20 years: Chartered accountant & educator
In this video, Saket breaks down the different categories of the balance sheet including assets, liabilities and equity. He also outlines two different ways of presenting the balance sheet, the 'current and non-current' presentation, and the 'liquidity' presentation, and when it is appropriate to use each of them.
In this video, Saket breaks down the different categories of the balance sheet including assets, liabilities and equity. He also outlines two different ways of presenting the balance sheet, the 'current and non-current' presentation, and the 'liquidity' presentation, and when it is appropriate to use each of them.
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8 mins 52 secs
A balance sheet or statement of financial position provides a snapshot of the sources of funds and investments of an entity, as at a particular date. The elements of a balance sheet are assets, liabilities and equity and these elements form the fundamental accounting equation: Assets = Liabilities + Equity. The assets and liabilities may be presented on the balance sheet in current/non-current format or in the order of liquidity.
Key learning objectives:
Outline the different categories of items on the balance sheet
Explain the current and non-current classification of assets and liabilities on the balance sheet
Identify the assets and liabilities presented in the order of liquidity
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The balance sheet is categorised into the different elements which are assets, liabilities and equity.
Assets and liabilities are classified as current and non-current, except when a presentation based on liquidity would provide information that is more relevant and reliable.
Non-current assets are long-term assets which are used in the business over multiple years. Examples include property, plant and equipment, intangible assets and long-term debt and equity investments not held for trading. Current assets are those which are consumed within an entity’s operating cycle and includes inventories, short-term investments and receivables which are convertible into cash within 12 months, and cash and cash equivalents.
Similar to assets, current liabilities are those which are expected to be settled within 12 months from the balance sheet date. Examples of current liabilities are short-term provisions, trade payables and corporation tax payable. An amortising loan which has more than one year remaining to maturity has both current and non-current components.
The liquidity approach to classification of the assets and liabilities is generally relevant to the financial institutions as this form of presentation provides more relevant and reliable information. The items within assets and liabilities are presented in decreasing order of liquidity though an increasing order of liquidity presentation may also be used.
When the order of liquidity format is used for presentation of assets and liabilities in the balance sheet, there is information about current and non-current components of assets and liabilities in the notes to the financial statements.
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