The balance sheet reports the financial position of an enterprise at a given
point of time. Precisely, how the business is financed and where the funds are
invested is tabulated in a balance sheet. There are three major components in
a balance sheet namely assets, liabilities and equity. Assets indicate the employment
of capital in the business while the liabilities and equity show the funding
composite. The balance sheet is based on the fundamental accounting equation:
Assets = Liabilities + Equity
Depending on the nature and liquidity of the assets they are classified as
current and fixed assets. Liabilities are categorized into current and long
term or non-current liabilities depending upon their maturity profiles. The
amounts invested by the owner or shareholder along with the retained profits
are recognized separately and designated as shareholders' equity.
Components of Balance Sheet
Classification of similar items into groups facilitates
analysis and understanding of the balance sheet. The balance sheet is grouped
into three main categories as mentioned earlier; assets, liabilities and equity.
See exhibit 1 for a sample balance sheet. These are discussed in detail as
follows:
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