Balance sheet formats

Most balance sheets in use today will broadly follow one of two formats: the traditional format and the financial analysis format. Usually the traditional format is used for statutory tax and company reporting. The financial analysis format is used internally – it assists management to properly understand and manage the financial performance of the business.

 

Traditional vs Financial analysis balance sheet formats

 

Traditional balance sheet

Most financial statements reflect a balance sheet format consistent with the following formula:

EQUITY = (current assets – current liabilities) + (non-current assets – non-current liabilities).

The debt financing components of the traditional balance sheet are included in current liabilities and non-current liabilities.

 

Financial analysis balance sheet

Financial analysis requires a small change in the balance sheet format. All funding components should be separated from operating components. This change makes it easier to analyze the financial performance of a company. The following balance sheet format is used for financial analysis:

EQUITY + DEBT = (current assets – current liabilities) + non-current assets.

A business is funded by equity and debt. So it is convenient to have both of these on the same side of the equation.

The right hand side of the equation is everything needed to operate the business. It excludes any equity and debt items. In essence all funding is removed from the operating side of the equation. The net working capital is redefined by removing the cash on hand and at the bank and the bank overdraft from the right hand side of the equation. The same principal would apply to all forms of funding. This means that the end result is the following balance sheet format:

DEBT + EQUITY = WORKING CAPITAL + NON CURRENT ASSETS.

This can be restated as:

TOTAL CAPITAL EMPLOYED = TOTAL NET OPERATING ASSETS.

This can be summarized as:

FINANCE = OPERATIONS.

This is used for internal purposes by management to understand the operations of the business, and to separately understand how the business is funded (by a combination of equity and debt). The Financial analysis balance sheet reveals clearer information than the traditional balance sheet.

 

Financial statement analysis

 

"The financial statements are linked!"