Balance Sheet

B A (JMC) (3-YDC), SEMESTER SYSTEM

SEC III: PUBLIC RELATIONS AND EVENT MANAGEMENT

Unit-2: EVENT MANAGEMENT

LESSON – 35: Balance Sheet

 

Objectives:

1.      Know what is a balance sheet as a financial statement.

2.      Explain the importance of balance sheet.

3.      List types of balance sheet.

4.      Learn the features of balance sheet.

5.      Understand the preparation of a balance sheet.

Introduction:

The balance sheet shows the accounting equation i.e. A = L + E. It means Assets is equal to Liabilities plus Equity. The term "balance sheet" comes from the fundamental accounting principle that a company's assets must always equal the sum of its liabilities and equity. This is why the balance sheet is named as such, because the two sides of the equation "balance out" or they are equal.

A balance sheet is one of the three crucial financial statements that help in the evaluation of a business. It gives a clear-cut view of an organisation’s financial state. It is a financial record of its liabilities, assets and shareholder’s equity during a specific period and date. It is a key component of a company's annual financial statements and is used to evaluate a business's financial condition, capital structure and also calculates the rate of returns for its investors. Balance sheets are used by investors, lenders, business owners, and accountants to assess a company's financial health.

In this lesson we learn about the history of accounting, evolution of book keeping, financial statements, types of financial statements, balance sheet, types of balance sheets, importance of balance sheet, components of balance sheet, features of balance sheet, how to prepare a balance sheet, difference between balance sheet and other financial statements, importance of book keeping for event managers etc

History of Accounting

Accounting is a language that dates back thousands of years and has been used in many parts of the world. The earliest evidence of this comes from Mesopotamian civilizations more than 7,000 years ago. The Mesopotamians kept the earliest records of goods traded and received and these activities are related to the early record-keeping of ancient Egyptians and Babylonians. The Mesopotamians used primitive accounting methods, keeping records that detailed transactions involving animals, livestock, and crops. In India, philosopher and economist Chanakya wrote “Arthashastra” during the Mauryan Empire around the second century B.C. This book contained advice and details on how to maintain record books for accounts.

Bookkeeping evolved as currencies became available and tradesmen and merchants began to build material wealth. It is the process of recording and organizing a business's financial transactions in an organized system. It is a vital part of the accounting process and is used in almost every business and industry. Business sense and ability with numbers were not always found in one person so merchants employed bookkeepers to maintain a record of what they owed and who owed debts to them. Until the late 1400s, book keeping continued in a narrative style with all the numbers in a single column whether an amount was paid or owed. This is called “single-entry” bookkeeping.

An Italian monk, Luca Pacioli known as Father of Accounting revamped the common bookkeeping structure. He laid the groundwork for modern accounting and introduced “double-entry” book keeping. He published a textbook called “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” in 1494. However, the balance sheet in its present name was first named and used in the 1830s.

Today, the systems of accounting evolved a lot. All the financial transactions are summed up, analysed and reported to supervisory authorities, regulatory bodies and tax collection bureaus as part of the accounting process. It involves keeping track of all the financial transactions related to a business and requires preparation of financial statements.

Financial Statements

Financial statements are year-end reports that summarize a company's accounting transactions. They provide important information about a company. The three core financial statements, in other words three primary financial statements, are (1) Balance sheet variously called as Statement of Financial position or statement of financial condition, (2) Income statement also called as “profit and loss statement” and (3) Cash flow statement i.e. the "income and expenditure account". These financial statements are year-end reports that summarize a company's accounting transactions. They provide important information about a company.

Balance Sheet shows a company's assets, liabilities, and shareholders' equity at a specific point in time, on a date at the end of accounting period. Income Statement i.e. Profit and Loss Statement summarizes a company's revenues, costs of goods or services, expenses and net income over a specific period and the cash flow statement shows beginning and ending cash and cash equivalent balances, including restricted cash and operating activities, investing activities, and financing activities for an accounting period.. While "income and expenditure account" might be used in certain contexts, particularly for non-profit organizations, the standard terminology in corporate finance refers to the "income statement" or "profit and loss statement". These three statements are interconnected and provide a comprehensive view of a company's financial health.

Importance of Balance Sheet

A balance sheet is an essential component that assists in the smooth running of a business. Here are some of the reasons that explain the importance of a company’s balance sheet:

(1)   Assist banks in evaluating a firm’s net worth: When a business wants to expand its operations and make future investments, it seeks loans from banks. Under such circumstances, the banks will look at the firm’s balance sheet to evaluate whether or not it has the financial position to pay back the loan amount.

(2)   Help investors take decisions: While choosing a firm for the purpose of investment, a majority of investors look at the company’s balance sheet to determine its financial position. Moreover, they combine it with various other factors to assess the firm’s future growth potential.

(3)   Serves as a determiner for risk and returns: Balance sheet will enable determining the ease at which one can meet short-term obligations. Furthermore, it places a check on the liabilities of business if they are rapidly growing and avoid the chances of bankruptcy.

(4)   Enables financial analysis: Having a proper balance sheet will let people get a clear idea of the liquidity conditions of a company. Can view the cash flow of a firm, working capital funding, trade receivable status and also how much daily transactions a business can afford.

Having a properly maintained balance sheet is an excellent way to understand the financial standing of a business. It also helps in attracting prospective investors who may be willing to invest in a company. Further, it helps determine firm’s financial strengths, pinpoint issues and also measure progress of business over a period of time.  

Purpose of a Balance Sheet

The purpose of a balance sheet is to project a clear picture of a company’s financial standing at a point in time, in conjunction with other core financial statements that report financial results for a period of time.

A multi-year future periods balance sheet is also prepared with the income statement and cash flow statement as a projected financial statement used for business plans or even in mergers & acquisitions financial modelling decisions.

The balance sheet is used for financial analysis by applying ratios using amounts from the balance sheet and income statement. These financial ratios include liquidity ratios like the current ratio using working capital components and the more stringent acid test ratio that excludes inventory from the calculation. Companies compute their return on assets (ROA), return on equity (ROE), or return on investment (ROI) to measure performance. 

Types of Balance Sheets

There are three types of balance sheets. They are (a) Comparative balance sheets, (b) Vertical balance sheets, (c) Horizontal balance sheets. Let us have a look at them.

(a)   Comparative Balance Sheets are drawn for more than one-time period. These are often presented in the same financial statement to indicate trends. Companies may present comparative balance sheets with horizontal analysis to determine the amount and percentage changes in line items and totals, showing trends over time.

(b)   Vertical Balance Sheets show assets at the top, with the balance sheet’s liabilities and shareholders’ equity sections presented below. A vertical balance sheet has only one column of balances for a year. Vertical balance sheets may be presented with columns for multiple years as comparative balance sheets.

(c)   Horizontal Balance Sheets show Assets on the left side and Liabilities and Shareholders’ Equity on the right side of the balance sheet.

Components of Balance Sheet

There are three main components of a balance sheet. They are Liabilities, Assets & Shareholder’s Equity. Let us deal with them one by one.

1.      Liabilities: This section of the balance sheet shows the money that a company owes to others, like loan expenses, recurring expenses, other forms of debt, etc. Liabilities can be further subdivided into two categories – current liabilities and non-current liabilities:

(a)   Under current liabilities fall notes payable due within a year, current maturities of long-term, debt and accounts payable.

(b)   Non-current liabilities include deferred tax liabilities, bonds payable, long-term debt and notes payable in the long term.

 

2.      Assets: In the assets section of the balance sheet, items of value that can be converted into cash are found. These items will be listed in order of liquidity, that is, how easily they can be converted into cash. Assets can be further sub-divided into current assets and long term assets:

(a)   Current assets. Assets that can be converted easily into cash within a year or less are called current assets. They have the following divisions like (i) Prepaid expenses that include items of value for which the company has already made a payment, like business insurance, office rent, etc. (ii) Inventory like taw materials, finished products, etc. (iii) Accounts receivable include money that a company’s clients owe for services rendered that is payable in the short term. (iv) Marketable securities means investments that a business can sell off within a year and (v) Cash and cash equivalents shall mean money saved in a firm’s checking and savings accounts, currency and checks.

(b)   Long-term assets: Those assets that cannot be converted into cash within a year are called long-term assets. These can be further subdivided like (i) Fixed assets namely machinery, buildings, property, etc. (ii) Intangible assets namely patents, copyrights, franchise agreements and (iii) Long-term securities i.e. investments that a company cannot sell within a year.

3.      Shareholders’ equity: Shareholder’s equity is the amount of money stockholders have invested in a company. It includes retained earnings and share capital.

(a)   Retained earnings is the amount of a company’s gains that are reinvested into its business instead of returning to the shareholders in the form of dividends and 

(b)   Share capital is the amount of capital that a company receives for the purpose of business.

Features of Balance Sheet

A balance sheet as we already know consists of all the liabilities and assets of a company. It shows their value and nature enabling to know the position of the capital on a specific date. However, it does not show any revenues or expenses. As already said, balance sheets follow the equation of “Asset = Liability + Capital”, and both of its sides are always equal.

It takes into account the credit as well as debit balances of a company’s current and personal accounts. The credit balance comes under the personal account and is called the liabilities of a business. In comparison, the debit balance comes under the real account and is known as the assets of a business.   A company’s accountants generally prepare the balance sheet on the last day of an accounting year. This is so, as it is the ultimate step of final accounts and needs an assessment of the company’s trading as well as profit and loss account for its preparation.

Steps to prepare a balance sheet

There are certain steps to be followed in preparing a balance sheet. They are -

Step 1 – Making a trial balance: A trial balance is a regular report that one can find in any accounting software. If the programme has a manual mode of entry, make a trial balance by transferring ending balance of every general ledger account into a spreadsheet. 

Step 2 – Arranging it properly: In order to make the balance sheet similar to a relevant accounting structure, it is crucial to properly arrange the initial trial balance. Moreover, to adjust the trial balance using adjusting entries, it is necessary to ensure recording all entries completely. This will help auditors understand the reason behind each entry. 

Step 3 – Removing all revenue and expense accounts: The trial balance in a balance sheet contains liabilities, assets, equity, expenses, revenue, losses and gains. However, in order to calculate it, one needs to delete everything apart from the liabilities, assets and equity, although, these deleted accounts are necessary for making an income statement.

Step 4 – Making a calculation of the remaining accounts: Now, add up all the trial balance accounts. They will include cash, accounts receivable, common stock, retained earnings, inventory, fixed assets, accounts payable, debt, accrued liabilities, other liabilities and other assets

Step 5 – Validating balance sheet: In order to validate the balance sheet, the sum total of all assets in the sheet must match the equity accounts of stockholders’ and liabilities. 

Step 6 – Presenting it in the required format: The final step in preparing a balance sheet is to present all this data in the required balance sheet format.

Income Statement

Income statement is one of the 3 core financial statements. The main difference between a balance sheet and an income statement is that a balance sheet shows a company's financial position at a specific point in time, while an income statement also known as the profit and loss statement, shows a company's financial performance over a period of time. Balance sheet shows a company's assets, liabilities and equity at a specific point in time. It can be thought of as a company's bank balance. Income statement shows a company's revenue, expenses, gains, and losses over a period of time. It is used to show whether a company is profitable during a financial year. Together, the balance sheet and income statement provide a fuller picture of a company's current health and future prospects.

Cash Flow Statement

Cash flow statement is also one of the 3 primary financial statements. The major difference between a balance sheet and a cash flow statement is that a balance sheet shows a company's financial status at a specific date in time, while a cash flow statement also called as income and expenditure statement shows the movement of cash over a period of time. Balance sheet provides a snapshot of a company's financial status and helps determine its ability to pay obligations. On the other hand, cash flow statement shows the flow of cash in and out of a company over a period of time. It provides insights into a company's liquidity, operational efficiency and ability to generate cash. Cash flow statements categorize cash activities into operating, investing and financing activities.

Trial Balance

Trial balance is not a financial statement and does not form a part of a company’s final accounts, whereas the balance sheet is a financial statement that is an important component of a company’s final account. Trial balance is made for use within the company but Balance Sheet is made for the company’s external affairs. In trial balance, all its accounts are divided into debit and credit balances. In balance sheet, all its accounts are divided into equity, liabilities and assets. Trial balance records the closing balances of all the general ledgers of accounts. Balance sheet records a company’s equity, liabilities and assets. The purpose of trial balance is to verify that the total debits and credits of all the ledgers are in balance. The purpose of balance sheet purpose is to determine whether the business’s assets are equal to the sum of its liabilities and equity. For trial balances, there is no specific arrangement rule. For balance sheets, there is a specific arrangement format. In trial balance, Auditor’s signature is not mandatory whereas Auditor’s signature is mandatory in balance sheet. Trial balance is prepared at the end of every year, half-year and quarter. Balance sheet is recorded at the end of every financial year.

Non Profit Organisations

For accounting purposes, non-profit organizations are typically referred to as "not-for-profit organizations (NPOs)". This term highlights that their primary goal is not to generate profit, but to serve a social cause or a mission using funds from Govt grants or donations. NPOs may be collecting a finite amount of funds allocated at specific times of the year. For example, they may have grants paid out in regular intervals. They may also have fundraisers set at specific times, leading them to have limited cash flow. The balance sheet of these NPOs is prepared in the same manner as in the case of a business enterprise but it is called a Statement of Financial Position. It differs from a for-profit balance sheet in a few ways, but reflects its mission to spend money to support a specific cause. Public Sector Undertakings are called Section 8 Companies and are categorized as such because of their special non-financial objectives. Entities registered under Companies Act, 2013 must prepare financial statements adhering to the accounting standards set by the Government.

Accounting and Bookkeeping for Event Management

A balance sheet is extremely important for an event management company as it provides a clear snapshot of the company's financial health at a given time, allowing them to assess their assets, liabilities and overall financial stability, which is crucial for managing cash flow, making informed business decisions and attracting potential clients or investors by demonstrating their ability to meet financial obligations. Precise financial management is the key to achieving success in the event management business. While event planners focus on crafting unique and unforgettable moments, they must also maintain a firm grip on the financial aspects that underpin every successful event.

Effective book keeping practices in event management ensure fiscal responsibility and enable event planners to make informed decisions, manage budgets and deliver exceptional experiences within financial constraints. It is therefore necessary to understand the complexities of the event management industry and the specific bookkeeping requirements as they help in catering to the unique needs of event planners.

Here are the unique bookkeeping requirements the event organisers face:

(a)   Budget Tracking: Event planners must carefully track expenses and revenue against the event budget to ensure financial viability.

(b)   Vendor Payments: Managing payments to various vendors, including deposits and final payments, is crucial to maintaining vendor relationships and avoiding financial discrepancies.

(c)   Client Billing: Invoicing clients accurately and promptly, including any additional charges or adjustments, is essential for transparent financial transactions.

(d)   Expense Reconciliation: Reconciling expenses related to venue rentals, catering, decorations, and entertainment ensures that budgets are adhered to and that no expenses go unnoticed.

(e)   Sponsorship and Ticketing: Managing income from sponsorships, ticket sales, and registration fees requires careful tracking to ensure accurate financial reporting.

(f)    Marketing Costs: Recording marketing and promotional expenses, such as advertising and promotional materials, helps evaluate the return on investment (ROI) for marketing efforts.

(g)   Tax Compliance: Navigating tax regulations, including sales tax on ticket sales and deductions related to business expenses, is crucial to avoid legal complications.

Effective bookkeeping practices offer numerous benefits to event organisers, enhancing their financial management and event execution. Here are the key reasons why looking at client’s balance sheet is important for an event management company. They are for

(a)   Understanding financial position: A balance sheet shows exactly what the company owns (assets) and what it owes (liabilities), giving a clear picture of its net worth and ability to cover expenses.

(b)   Managing cash flow: By analyzing the balance sheet, event planners can identify areas where they might need to improve cash flow, such as managing accounts receivable or controlling inventory of event materials.

(c)   Budgeting and planning: A well-maintained balance sheet provides valuable data for creating accurate event budgets, forecasting future revenue and making informed decisions about upcoming events.

(d)   Identifying financial risks: The balance sheet can reveal potential financial risks like high levels of debt or significant reliance on short-term loans, allowing the company to proactively address these issues.

(e)   Advising the clients: After having studied the balance sheet of the client it is possible for the event organiser to advice the clients on the judicious spending of money on the event.

Summary:

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time, outlining the value of its assets i.e. what it owns, liabilities i.e. what it owes and shareholders' equity means the residual ownership value - all of which must balance according to the fundamental accounting equation: The equation is Assets = Liabilities + Shareholders' Equity. Thus the key components of a balance sheet are Assets, Liabilities and Shareholder’s equity. Assets are listed in order of liquidity, meaning how quickly they can be converted to cash. Current assets include cash, accounts receivable, inventory and prepaid expenses, while non-current assets include property, plant, equipment, investments and intangible assets like patents. Liabilities represent debts owed by the company to creditors. Current liabilities include accounts payable, short-term loans and accrued expenses, while non-current liabilities include long-term loans and deferred taxes. Shareholders' Equity represents the owners' residual claim on the company's assets, calculated by subtracting total liabilities from total assets. It includes contributed capital i.e. money raised from selling shares and retained earnings i.e. accumulated profits not distributed as dividends. Not for Profit organisation prepares statement of financial position not balance sheets. Event organisers shall understand the importance of financial statements.

Frequently Asked Questions (FAQs):

1.        Explain briefly the three key financial statements.

2.        What is the importance of balance sheet?

3.        What is the purpose of a balance sheet?

4.        What are the components of a balance sheet?

5.        Differentiate a trial balance and a balance sheet.

 

Model answers to FAQs:

1.      The three core financial statements, in other words three primary financial statements, are (1) Balance sheet variously called as Statement of Financial position or statement of financial condition, (2) Income statement also called as “profit and loss statement” and (3) Cash flow statement i.e. the "income and expenditure account". These are year-end reports that summarize a company's accounting transactions. They provide important information about a company. Balance Sheet shows a company's assets, liabilities, and shareholders' equity at a specific point in time. Income Statement i.e. Profit and Loss Statement summarizes a company's revenues and expenses over a specific period, resulting in net income and Cash Flow Statement details the movement of cash through operating, investing, and financing activities.

2.      A balance sheet is an essential component that assists in the smooth running of a business. Balance sheet is important because it (a) Assist banks in evaluating a firm’s net worth (b) Helps investors take decisions (c) Serves as a determiner for risk and returns (d) Enables financial analysis afford. Having a properly maintained balance sheet is an excellent way to understand the financial standing of a business. It also helps in attracting prospective investors who may be willing to invest in a company. Furthermore, it helps determine firm’s financial strengths, pinpoint issues and also measure business’s progress over a period of time.  

3.      The purpose of a balance sheet is to paint a clear picture of a company’s financial standing at a point in time, in conjunction with other core financial statements that report financial results for a period of time. The balance sheet is used for financial analysis by applying ratios using amounts from the balance sheet and income statement. These financial ratios include liquidity ratios like the current ratio using working capital components and the more stringent acid test ratio that excludes inventory from the calculation. Companies compute their return on assets (ROA), return on equity (ROE), or return on investment (ROI) to measure performance. 

4.      There are three main components of a balance sheet. They are Liabilities, Assets & Equity. Liabilities shows the money that a company owes to others, like loan expenses, recurring expenses, other forms of debt, etc. Now, liabilities can be further subdivided into two categories – current liabilities and non-current liabilities. Assets are items of value that can be converted into cash are found. These items will be listed in order of liquidity, that is, how easily they can be converted into cash. Assets can be further subdivided into current assets and long term assets.  Shareholder’s equity is the amount of money stockholders have invested in a company. It includes retained earnings and share capital. Retained earnings is the amount of a company’s gains that are reinvested into its business instead of returning to the shareholders in the form of dividends and Share capital is the amount of capital that a company receives for the purpose of business.

5.      The main differences between Trial Balance and Balance Sheet are that Trial balance is not a financial statement and does not form a part of a company’s final account, whereas the balance sheet is a financial statement that is an important component of a company’s final account. Trial balance is made for use within the company but Balance Sheet is made for the company’s external affairs. In trial balance, all its accounts are divided into debit and credit balances. In balance sheet, all its accounts are divided into equity, liabilities and assets. Trial balance records the closing balances of all the general ledgers of accounts. Balance sheet records a company’s equity, liabilities and assets. The purpose of trial balance is to verify that the total debits and credits of all the ledgers are in balance. The purpose of balance sheet purpose is to determine whether the business’s assets are equal to the sum of its liabilities and equity.

Multiple Choice Question (MCQs):

1. The balance sheet shows the accounting equation of ___________.

a)      L + A - E

b)      A = L + E

c)      E = A + L

d)      I = A - L

2. ____________ is known as the Father of Accounting.

a)      Luca Pacioli

b)      Leonard da Vinci

c)      Baden Paul

d)      Kautilya

3. ______________ is not a core financial statement.

a)      Balance Sheet

b)      Profit & Loss

c)      Income & Expenditure

d)      Trial Balance

4. The balance sheet of a Not for Profit Organisation is called __________

a)      Statement of Statutory Audit

b)      Statement of Public Spending

c)      Statement of Govt Auditing

d)      Statement of Financial Position

5. ___________ is not a component of balance sheet.

a)      Liability

b)      Asset

c)      Audit

d)      Equity

Keys to MCQs: 1(b) 2(a) 3 (d) 4(d) 5(c)

Glossary:

Financial Statement: It is a collection of documents that show a company's financial health, performance, and liquidity at a specific point in time

Accounting: A system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.

Book Keeping: It is recording the financial transactions and information concerning the business of a company regularly.

Single entry: Single-entry bookkeeping, also known as, single-entry accounting, is a method of bookkeeping that relies on a one-sided accounting entry to maintain financial information.

Double entry: The double entry system of accounting is a bookkeeping method that records every financial transaction in at least two accounts, a debit and a credit. The name "double entry" comes from the requirement that for every entry in one account, there must be an opposite entry in another account.

Assets: An asset is any resource with financial value that is controlled by a company, country, or individual.

Liability: A liability is a financial obligation or debt that a business or entity owes to an outside party.

Equity: It is the value of a business's owners, calculated by subtracting a company's liabilities from its assets

Shareholders: A shareholder, also known as a stockholder, is a person or entity that owns shares of a company's stock or mutual fund. Shareholders are part-owners of the company and have certain rights and responsibilities.

Cash Flow: It refers to the inflow and outflow of the amount of cash or its equivalents in business.

Key words: Financial Statements, Income, Expenditure, Profit, Loss, Balance Sheet, Assets, Liabilities, Equity, Inventory, Trial balance

Y. Babji,

Editor, Public Relations Voice,

Academic Counsellor, Public Relations (since 1989) at

 AP Open University/Dr BR Ambedkar Open University