The Balance Sheet Although the balance sheet was first implemented just a couple of centuries ago, it has quckly developed and sophisticated to become nowadays a widely used and powerful tool in the hands of professional users, well known and popular even among the mass public. In spite of its prominence, or may be because of it, the balance sheet can not be easily and fully described in a few words, but still, if we leave aside its various functions and forms and any other subjective factors, we can state that the balance sheet is a summary of an enterprises’ assets, liabilities and equity at a specific moment of time. To simplify this description even further we could say that the balance sheet shows an entity’s possessions, obligations and others’ debts to it. The objective point of view however is often too restrictive, and the most simple things many times prove to be rather complex.. Among the thousand more complex definitions appended to the balance sheet one of my favorites is the definition given by … according to which the balance sheet is a statement meant to communicate information about the financial position of an enterprise at a particular point in time, summarizing the information contained in accounting records in a clear and intelligible form, giving information about the financial state of an enterprise and indicating the relative liquidity of the assets, showing the liabilities of the enterprise (i.e.
what the enterprise owes and when these amounts will fall due), able to assist the user in evaluating the financial position of the enterprise, being however only part of the data needed by users. Or to summarize this long description with which I completely agree, I could say that although the balance sheet is one of the most outstanding instruments in the hands of financial analysts, managers, investors and other users, its importance should not be over emphasized, it has to be viewed along with many other documents, and it is far from being the perfect and the super financial document. In order to get a more clear, complete and fair picture of the balance sheet, apart from reviewing the definitions given by the experts in this field, we would need to consider as many sides and issues of the subject as possible. Being objective we should have a look at the etymology of the word balance, the history of this document, its theoretical essence and the basic concepts of accounting implied in it, its forms in the accounting practise. In our attempt however not to become over-objective or scholastic, we should also review the aims and purposes of the balance sheet and the extent to which they are fulfilled, the users of this financial statement and their contradictory needs, the negative aspects and restrictions of the balance sheet, and finally the trends of its further development.
In short, we have to go further into the matter.. The history of the so called financial statements, and the balance sheet among them, can be traced back to Renaissance Italy, where along with the double – entry book – keeping they first evoked to respond to the growing more and more complex needs of the accounting connected with the economic development of the society at that period (expansion of trade activities, development of banking, etc.) and with the transition from the owner – manager model towards limited companies or the breakdown of ownership from control. Obviously these historical events called for the development of new methods and new documents, reflecting the changes. Naturally the word balance itself has also an Italian origin (bilan, bilanz) though it is formed up of two latin words: bi – double and lanx – scales. Even from here it becomes obvious that the balance sheet is a sheet or summary of two different aspects of one and the same thing: an entity’s financial position. Further to this aspect, we can take a look at the definition of the balance sheet given by John Arnold, Tony Hope and Alan Southworth: The balance sheet is the most inituitive and easily understood document of accounting.
Most of us at some stage in our lives will be required to compute a listing of our possessions. Such a listing of possessions is a major element in the construction of a balance sheet. Far from being a precise statement on what the balance sheet is, it can easily be perceived from a phylosofical and psychological view point, and then, though defined at present times, it can be related with the historical side of the balance sheet. The link is as simple as that: one would generally describe his possessions by listing the things he has and those that should be returned to him, as well as his debts to other people, further more, he would intuitively put those lists on the scales to find out what his financial state is, or to get the balance. To extend this etimological analogy a bit more, by putting on the different sides of the scales the lists of his possessions and his debts, one would, probably intuitively, measure his financial position with the height difference that would occur between the sides of the scales.
Then, in the prossess of separation of the owner from the manager, this way of measurement of a person’s financial state, was naturally transferred into what we now call an enterprise’s balance sheet. Furthermore, the fundamental method of scaling possessions and debts continues be the basis of this document. As we all know a fundamental characteristic of every balance sheet is that the total figure for assets always equals the total of liabilities plus owners’ equity. As we have already seen, actually the above simple equation, representing the theoritical essense of this document, and a basis of its practical side, is the reason for it to be called balance. Actually, the two sides of the balance sheet are merely two views of the same business property.
Having defined the essence of the balance sheet, in theoretical aspect we have to review the concepts in accordance with which it is built up. Since it is an accounting document, obviously, we would have to find out the application of the basic accounting principles in it. Further to this we can deffinitely state that the balance sheets is in complince with all of the basic accounting principles and concepts. Let us review some of the most obvious principles that can be referred to the balance sheet: The entity principle: as in all accounting documents in the balance sheet an enterprise is presumed to exist in its own right. It is therefore treated as a separate entity from the person or persons who own or operate it and in no way reflects their assets or liabilities.
The same applies equally to organizations that are not commonly referred to as businesses (charities, clubs, etc.). The money-measurement concept: obviously everything shown on the balance sheet is measured in money, all pointers that cannot be expressed in monetary terms, being left aside; The cost principle: I would classify this one as may be the most contradictory principles not only in the financial statements but in the accouning itself. I can even add that it is the reason for some of the negative aspects of the balance sheet. In spite of the different ways in which assets can be valued the accountants have traditionally used the historic cost as the basis of valuation of assets in the balance sheet, assuming that the enterprise is a going-concern, and taking into consideration the need for objectivity. Periodicity principle: being a document, showing the financial position of a firm on a given date, by its very nature the balance sheet has to be drawn at a some periods of time, so there is no way for it not to comply with this principle.
As already mentioned the balance sheet can be easily referred to and found in complience with any other concepts like the accrual concept, the duality concept, the prudence principle, etc. To finish with the aspects here referred to as objective, we have summarize in short the practical side of the balance sheet. No matter how often it is drawn, and what of the two popular forms it is presented in, the balance sheet, as known, consists of three major parts: assets – or what the firm possesses and has the right receive in future; liabilities – or what the firm’s obligations are; shows also how many of these should be returned in the short-run, and how many the enterprise can employ in the long-run; owner’s equity – the firm’s capital, it can be also figured as the differense between assets and liabilities. To summarize the theoretical and practical essense of the balance sheet, we can use another contemporary definition of it given by A. Belkaouli in Accounting theory: The balance sheet me …