What is Balance Sheet Items?
The term “balance sheet items” refers to all the records captured in the balance sheet in the form of assets and liabilities as on a certain reporting date. It is important to note that the balance sheet is one of the three fundamental financial statements (the other two being the income statement and cash flow statement). Financial analysts use it predominantly for the purpose of both accounting and financial modeling.
The balance sheet items can be broadly divided into current assets, non-current assets, current liabilities, non-current liabilities, and shareholders’ equity. Typically, assets are placed on the left-hand side of the balance sheet and liabilities on the left-hand side. Further, both assets and liabilities are placed in decreasing order of liquidity with equity placed after liabilities.
Items of Balance Sheet
Now, let us discuss some of the most common and major items in a balance sheet:
1. Current Assets
- Cash & Cash Equivalents: As it is considered to be the most liquid form of assets, it is placed at the top left corner in the balance sheet. Cash equivalents are clubbed with cash as it primarily includes those assets which have maturities of less than 3 months or can be liquidated on very short notice. Examples of cash equivalents include marketable securities.
- Accounts Receivable: It represents the amount of sales that have been executed on credit and has not been collected as on the balance sheet date. It is net of all the provisions done to cover the doubtful accounts (high probability of becoming bad debt). If entities are able to recover the receivables, then the value of accounts receivable goes down while cash increases.
- Inventory: It represents the amount of money invested in the business in the form of finished goods, work-in-progress goods, and raw material. When sales are recognized then the value of this account is transferred to the income statement in the form of cost of goods sold as per the concept of matching principle.
- Prepaid Expenses: It consists of all those expenses that a company has already paid but has not availed the services against the payment till the balance sheet date. Examples of prepaid expenses include advance payment made for an insurance policy, salary paid to workers in advance, etc.
2. Non-Current Assets
- Plant, Property, and Equipment (pp&e): It accounts for all the tangible fixed assets on a company’s book. Examples of PP&E primarily include building, equipment, and land.PP&E is recorded on the net of depreciation except for land, which is an exception.
- Intangible Assets: It accounts for all the fixed assets of a company that is intangible in nature. These assets can be categorized into identifiable and unidentifiable intangible assets. Patents and licenses are examples of identifiable intangible assets, while brand value and goodwill are examples of unidentifiable intangible assets.
3. Current Liabilities
- Accounts payable: It represents the dollar value ofthe money that a company is obligated to paythe suppliers for goods purchased or services availed on credit. The value of accounts payableand cash account decreases by the same amount as the creditors are paid off.
- Unearned revenue: It accounts for the revenue for which payment has been received but the service or product is yet to be delivered as on the balance sheet date.
- Notes payable: It includes the creditors that are not part of the accounts payable and are due within a year’s time. However, there are instances where notes payable appear as part of non-current liabilities as their maturity is of more than one year.
- Current portion of long-term debt (CPLTD): This account represents the portion of long-term debt that has to be paid off within a year’s time. Basically, the principle repayment due next year is captured under this head. It can be derived from the debt amortization schedule. In some case, this account is represented separately and are include as part of the long-term debt under non-current liabilities.
4. Non-Current Liabilities
- Bonds Payable: It represents the value of the bonds, which the company has issued, remaining outstanding as on the balance sheet. The bonds can be either coupon paying or zero-coupon.
- Long-Term Debt: In CPLTD is captured under current liabilities, then it represents the remaining portion of the long-term debt. Otherwise, it is the aggregate of all long-term debts, which primarily include term loans.
5. Shareholders’ Equity
- Share Capital: It represents the amount of money invested by the shareholders in the company. The share capital is categorized into – authorized and paid-up share capital. Authorized share capital indicates the maximum number of shares that a company is allowed to issue, while paid-up share capital represents the actual number of shares that has been issues to the shareholders.Usually paid-up share capital remains stable over the period of time until there are subsequent rounds of equity infusion to fund business requirements.
- Retained Earnings: It represents the portion of the net income that is retained in the books of the company over a period of time. If the company makes a profit, then after dividend payment the remaining portion of the net income is added to this account. However, in the case of losses, it results in deterioration of the retaining earnings.
Conclusion
So, it is important that as an analyst or an investor you know what each of the line items of a balance sheet denotes. The importance emanates from the fact that all the items in the balance sheet are interlinked with that of the income statement and cash flow statement. In order to interpret the various accounting adjustments in financial reporting one should be thorough with the line items in each of the financial statements.
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