WHAT IS A BALANCE SHEET?

In my years of financial training, I have noticed that a large number of executives go through life using the word 'balance sheet' without really knowing what it means.  They know that it's one of the key accounting documents, but that's about as far as the knowledge goes.

In essence, a balance sheet is a statement, at a particular date, of financial position, showing what is owned by the person/business, and what is owed to others.

If you got a piece of paper and wrote out your own personal balance sheet, what would it look like?  Well, it would, primarily, list out the assets that you own.  For accountants, assets are items of future economic value.  The balance sheet lists assets in two separate categories: those which are expected to last for more than one year (non-current assets), and those which will last for less than one year in their present form (current assets).  So, your personal list might include:

NON-CURRENT ASSETS
Any land and buildings you own
Any equipment, vehicles and furniture you own

CURRENT ASSETS
Any money owed to you by friends, relatives etc
Any short-term stock (e.g. food in the freezer)
Any cash in the bank

But you not only have assets, you have liabilities - amounts you owe to others.  So you will deduct:

NON-CURRENT LIABILITIES
Any money due to others after one year, such as your long-term mortgage liability

CURRENT LIABILITIES
Any money owed on credit cards (this is current because the lender can claim it at any time)
Any short-term borrowing such as bank overdrafts
Any unpaid goods and services, where you have received the benefit, but not paid for it yet

The total of your assets, less your liabilities, equals your equity.  If the number is positive, then you are solvent.  If it's negative, then you are insolvent, and may have borrowed too much!

That's it, simple as that.  If you work for an organization, it will usually produce a balance sheet at the end of the year, to show its financial position.

In summary, a balance sheet shows:

1. Assets with a future value lasting more than one year (non-current assets)
2. Assets with a future value lasting less than one year (current assets)
3. Liabilities to be repaid after more than one year (non-current liabilities)
4. Liabilities to be repaid within one year (current liabilities)
5. The net balance of assets less liabilities, which is called equity.  If equity is positive, the person/organization is solvent.