Financing and Marketing Management

Unit 6 - Basic Accounting Procedures or Analysis of Business Performance

6.3. The Balance Sheet

The balance sheet shows the financial position of a business at a particular point of time. But normally the balance sheet which is also called financial statement or networth statement is prepared at the end of the financial accounting period. It shows the assets that a business has its liabilities, and the amount of equity belonging to the shareholders. The reason it is called the balance sheet is because total assets must equal liabilities and shareholders’ equity as illustrated below:

Assets = Liabilities + Shareholders’ Equity

The 2 sides of this equation must always equal or balance. The liabilities and equity section shows where the business gets its funds and the assets section shows how those funds have been used. The assets section is generally divided into 2 sub-sections, showing the short term and long term assets. In this context, a long term item is one whose life in the business is expected to be longer than 1 year.
Based on the liquidity, assets are classified as current, intermediate and long term/fixed assets. Current assets are those which have very high degree of liquidity. Example cash on hand produce ready for sale.
Examples of long term or fixed assets include:

• Property
• Plant and machinery
• Financial investments that are to be held for the long term
• Patents
• Licenses

Short term assets are those whose lives are shorter than 1 year and include:

• Inventories or stock
• Account receivables / debtors (when credit is given to customers)
• Cash
• Financial investments that are to be held for the short term only (i.e. less than 1 year)

Liabilities: three types- current , intermediate and long term liabilities
Liabilities are also broken down into short and long term items. Short term liabilities include:

• Accounts payable / creditors (when credit is taken from suppliers)
• Income taxes payable
• Short term borrowings (where the repayment date is within 1 year)

Long term liabilities include borrowings where the repayment date is longer than 1 year from the balance sheet date.