The balance sheet (also known as the statement of financial position) is an essential set of final accounts that shows the value of an organization’s assets, liabilities, and the owners’ investment (or equity) in the business at a particular point in time. Hence, the balance sheet is often referred to as a “snapshot” of a firm’s financial position, indicating its financial health. The reporting date of the balance sheet for an organization is the same each year.

Assets are the possessions of a business that have a monetary value. Assets are owned by a business. Typical examples include: buildings, land, machinery, equipment, stock (inventory), and cash.

Liabilities are the debts of a business, i.e. the money owed to others. Typical examples include any money owed to financiers (such as commercial banks), trade creditors, and the government (for corporation tax).

Essentially, a balance sheet must show two important things:

• the organization’s sources of finance, including borrowed funds (part of its liabilities) and equity (internal finance invested by shareholders, and any accumulated retained profits).

• the organization’s uses of finance, i.e. how the business has used its sources of finance, such as the purchase of non-current assets (also referred to as non-current assets) and current assets for trading.

So, the balance sheet is so called as a firm's uses of finance must match its sources of finance.

The required format of the balance sheet in the IB Business Management course is shown below:

Format of the balance sheet for a profit-making business entity

Statement of financial position for (Company name) as at (Date)

	$m	$m
Non-current assets:
Property, plant, and equipment	200
Accumulated depreciation	(20)
Non-current assets		180
Current assets:
Cash	15
Debtors	25
Stock	20
Current assets		60
Total assets		240
Current liabilities:
Bank overdraft	5
Trade creditors	20
Other short-term loans	15
Current liabilities		40
Non-current liabilities:
Borrowings (long term)	100
Non-current liabilities		100
Total liabilities		140
Net assets		100
Equity:
Share capital*	80
Retained earnings	20
Total equity		100

Source: adapted from Business Management guide, page 61 (May 2022)

Notes

• For sole traders, partnerships, and non-profit business entities, there is no share capital recorded in the balance sheet.

• Also, for non-profit organizations, the term "retained earnings" should be replaced with "retained surplus".

 Watch this video clip for an explanation on the construction of the balance sheet (statement of financial position):

Note to teachers: If using or referring to old exam papers and mark schemes (final exams 2023), please note that the above prescribed format may result in different figures and answers. For example, the terms "net fixed assets", "working capital", "net current assets", "long-term liabilities (debt)", and "accumulated retained profit" do are no longer used throughout Unit 3 of the syllabus. Hence, use resources for the previous syllabus with some caution.

Teachers can also download a poster showing the format of the balance sheet by clicking the icon below.

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This poster has been created ans shared by IB educator Maria Pardo, who teaches at American School of  Valencia in Spain. Many thanks for sharing this on InThinking, Maria!

An explanation of the terms appearing in the balance sheet is provided below.

• Non-current assets (also known as fixed assets) are the long-term assets or possessions of an organization with a monetary value but are not intended for resale within the next twelve months of the balance sheet date. Instead, the non-current assets are used over and over again as part of the organization’s operations. Typical non-current assets include buildings, plant (production facilities), equipment, machinery, and vehicles.

• The value of most non-current assets falls in value over time due to depreciation. Hence, the balance sheet includes “accumulated depreciation” (of non-current assets) to calculate the net value of the organization’s non-current assets at the point of constructing the balance sheet. Non-current assets are generally highly illiquid assets. These items of value, owned by the business, cannot be sold quickly, are difficult to sell, and/or cannot be sold easily without incurring a significant loss in value.

Buildings and machinery are examples of non-current assets

• Current assets are possessions of an organization with a monetary value, but intended to be liquidated (turned into cash) within twelve months of the balance sheet date. These include cash (in hand and at the bank), debtors, and stocks (inventory):

1. Cash refers to the money an organization has either “in hand” (at its premises) and/or “at bank” (i.e. in its bank account). Cash is the most liquid of current assets and is easily accessible to the business.

2. Debtors are a type of current assets, referring to individual or business customers that owe money to the organization because they have bought goods or services on trade credit. The usual trade credit period is between 30 and 60 days.

3. Stocks (also known as inventories) are the goods that a business has available for sale, per time period. Stocks are intended to be sold as quickly as possible, thereby generating cash for the business.

In turn, stocks (inventories) can be categorized in three ways:

• Raw materials are the natural resources used in the production process to create goods and provide services to customers.

• Work-in-progress (also referred to as semi-finished goods) are parts and components of a final product in the production process. They are the items that are in the process of being produced in order to sell to customers.

• Finished goods are the final products, ready for sale to customers. These products are of most value to customers.

• Total assets are simply the sum of non-current assets and current assets.

• Current liabilities are the short-term debts of a business, which need to be repaid within twelve months. Typical examples include bank overdrafts, trade creditors, and other short-term loans.

1. Bank overdrafts allow customers to temporarily take out more money than is available in their bank account. This banking service enables pre-approved customers are used for very short term purposes and typically repaid within a few months in order to avoid high interest charges.

2. Trade creditors - Suppliers may give trade credit (typically for 30 to 60 days), which needs to be repaid at a future date.

3. Short-term loans - These are advances (loans) from a financial lender, such as a commercial bank, that needs to be repaid within 12 months of the balance sheet date.

• Non-current liabilities are the long-term debts of a business, falling due after 12 months of the balance sheet date. In other words, this refers to the long-term borrowings of the business, such as long-term loans and mortgages.

• Total liabilities are simply the sum of current liabilities and non-current liabilities, i.e. the sum of all the monies owed by the business.

• Net assets refers to the overall value of an organization’s assets after all its liabilities are deducted. Hence, net assets is calculated by using the formula:

or

• Equity refers to the value of the owners' stake in the business, i.e. what the business is worth at the time of reporting the balance sheet. Equity is comprised of both share capital and retained earnings.

1. Share capital refers to the value of equity in a business that is funded by shareholders, either through an initial public offering or via a share issue.

2. Retained earnings (sometimes referred to as retained profits) is value of equity in a business that is funded by net profit after tax that is not distributed as dividends to shareholders. Instead, it is kept as an internal source of finance for the business to use.

For a balance sheet to balance, the value of the firm’s net assets must equal the value of its equity. This is to ensure the firm’s total value of its sources of finance matches its uses of finance.

 ATL Activity 1 (Thinking and Communications skills) - Balance Sheet Hexagons

This activity is based on the Profit and Loss Hexagons ATL Activity. Teachers should print the large yellow hexagons with the various components of the balance sheet (statement of financial position). These are given in a mixed order to students who work in small groups of 2 - 3 people to construct a complete balance sheet. The first team to get all the components in the order order are the winners. The hexagons can then be used as a classroom display for revision purposes.

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To use this activity in class, download the Balance Sheets Hexagons here. Please note the hexagons already appear in the correct order for your reference.