COURSE 2 - The Balance Sheet
The balance sheet (also called statement of financial position) reports the financial position of the business at a point in time. It does so by listing the categories and amounts of assets, liabilities and equity on a specific date, in a format that proves the fundamental accounting equation. ASSETS = EQUITY + LIABILITIES
ASSETS – LIABILITIES = EQUITY
Formats of presentation
Regardless of the format for the presentation of the balance sheet, comparative information should always be presented; depending on national or regional requirements, the current year is compared with the previous year or with the last two years. In Europe, assets are disclosed in their increasing liquidity order and liabilities in their decreasing maturity order, while in the USA the opposite rule functions. The notes should include details concerning the specific accounting policies used for the line-items presented in the balance sheet and sub-classifications to provide details of the their movement. This balance sheet format makes a distinction between current and non-current assets and liabilities. Basically, current assets consist of cash and other assets that the enterprise will use in the normal course of its operating cycle. Similarly, current liabilities are those that the enterprise expects to settle within twelve months of the balance sheet date or in the normal course of its operating cycle, if longer. The stocks of a china manufacturer and the stocks of a wine producer are both current assets, even though the stocks of the latter sometimes require more than twelve months to be ready for sale. All other assets and liabilities are classified as non-current. A different balance sheet format is used in Romania by big companies that apply the Harmonized Accounting Regulations. This format emphasises the investor’s interest in the enterprise and is described by the second form of the fundamental accounting equation: ASSETS – LIABILITIES = EQUITY
Balance Sheet: presentation and layouts
1. Balance Sheet presentation
An entity must present classified balance sheets, separating current and noncurrent assets and liabilities. Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise’s normal operating cycle; or assets held for trading within the next 12 months (assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer). All other assets are noncurrent.
An asset shall be classified as current when it satisfies any of the following criteria: (a) it is expected to be realized in, or is intended for sale or consumption in, the entity's normal operating cycle; (b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the balance sheet date; or (d) it is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date. Current liabilities are those to be settled within the enterprise’s normal operating cycle or due within 12 months, or those held for trading (obligations that will be liquidated within one year or the operating cycle, whichever is longer). All the other liabilities are noncurrent.
Minimum items on the face of the balance sheet
(a) property, plant and equipment;
(b) intangible assets;
(c) financial assets;
(e) trade and other receivables;
(f) cash and cash equivalents;
(g) trade and other payables;
(i) liabilities and assets for current income tax.
Property, plant and equipment are tangible assets that:
(a) are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more...
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