As a trading-based businessman, do you know about trading company balance sheets?
If not, then you must read this article which will discuss the balance sheet of a trading company along with its types and examples.
In general, the balance sheet consists of 3 main components, namely assets, liabilities (liabilities), and owner’s equity (shareholders).
This report can make it easier for you to measure business value in a certain period, so you can better understand the financial position of your business.
Read Also : What is Business Analysis? Definition and Practice
For more information about trading company balance sheets, let’s look at the following article!
Definition of Balance Sheet Report
The balance sheet is a type of financial report designed to communicate exactly how much a company or organization is worth.
The balance sheet contains several important components or accounts, namely assets, liabilities, and equity of the company owner for a certain period.
Typically, balance sheets will be prepared and distributed monthly, quarterly or once a year.
The time it is prepared depends on the frequency of reporting as determined by law or company policy.
The balance sheet contains a business summary for a certain accounting period for later review, both internally and externally.
Internal review of trading company balance sheets is generally carried out by business leaders, key stakeholders, or employees where the report is stored in the company’s financial reporting software .
While the external review is carried out by potential investors who are interested in the company.
When balance sheets are reviewed internally, audiences can change their policies and approaches.
For example regarding doubling profits, correcting failures, or switching to new opportunities.
Meanwhile, when the balance sheet is reviewed externally, the audience will be informed about what resources are available to the business and how they are financed.
Based on this information, potential investors can decide whether to invest in the company or not.
Potential investors also have the opportunity to use the information in the balance sheet to calculate important metrics, such as liquidity, profitability and debt to equity ratio.
From the explanation above, it is important to remember that basically, balance sheets are always based on past data and then communicate it to the audience.
Read Also : 7 Ways to succeed in Online Business
Meanwhile, investors and stakeholders can use the balance sheet to predict and evaluate company performance in the future.
The formula for calculating the balance sheet
The following is the formula for calculating the balance sheet in accounting:
Assets = Liabilities (Liabilities) + Owner’s Equity.
From this simple equation, other equations can be made, including:
Owner’s Equity = Assets – Liabilities (Liabilities)
Liabilities (Liabilities) = Assets – Owner’s Equity
The accounts in the balance sheet must always balance. The asset account must always equal liabilities plus owner’s equity.
Owner’s equity must always equal assets minus liabilities. Liabilities must always equal assets minus owner’s equity.
If the balance sheet does not balance, it is possible that the documents were prepared incorrectly.
Usually, errors are caused by incomplete or missing data, incorrectly entered transactions, errors in currency exchange rates or inventory levels,
Or it could also occur due to a miscalculation of equity and errors in calculating depreciation or amortization. Therefore, you must be careful in entering data even though you are assisted by online accounting software .
Trading Company Balance Sheet Components
There are several components or accounts in a trading company’s balance sheet, namely assets, liabilities, and owner’s equity.
For more detailed information about these three components, see the explanation below:
1. Assets
Assets are defined as everything that is owned by a company and has a measurable value.
Companies can convert assets into cash through a process known as liquidation.
Assets are usually counted as positive (+) in the balance sheet and broken down into two further categories, namely current assets and non-current assets.
Current assets usually include everything a company owns that can easily be converted into cash within a year. Among them:
- Cash and cash equivalents
- Prepaid expenses
- Inventory
- Securities
- accounts receivable
Meanwhile, non-current assets usually include long-term investments that are not expected to be converted into cash in the short term, such as:
- Land
- Patent
- Trademark
- Brand
- Intellectual property rights
- Equipment used to produce goods or perform services
Since companies invest in assets to meet business objectives, you must develop an intuitive understanding of assets.
Without this knowledge, it may be difficult to understand balance sheets and other financial documents that contain information about the health of the company.
2. Liabilities (Liabilities)
Liabilities are the opposite of assets.
If an asset is something the company owns, then a liability is something that is owed.
Liability is a financial and legal obligation to pay a sum of money to a debtor. That is why liabilities are usually counted as negative (-) in the balance sheet.
Just as assets are categorized as current or non-current, liabilities are categorized as current liabilities or non-current liabilities.
Current liabilities usually refer to all obligations that are due to debtors within one year, which include:
- Employee salary
- Rent payments
- Utility payments
- Debt financing
- accounts payable
- Other costs accrued
Meanwhile, non-current liabilities usually refer to long-term obligations or debts that will not mature within one year, including:
- Rent
- Loan
- Bonds payable
- Pension conditions
- Deferred tax liability
Liabilities can also include obligations to provide goods or services in the future.
3. Owner’s Equity
Owner’s equity, also known as shareholder’s equity, usually refers to whatever belongs to the owner of the business after the liabilities are accounted for.
If you add up all the resources a business owns (assets) and subtract all claims from third parties (liabilities), what you are left with is owner’s equity.
Owner’s equity usually includes two key elements.
The first is money, which is donated to the business in the form of an investment in return for some degree of ownership (usually represented by shares).
And the second is the income that the company generates over time and maintains.
Read Also : What is Human Resource Development? Definition, Functions and Methods
Example of a Trading Company Balance Sheet
By looking at the simple example of a company’s balance sheet below, you will get important information about a company’s financial health.
PT. Jaya Sakti Award
Balance Report
November 30, 2018 period
| Non-Current Assets | 30 November 2018 | 30 November 2017 |
| brand | 4,000,000 | 4,500,000 |
| Customer Relations | 1,000,000 | 1,500,000 |
| Lease Rights | 8,000,000 | 9,000,000 |
| Capitalized expenses | 9,000,000 | – |
| Goodwill | 1,000,000 | 1,000,000 |
| Land and Building | 11,000,000 | 10,500,000 |
| Equipment | 250,000,000 | 230,000,000 |
| Long Term Receivables | 9,000,000 | 8,000,000 |
| Deferred Tax Receivables | 23,000,000 | 18,000,000 |
| Total Non-Current Assets | 316,000,000 | 282,500,000 |
| Current assets | ||
| Supply | 220,000,000 | 200,000,000 |
| Receivable Account | 30,000,000 | 35,000,000 |
| Tax Receivables | 6,500,000 | – |
| Other Receivables | 15,000,000 | 20,000,000 |
| Prepaid expenses | 16,500,000 | 16,000,000 |
| Short Term Investment | 43,000,000 | 100,000,000 |
| Cash and cash equivalents | 200,000,000 | 205,000,000 |
| Total Current Assets | 531,000,000 | 576,000,000 |
| Total Assets | 847,000,000 | 858,500,000 |
| Noncurrent liabilities | ||
| Pension fund | 5,000,000 | 5,000,000 |
| Deferred Tax Liability | 28,000,000 | 14,000,000 |
| Total Non-Current Liabilities | 33,000,000 | 19,000,000 |
| Current Liabilities | ||
| Accounts Payable | 60,000,000 | 62,000,000 |
| Tax Obligations | – | 20,000,000 |
| Other Liabilities | 40,000,000 | 42,000,000 |
| Accrual Expenses | 100,000,000 | 85,000,000 |
| Total Current Liabilities | 200,000,000 | 209,000,000 |
| Shareholder Equity | ||
| Share Capital | 3,000,000 | 3,000,000 |
| Reserve | 27,000,000 | 16,500,000 |
| Saved Income | 617,000,000 | 630,000,000 |
| Total Shareholder Equity | 647,000,000 | 649,500,000 |
| Total Liabilities and Equity | 847,000,000 | 858,500,000 |
From the example of the trading company’s balance sheet above, you can see that the total liability and equity accounts are the same as the total asset accounts.
So, that was an article about trading company balance sheets, starting from the definition, components, to examples.
Given the importance of the balance sheet in a business, it would be nice if you started studying it as soon as possible if you don’t understand it.