $400,000
Assets, liabilities and equity are usually sorted into groups in the balance sheet. The groups are added up to show ‘total assets’, ‘total liabilities’ and ‘total equity’. You might also see ‘current’ and ‘non-current’ assets and liabilities listed. You can find definitions of these on our finance definitions page. [link]
What you should be able to tell from the balance sheet
After looking at the balance sheet, you should know:
- what date the balance sheet refers to
- what assets the corporation had on that date and how much they were worth
- how much money the corporation owed on that date and to whom
- the value of the corporation on that date
- whether the corporation may be becoming insolvent.
Example of a balance sheet
Below is a very simple example of a balance sheet that shows the corporation’s assets, liabilities and equity. You can see that the corporation has negative equity in the previous year – this means it owed more money than its assets were worth.
Brackets around numbers in financial statements mean the number is negative.
30 June of current year | 30 June of previous year | |
$ | $ | |
| Assets |
|
|
| Cash in the bank | 100,000 | 25,000 |
| Motor vehicles | 75,000 | 20,000 |
| Computer equipment | 10,000 | 15,000 |
| Total assets | 185,000 | 60,000 |
|
| |
| Liabilities |
|
|
| Bank loan | 30,000 | 40,000 |
| Employee leave entitlements | 20,000 | 15,000 |
| Accounts payable | 25,000 | 25,000 |
| Total liabilities | 75,000 | 80,000 |
|
| |
| Equity | 110,000 | (20,000) |