The balance sheet (貸借対照表) is a financial statement that sets what a company owns at a specific moment, such as its fiscal year-end, beside where the money for it came from, showing its financial position.
Left side (debit)
Right side (credit)
Assets: the forms in which raised funds are held
Liabilities: sources of funds that must be repaid
(Only assets go on the left)
Net assets: sources of funds that need no repayment
Total assets
Total liabilities and net assets (same amount as the left)
The left side is called the debit side and the right side the credit side; assets go on the debit side, and liabilities and net assets on the credit side. The two totals always match, which can be written as assets = liabilities + net assets. Listed companies disclose this statement, along with the income statement, the cash flow statement and others, in the annual securities report they publish for investors.
AnalogyIt is like a snapshot of a household's finances taken at one moment at the end of the month. Savings, the car, and the loan still left to repay all appear in the same picture.
How to rememberThe Japanese name 貸借対照表 literally describes a table that sets the debit and credit sides face to face for comparison.
Exam points
ExamA balance sheet (貸借対照表) shows the financial position (財政状態) at a single point in time, such as the fiscal year-end. Profit over a period (operating results, 経営成績) is shown by the income statement (損益計算書), which is a separate statement.
ExamThe format puts the assets (資産) section on the debit side (借方, left) and the liabilities (負債) and net assets (純資産) sections on the credit side (貸方, right).
ExamA balance sheet (貸借対照表) that a parent company prepares for its whole group, subsidiaries included, is called a consolidated balance sheet (連結貸借対照表).
The cash flow statement (キャッシュフロー計算書) is a financial statement showing how much cash, such as cash on hand and bank deposits, came in and went out over a period.
Section
What it covers
Cash in (examples)
Cash out (examples)
Operating activities
Buying and selling in the core business
Receiving payment for goods and services
Paying for purchases and wages
Investing activities
Investment in equipment and the like
Selling equipment no longer in use
Buying machinery and buildings
Financing activities
Raising and repaying funds
Bank borrowing, issuing shares
Repaying loans, paying dividends
Cash movements are shown in three sections: buying and selling in the core business goes under operating activities, investment in equipment and the like under investing activities, and raising and repaying funds under financing activities. Even when sales have been recorded and a profit has been made, cash on hand has not grown until payment arrives (this uncollected amount is called accounts receivable), so a separate statement is needed to track cash apart from profit.
AnalogyIt is like taking a month of bank passbook entries and regrouping them into three totals: pay and living costs, buying or selling a car, and taking out or repaying a loan. You can see how much moved, and for what, in each group.
How to rememberCash plus flow: the name itself reminds you that this statement follows movements rather than capturing balances.
Exam points
ExamThe financial statement (財務諸表) that shows increases and decreases in cash split into three sections by type of activity is the cash flow statement (キャッシュフロー計算書).
ExamPayment received for goods sold in the core business is recorded under operating activities (営業活動).
ExamWhen accounts receivable (売掛金) rise, sales are booked but the money has not yet come in, so cash flow (キャッシュフロー) falls short of profit by that amount.
Assets (資産) are the property a company holds and can put to use in its business, such as cash, goods, and buildings.
Assets are recorded on the debit (left) side of the balance sheet and show the forms in which raised funds are held, in other words how the funds are used. For example, the amount owed for goods sold on the promise of later payment (accounts receivable) is also an asset. The sum of all assets is called total assets, and it serves as the denominator in financial indicators such as the equity ratio.
AnalogyIn household terms, these are what you own right now, such as savings, a house, a car, and money you lent a friend and expect to get back.
Exam points
ExamAccounts receivable (売掛金) are amounts for which sales have been recorded but payment has not yet been collected. They exclude orders that have been received but not yet recorded as sales, and deals already paid for.
ExamThe operating return on total assets (総資産営業利益率) is found by dividing operating profit (営業利益) by total assets (総資産) and multiplying by 100.
Net assets (純資産) are what remain after subtracting total liabilities from total assets: the company's own wealth, which does not have to be repaid.
Item
Amount (in units of 10,000 yen)
How it is found
Total assets
800
Total of the left side of the balance sheet
Total liabilities
500
Total of the upper part of the right side
Net assets
300
800 − 500
Capital contributed by shareholders and profits built up over the years make up net assets, which appear below liabilities on the credit (right) side of the balance sheet. Net assets are also called equity, and they are used to calculate indicators of a company's financial safety and profitability.
AnalogyTake the value of your house, subtract the loan still owed, and what is left is the part that is truly yours.
How to remember"Net" means what is left after deductions. Take away what was borrowed, and the remainder is the net part.
Exam points
ExamThe equity ratio (自己資本比率) is found by dividing net assets (純資産), that is, equity (自己資本), by total assets (総資産) and multiplying by 100.
ExamROE is a profitability (収益性) indicator found by dividing net income for the period (当期純利益) by equity (自己資本), and the E stands for Equity.
Liabilities (負債) are things a company has an obligation to repay or pay in the future, such as loans and unpaid bills for purchases.
Liabilities are recorded in the upper part of the credit (right) side of the balance sheet and, together with net assets, show the sources of funds. Because this money was raised from others such as banks and business partners, it is also called borrowed capital.
AnalogyIt is like money borrowed from a friend or a purchase you chose to pay for later: something that comes with a promise to pay eventually.
How to rememberThe character 債 in 負債 is the same one as in 債務 (debt), and it stands for a promise of payment owed to someone.
Exam points
ExamWhen borrowings (借入金) rise, liabilities (負債) grow and cash comes in at the same time, so cash flow (キャッシュフロー) increases.
ExamTotal assets (総資産) equal total liabilities (負債) plus total net assets (純資産).
The balance sheet shows the financial position at a specific point in time, while the cash flow statement shows cash coming in and going out over a period.
On a balance sheet, assets = liabilities + net assets always holds, so the two sides have equal totals.
Changes in cash depend on actual money in and out, not on profit: a rise in accounts receivable leaves cash short of profit, and a rise in borrowings increases it.
The equity ratio is net assets divided by total assets, multiplied by 100.