The balance sheet is one of the three financial reports that are very important in accounting practice. So from that, you need to understand how to calculate the balance.
The three financial reports are profit and loss reports, balance sheets, and cash flow reports.
The balance sheet report is a financial report that provides an overview of the assets a company has, as well as the amount invested by shareholders.
Generally, companies use this report to be able to obtain information regarding the company’s financial position whether it is experiencing a loss or not.
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So, for further explanation about the balance, starting from the definition, components, functions, and how to calculate it, let’s see this article to the end!
What is a Balance Sheet?
The balance sheet is a financial report that contains data related to business assets, liabilities and shareholder equity for a certain period.
It contains an overview of what the company owns, the company’s debt, and the amount invested by shareholders.
Through the balance sheet, you can know the value of a business at a certain time, so you can better understand its financial position.
The balance sheet provides a snapshot of your finances at any given moment by aggregating every journal entry since your company’s operations.
Because it contains a summary of business finances, the balance sheet is also sometimes referred to as a statement of financial position.
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Companies usually prepare it at the end of a reporting period, such as a month, quarter, or year. The balance sheet can be likened to a reflection of a business or company.
Balance Sheet Components
All balance sheets have three main components, namely assets, liabilities and owner’s equity.
So, before knowing the formula for calculating the balance and examples, try to understand its components first.
The components reported on the balance sheet must match the accounts described on the chart of accounts. The following is an explanation of each component:
1. Assets
The first component that must be present in the balance sheet is assets. This section outlines the value your business has that can be converted into cash.
List your assets listed in order of liquidity, or how easily they can be converted to cash, sold or consumed.
There are two main categories of assets recorded in the report, namely current assets and long term assets or non-current assets.
Current assets can easily be converted to cash within a year or less. Furthermore, these assets are divided into several accounts, including:
- Cash: This is the most liquid asset account, namely the money and checks held in your business checking and savings accounts.
- Securities: Investments that you can sell within one year
- Receivables: Customers owe you that will be paid in the short term
- Supplies or inventory: An asset account for a business that sells goods, such as a merchandising company . The inventory includes finished products and raw materials.
- Prepaid fees (paid in advance).
- Cash equivalents (currency, stocks and bonds).
- Prepaid expenses, such as office rent or insurance for your business.
This account includes the credited balance of all sales revenue, after deducting allowance for bad debts.
When the company recovers the receivable, this account is reduced, and cash is increased by the same amount. The data is listed in the formula for how to calculate the balance used in the company’s financial reporting application .
Second, there are non-current assets (long term or non-current assets) in which these assets will not be converted into cash within one year.
This account can be further divided into several accounts, namely:
Fixed assets : Including property, buildings, machinery, and equipment such as computers.
Long-term securities: Investments that cannot be sold within one year.
Intangible assets: These are assets that are not physical objects, such as trademark copyrights, franchise agreements and patents.
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2. Liabilities (Liabilities)
The next section of the balance sheet is the liabilities or liabilities of the company.
The obligations referred to here are company debts to other parties, including company expenses, loan payments, and other forms of debt.
Just like assets, liabilities are also divided into two accounts, namely current liabilities and non-current or long term liabilities.
Current liabilities include expenses for rent, utilities, taxes, current payments on long-term debt, interest payments, and payroll.
Meanwhile, non-current or long-term liabilities include long-term loans, deferred income taxes and pension fund obligations.
3. Shareholder Equity
The third component that will be calculated later in the formula for calculating the balance sheet is shareholder equity.
- Account refers to a number of things, including the following:
The amount of money generated by the business. - The total money put into the business by its owners (or shareholders).
- Any capital donated.
In other words, shareholder equity is the net assets owned by the company.
In the balance sheet report, shareholder equity is calculated using the following formula:
Shareholders Equity = total assets (current and non-current) – total liabilities (current and non-current)
Balance Report Function
Before going into the discussion about how to calculate balances and examples, it would be nice for you to also know the function of this report.
Based on the previous explanation regarding the meaning of the balance sheet, the function of the balance sheet report is as follows:
- The balance sheet serves to show the actual financial position of the company in a certain period.
- The financial position can be clearly ascertained with the help of a balance sheet.
- Serves to provide information to management to make better decisions through ratio analysis.
- The balance sheet also helps management to find out the company’s financial position in the past and present.
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How to calculate the balance sheet and examples
There is an accounting formula or equation that is used as a way of calculating balances in accounting software .
The formula shows that for every debit amount, there is an equal and opposite credit amount.
The sum of all assets must always equal the total of all liabilities and equity. Here is the formula:
Assets = Liabilities + Owner’s Equity
In order for you to understand better, take a look at the sample balance sheet report table below:
PT. Duta Mandiri
Balance Sheet Report
30 June 2016
| Asset | Obligation | ||
| Current assets | Current Liabilities | ||
| Bank cash balance | 50,000,000 | accounts payable | 50,000,000 |
| Accounts receivable | 110,000,000 | Wage account | 135,000,000 |
| Temporary investment | 70,000,000 | Tax account | 85,000,000 |
| Total Current Assets | 230,000,000 | Total Current Liabilities | 270,000,000 |
| Non-Current Assets | Noncurrent liabilities | ||
| Property | 650,000,000 | bond account | 350,000,000 |
| Total non-current assets | 650,000,000 | Total non-current liabilities | 350,000,000 |
| Shareholder Equity | |||
| Saved income | 200,000,000 | ||
| common stock | 60,000,000 | ||
| Total shareholder equity | 260,000,000 | ||
| Total Assets | 880,000,000 | Total liabilities and equity | 880,000 |
Based on the table above, it can be seen that the total assets with total liabilities and equity must have the same nominal.
By nature, your balance sheet should always be in balance. One side represents the assets of the business and the other side represents the liabilities and shareholder equity.
So, that’s information regarding the meaning, components, functions, and how to calculate a balance sheet along with examples.
Hopefully reading this article can help those of you who are looking for references about preparing a balance sheet report.