📋 What is a Balance Sheet?
Definition: A balance sheet (also called a statement of financial position) is a snapshot of what a business owns (assets), what it owes (liabilities) and the owner's equity at a specific point in time.
Unlike the income statement which covers a period, the balance sheet is a photograph of one single moment — usually the last day of the financial year.
The accounting equation: Assets = Liabilities + Owner's equity
This equation ALWAYS balances — hence the name 'balance sheet'!
Think of it this way: everything the business OWNS was paid for either by BORROWING (liabilities) or by the OWNERS putting money in (equity) 💡
[Diagram: balance-sheet-equation] - Available in full study mode
🏢 Non-Current Assets
Definition: Non-current assets (also called fixed assets) are items the business owns for more than one year that help it generate income.
- Land and buildings
- Machinery and equipment
- Vehicles
- IT systems and software
- Intangible assets (goodwill, patents, trademarks)
Non-current assets lose value over time through depreciation (for tangible assets) or amortisation (for intangible assets). On the balance sheet, they are shown at their net book value (original cost minus accumulated depreciation).
Non-current assets are the long-term 'tools' of the business — they help generate revenue year after year 🔧
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🔄 Current Assets & Current Liabilities
Current assets
Items that will be converted to cash within one year.
- Stock (inventory) — goods waiting to be sold
- Trade receivables (debtors) — money owed by customers
- Cash and bank balances — money available immediately
Current liabilities
Debts the business must pay within one year.
- Trade payables (creditors) — money owed to suppliers
- Short-term loans and overdrafts
- Tax owed — corporation tax due to the government
Working capital: Net current assets (working capital) = Current assets − Current liabilities
This shows whether the business can pay its short-term debts. Positive = healthy. Negative = danger!
🏦 Non-Current Liabilities & Equity
Non-current liabilities
Long-term debts that are not due within one year.
- Bank loans (repayable over several years)
- Mortgages
- Debentures (long-term bonds)
Owner's equity (shareholders' funds)
The value of the business that belongs to the owners after all liabilities are paid.
- Share capital — money invested by shareholders
- Retained profit — accumulated profits kept in the business
- Equity = Assets − Liabilities (what is left for the owners)
The balance sheet must always balance: Assets = Liabilities + Equity. If it does not, there is an error somewhere. ⚖️
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🔢 Constructing a Balance Sheet (IB Format)
IB PRESCRIBED FORMAT: The markscheme states maximum [3] out of [4] if the balance sheet is not in the IB prescribed format. You MUST use this exact structure to get full marks.
The IB prescribed format
Your balance sheet must follow this exact structure with these headings in this order:
[Business name] — Statement of Financial Position as at [date]
Non-current assets Property, plant, equipment ... $xx,xxx Less accumulated depreciation ... ($x,xxx)
Current assets Stock (inventory) ... $x,xxx Trade receivables (debtors) ... $x,xxx Cash ... $x,xxx
TOTAL ASSETS ... $xx,xxx
Current liabilities Trade payables (creditors) ... $x,xxx Overdraft ... $x,xxx
Non-current liabilities Bank loan ... $xx,xxx
TOTAL LIABILITIES ... $xx,xxx
NET ASSETS ... $xx,xxx
EQUITY Share capital ... $xx,xxx Retained earnings ... $x,xxx TOTAL EQUITY ... $xx,xxx
Key checks: (1) Net assets MUST equal total equity. (2) Must include a HEADING with business name and DATE. (3) Total assets = total liabilities + equity. If it does not balance, you have an error!