BALANCE SHEET 1. Definition and origin of a balance sheet.—We have seen that at any given moment the balances of some accounts in a business represent rights held by the business and rights held by others against the business. If the business is considered as a distinct and separate entity, the proprietor's investment may even be regarded as a right which he holds against the business.
A balance sheet is the statement by which these various kinds of rights are indicated and classified ac cording to relation with the business or their effects upon it. On the one side are the rights held by the business which are assets and, opposed to these, are the rights held against the business or the divisions of ownership of the assets.
Some authorities may take exception to the state ment that assets are rights held by the business. A firm holds any tangible asset not because of its per sonal characteristics but rather because it gives a com mand over services or a right to demand something from another. Accounts receivable and notes receiv able, are rights which the business holds against others, which may be turned into money on demand. larly, buildings, machinery and other equipment, are held because the business has the right to their services.
2. Use of a balance order to develop a good form of balance sheet one must keep in mind the various kinds of information which it should make available. These may be classified as follows: 1. The total investment in the enterprise at the time the statement is made. A list of assets in any order will accomplish this if the assets are correctly valued.
2. Distribution of interest in the total capital. A list of liabilities and proprietorship as opposed to a list of assets, will accomplish this, regardless of ar rangement.
3. The amounts owed to,the business by other per sons, with an indication of the degree of collectibility of these debts.
4. The amount of capital invested in production as sets and the amount invested in assets which are quick ly convertible into cash.
5. The relationship between the amounts to be paid and the funds with which they shall be paid.
Liabilities which must be met in the near future must, of necessity, be liquidated by parting with some asset. The exact amount of assets available for the paying of these liabilities will be brought out if the balance sheet is prepared in such a form as to show the amounts due and the funds with which they will be met. This applies not only to current payments but to fixed payments and the distribution of profits. If a business has been blest with large profits which have not yet been realized in the form of cash or such as sets as may be immediately and easily converted into cash, the owners cannot withdraw these profits for their personal use until they have provided cash or its equivalent with which to make the distribution.
3. Classification of assets.—There are three stand ard classifications into which assets may be divided, namely: "current assets," "fixed assets," and "pre paid expenses or deferred charges to operations," also known as "deferred assets." Current assets consist of cash and those assets which may be readily converted into cash in the ordinary course of the business, as accounts receivable, notes receivable and a stock of unsold merchandise. In some cases current assets will include bonds and stocks owned, and other like items if these are held for tem porary investment only.
The assets with which the business is carried on are termed fixed assets. These include land, buildings, machinery, furniture, fixtures and other equipment. Intangible assets such as franchises, patent rights, good-will, and securities held for permanent invest ment, will usually be classed as fixed assets. The com mon features of these assets are their durability and the fact that they are the instruments with which busi ness operations are carried on, in the case of physical assets, and the means of securing or holding control over competitors, in the case of intangible assets.