Balance sheet is a financial statement so it should give much information as possible to the users of the balance sheet. The items in the balance sheet (components of balance sheet) are therefore classified in the following manner:
Assets – Definition and Types:
Assets are resources owned by a business having future economic value measurable and quantifiable in monetary (dollar) terms.
Some valuable items cannot be quantified and expressed in monetary terms and they may include the good reputation of the business, customers’ loyalty, skilled employees, the value of successful consumer brands etc. In the absence of any objective monetary value, these items are not reported as assets in the accounting records. Assets may be categorized as non-current and current assets.
Non-Current Assets – Definition and Examples:
Non-current assets are the assets which are intended for continuing use in the business. They are used to help the business to generate profits, often over a period of several years. They are not acquired with the intention of immediate resale to a customer in the normal course of trade. However, they could be sold at some time in the future, when business has no future use for them.
Typical examples of non-current assets include land, buildings, furniture, fixtures, machines and vehicles etc.
Current Assets – Definition and Examples:
Current assets include cash in hand, cash at bank and other assets which are expected to turn into cash or to be be used up within one year of the balance sheet date. They are usually transformed into something else in the normal course of trade as one would expect the inventory would be sold, the trade receivables to pay off their debts and the cash to used for buying new inventory or for paying liabilities or expenses and so on within one year. Current assets are presented in the increasing order of liquidity. Liquidity measures the ability of an asset to generate cash.
The usual examples of current assets are inventory, trade receivables, other receivables, cash at bank and cash in hand etc.
Liabilities – Definition and Types:
A liability is an amount which the business owes to a third party. The division of liabilities into current and long term is done on the same basis as the split of assets into current and non-current assets.
When preparing a balance sheet, we differentiate between liabilities which must be paid in the short term i.e., within one year and those which must be paid in the long term i.e., after one year.
Current Liabilities – Definition and Examples:
Current liabilities are analogous to current assets in respect of time period as these are liabilities which fall due within one year of the balance sheet date. Typical examples of current liabilities include bank overdraft, trade payable, short term loans (falling due within one year) etc. Usually bank overdrafts are payable on demand so this makes them a current liability even though many businesses have more or less permanent overdrafts.
Non-Current Liabilities – Definition and Examples:
Non-current liabilities are liabilities of a business that are due in more than one year of the balance sheet. An example of a non-current liability would be a loan payable in ten years.