What is the Balance Sheet?

According to our accounting standards – our balance sheet is technically called a Statement of Financial Position. Why? This is because it shows the position of the company at a single point in time – a snapshot of the balances of our assets, liabilities and equity (hence the more understandable name of Balance Sheet!). The Profit and Loss Statement shows us the accumulation of transactions over a period of time (such as a year) and we know that those transactions impact our assets, liabilities and equity.

Do people call it the Statement of Financial Position in every day business life? Not really – if you read business media publications like the Australian Financial Review or watch financial journalists David Chau or Alan Kohler on the ABC – you’ll notice they don’t use this term at all. Instead they use the more common term “Balance Sheet” and that is what we will use in this textbook. Of course, if you wish to become an accountant, you will use the terms Statement of Financial Performance (the P&L statement) and Statement of Financial Position (the Balance Sheet) when preparing these documents, but in daily conversation with your colleagues, you are likely to use the shorthand term Balance Sheet.

Constructing the balance sheet

Around the world, international accounting standards mean that balances sheets look the same everywhere! This allows us to compare various businesses – a handy tool if you’re deciding where to invest. It also allows businesses to compare themselves against each other – who holds more inventory? Who has a large amount of cash?

Now let’s construct the balance sheet for Saanvi’s business that we encountered in the previous section. First we need to go back to the trial balance for SCC and check off the accounts that we have already used. I’ve placed a green tick symbol next to the accounts we’ve already utilised in another financial statement. You can’t use an item from the trial balance in more than one financial statement – otherwise you may double count or double report and potentially overstate or understate the business’s financial position or performance.

Trial balance for Saanvi’s Chic Celebrations Pty Ltd
for the period 1 July 2021 to 30 June 2022

I’ve placed a green tick on all of the accounts that we’ve already used. Now we have to construct our balance sheet using the remaining items.

Notice that our share capital is taken from our Statement of Changes in Equity, and our Retained earnings is the net profit ($2,500) less the dividends paid to shareholders ($2,000).

Should we be matching Net Assets to Equity? Or Assets to Liabilities plus Equity?

The accounting equation is phrased:

Assets = Liabilities + Equity

And we’ve been using this format in recording our transactions in Excel. However, upon review of many Australian listed firms you’ll see they report Net Assets (Assets minus Liabilities) and Total Equity. They are still presenting the accounting equation but in a different way – re-arranging the components of accounting equation using simple alegbra.

What should you do? In this textbook we will follow the Australian reporting convention of Assets, Liabilities, then Net Assets and Total Equity.