Definition of Balance Sheet
The balance sheet is a financial statement showing the financial position of an organization or business unit (hereinafter referred to as the "entity") at a particular date. It is prepared based on the accounting equation of “Assets = Liabilities + Owners' Equity”, by classifying, summarizing and listing all assets, liabilities and owners' equity items of an entity at a specific point in time according to some classification standards and order of presentation. As the data on the balance sheet represents the financial position at a particular point in time, the balance sheet is also regarded as a status statement.
The balance sheet shows the economic resources (assets) owned or controlled by an entity at a particular date, the current obligations (liabilities) assumed and the owner's claim to net assets (owner's equity). The balance sheet allows the users of financial statements to have a clear snapshot of the total amount of assets owned or controlled by the entity and their structure; to obtain an understanding of the equity structure of the entity at a particular date; to analyze the amount of present and future debts to be paid by the entity based on the total amount of liabilities and their structure; and to have a clear picture of the sources of funds of the entity and their makeup. By analyzing the relevant contents of the balance sheet, the users of financial statements can have a complete understanding of the liquidity of the entity's assets and analyze its solvency for debts repayment, thus gaining a reference information for their future economic decisions.
Format of Balance Sheet
There are essentially two types of formats for a balance sheet: account form and report form. Most enterprises and other organizations in China adopt an account form for presentation of a balance sheet (see the sample form below), which is divided into left and right sides. Assets are listed on the left side, showing a layout of all asset items in the order of liquidity, with more liquid asset items such as "monetary assets" listed at the top position and less liquid asset items such as "long-term equity investments" and "fixed assets" listed at the bottom position. Liabilities and owners' equity are listed on the right side, showing the content and makeup of all liabilities and owners' equity, which are generally listed in the order of claims, with the current liabilities such as "short-term borrowings" and "accounts payable" required to be repaid within one year or within a normal operating cycle of more than one year listed at the top position, the non-current liabilities such as "long-term borrowings" required to be repaid in more than one year listed in the middle position, and with the owners' equity not required to be repaid until the entity is liquidated listed at the bottom position. The balance sheet is balanced on the left and right sides, and the total amount of all the asset items equals the total amount of all the liability items and the owners' equity items, i.e., “Assets = Liabilities + Owners’ Equity”.
Sample of Balance Sheet