The Income|Outcome^® Contextuary

An organization reports its financial performance and position through the Balance Sheet, Income Statement, and Statement of Cash Flows.

The Balance Sheet is a summary of the Assets, Liabilities, and Equity for the business at a certain point in time - it gives a financial snapshot for the given moment.

In the annual report the Balance Sheet shows the state of the business at the end of the business year; it does not show how the business has changed over the year. Compare Balance Sheets for the current and previous periods to see the changes.

“What do you mean by that?”

The Balance Sheet can be one of two formats: Total Asset or Net Asset.

Total Asset Balance Sheet (upper illustration)

North America uses a Total Asset Balance Sheet which shows the Assets (what you have in the business) and balances against where the funding for those Assets comes from:

• • Liabilities is the portion funded by others - borrowing from sources such as banks (Loans); or by acquiring inventories today, but paying suppliers in the future (Payables).
  • Equity is the portion funded by initial investing (Capital Stock), and by reinvesting profits in the company (Retained Earnings).

Total Asset Balance Sheet Equation: Total Assets = Total Liabilities + Equity

Net Asset Balance Sheet (lower illustration)

Elsewhere in the world, a Net Asset Balance Sheet may be used. It balances the ‘Net Assets’ (Total Assets less Liabilities) against the Equity. The Net Asset Balance Sheet has advantages for measuring management performance, and is prevalent outside North America.

Net Asset Balance Sheet Equation: Total Assets - Total Liabilities = Net Assets = Equity

“What do you mean by that?”

Any term which uses the phrase ‘net asset’ or ‘net assets’ must be examined closely. See discussion at Net Asset.