Balance Sheet is a statement of financial position at a particular point in time. It provides insight into the sources of funding (i.e. be it equity or borrowings) and the type of assets owned. It also shows the ability of a business in meeting its financial obligations. The trends of the various items in the Balance Sheet give the owner an indication as to the financial strength of the business and tell a different story. For example, an increasing trend in the accounts payable and cash position could be because the business is delaying payment to increase its cash. An increasing trend in the accounts payable and inventory position could be because the business purchased inventory just before the end of the accounting period.
Balance Sheet has three main elements:
Assets = Liabilities + Shareholders Equity
Represent items that create value or have value in the open market and are classified as:
- Current assets easily convertible to cash, which include cash, accounts receivable, inventories and other receivables that are collectible within a year:
- Cash (petty cash and bank deposits) the most liquid of all current assets as these money are available immediately.
- Accounts receivable usually, these are the second most liquid of all current assets are these are money owed by customers and hence, easily convertible to cash. However, if customers are unable to pay up, the business will have to make a provision for bad and doubtful debt or may have to write off the balances as bad debt.
- Inventories these are recorded at the lower of cost of purchase or market value. Inventories are considered current assets as these can be easily sold off as part of normal business operations. However, some inventories can only be sold at discounted price or perhaps not sold at all. In such instances, similar to bad debt provision, the business must take into account stock obsolescence and provide for it
- Non-current assets not so readily convertible to cash, which include property, plant and equipment (or PP&E as it is known) and receivables that are collectable after a year. Most of the PP&E (except for land) is depreciated over their useful life. Depreciation is an accounting concept to show that fixed assets must be replaced over time due to wear-and-tear. Depreciation represents the economic costs of using the asset over its life. Intangible assets, such as goodwill and copyrights are classified as non-current assets as well.
Represent the amounts owed to others and are classified as:
- Current or short-term liabilities, which include accounts payable and expenses which have been incurred but invoices not received yet. These are usually payable within the next 12 months:
- Accounts payable amount owed to suppliers for purchase of materials. The credit term is usually for a few months at most (ie less than a year).
- Accruals usually for amount owed to employees (for example, travel expenses incurred by employees for business purpose which have not been reimbursed yet) and other expenses incurred by the business of which invoices have not been received yet.
- Tax payable tax estimated to be payable within the coming 1 year is included in the Balance Sheet for the current year as the tax is due to income earned during the year.
- Non-current or long-term liabilities, which include deferred taxation and expenses payable after 12 months. If certain payables have long repayment term (for example, a mortgage repayment over a 5-year period), the amount payable within the following year will be disclosed under current liabilities and the amount payable for the subsequent 4 years will be disclosed as non-current liabilities.
Represent the shareholders or owners equity in the business. This is the net worth of the company if a company is to sell off all its assets (assuming it is able to sell off the assets at the value recorded in the Balance Sheet) and pay off all its debts. Shareholders equity comprise of initial capital invested into the business and earnings made by the business which are retained and reinvested in the business (known as retained earnings). Retained earnings are available for future distribution to shareholders as dividends. The panel of service providers selected by SingaporeAccounting.com is well versed in Singapore FRS and is able to prepare Balance Sheet which complies with Singapore FRS requirements. Please refer to Accounting Services for further information on the services offered.