For the purpose of an easy showing of these various groups and their titles, it is customary to list the amounts of the several detailed items of each group in an inner money column, and to extend the total into the adjoining money column on the line of the last item in the group. A similar arrangement is made of the groups of liabilities so that not only the items in the various groups but the group totals as well are available. The totals of the various groups give the grand totals for the assets and the liabilities respectively.
The balance sheet as now classified and arranged provides first a formal title, giving the name of the business and the date of the balance sheet; then the assets, under which appear the groups Current Assets, Deferred Charges, Fixed Assets, and Other Assets; under the liabilities appear the groups Current Liabilities, Fixed Liabilities, and Other Liabilities. The showing of Proprietorship or Net Worth under the three different kinds of ownership has already been set forth. The illustration on [page 31] shows a typical form of classified balance sheet. This should be studied carefully, as it is the type which will be used hereafter.
The Problem of Content.—The form of the balance sheet serves the purpose of making easily available the information contained in the balance sheet. Form is of little value unless the content is accurate. What a balance sheet contains is, after all, far more important than its form. The problem of content comprises a consideration of two points: (1) the proper inclusion of all items, both assets and liabilities, belonging in the balance sheet; and (2) the correct valuation of the items so included.
With regard to the first, it may be said briefly that care must be exercised to see that all assets belonging to the business and having value, and that all claims against the business of whatever nature, are included.
Assuming that a given balance sheet contains a list of all the assets and all the liabilities, the further problem of the proper valuation of these items must be considered. A balance sheet in which the title Cash includes counterfeit bills, N. G. (that is, uncollectible) checks and other similar items, would not be considered a reliable balance sheet. Similarly, the basis for the valuation of each of the asset items must be investigated and determined correct before the balance sheet may be considered to represent the true financial condition of the business. It is the experience of every business that it cannot collect all of the credits extended to customers. Regardless of how carefully credit is granted, it will be found that some customers do not pay their debts. Accounts and notes receivable must, accordingly, be valued with a proper consideration for the estimated amount of the uncollectible portion. The stock of merchandise on hand must be valued according to the standard formula, at cost or market, whichever is the lower. The deferred charges group of assets will show the value of the unconsumed portions of the assets purchased, with due regard to the time element. Thus, a three-year insurance policy purchased at the beginning of the year will at the close of the year be valued at two-thirds of its original cost. The fixed asset group will be valued at cost less depreciation, which represents the amount of the loss in value of the assets due to wear and tear, lapse of time, and obsolescence.
In determining liabilities, providing they have all been included, there is not the danger of an understatement, because their amount is subject to verification on the basis of the creditors’ claims. For obvious reasons the liabilities are seldom overstated.
General Principles Governing Form and Content.—In drawing up a balance sheet, the form must be flexible enough to meet whatever requirements for information may be placed upon it. Thus, a balance sheet to be presented to the banker as the basis of a loan should be carefully classified so as to show clearly the financial condition, and sufficient detail should be given to indicate the basis used in valuing the various items. A balance sheet drawn up for publication may, on the other hand, contain less detailed information and less attention need be given to its form. A balance sheet drawn up for use within the business itself may well contain very full information and its form should be such as will accurately portray the status of affairs. A balance sheet which shows on its face that cognizance is taken of uncollectible accounts and of the loss in fixed assets due to depreciation, is much more valuable as a financial statement than one lacking that information, provided of course it is to be used to indicate that consideration has been taken of those elements. Excepting for the general remark that regard must always be had to the purpose for which the balance sheet is drawn up, no hard-and-fast rule can be laid down in the matter of the relative fullness of detail with which it should be made.
Illustration. To illustrate the features of the balance sheet discussed in this chapter, the following statement showing the financial condition of the partnership of Jackson & Edwards is given:
Jackson & Edwards
Balance Sheet June 30, 19—
| Assets | |||
| Current Assets: | |||
| Cash | $ 2,365.00 | ||
| Accounts Receivable | $8,500.00 | ||
| Less—Reserve for Doubtful Accounts | 170.00 | 8,330.00 | |
| Merchandise | 10,425.00 | $21,120.00 | |
| Deferred Charges: | |||
| License Fees Paid in Advance | $ 175.00 | ||
| Unexpired Insurance | 75.00 | ||
| Supplies | 80.00 | 330.00 | |
| Fixed Assets: | |||
| Furniture and Fixtures | $ 750.00 | ||
| Less—Reserve for Depreciation | 75.00 | $ 675.00 | |
| Buildings | $9,680.00 | ||
| Less—Reserve for Depreciation | 242.00 | 9,438.00 | |
| Land | 2,500.00 | 12,613.00 | |
| Total Assets | $34,063.00 | ||
| Liabilities | |||
| Current Liabilities: | |||
| Notes Payable | $2,500.00 | ||
| Accounts Payable | 6,750.00 | ||
| Wages Accrued | 250.00 | ||
| Interest Accrued | 75.00 | $ 9,575.00 | |
| Fixed Liabilities: | |||
| Mortgage on Land and Buildings | 2,500.00 | ||
| Total Liabilities | 12,075.00 | ||
| Net Worth | |||
| Represented by: | |||
| S. J. Jackson, Capital | $10,267.00 | ||
| P. R. Edwards, Capital | 11,721.00 | $21,988.00 | |