The balance sheet
What is the balance sheet?
The balance sheet is the fundamental financial statement of any business. It is a snapshot of the company's financial position at a specific date — usually 31 December of each year.
The word balance perfectly captures its essence: two trays that must always be in perfect equilibrium. The left side, called Assets, describes how the capital is employed; the right side, Liabilities & Equity, describes where that capital comes from.
The balance sheet is a synthetic table summarising the information obtained from the inventory. It shows the company's assets, liabilities and equity at a given point in time.
Why is the balance sheet useful?
Assess financial health, evaluate solvency, make informed investment and financing decisions.
Evaluate solvency before granting loans. Measure available guarantees in case of default.
Assess net asset value (equity) and track the evolution of their investment.
Serve as the basis for tax returns and VAT statements (Art. 959 CO).
The balance sheet is governed by Arts. 959, 959a and 959b CO. All legal entities (SA, Sàrl, associations, foundations) must prepare one. Sole proprietorships and partnerships with turnover above CHF 500'000 are also required.
The inventory: starting point of the balance sheet
Before drawing up a balance sheet, the company must carry out an inventory: list and value all its assets as well as all its debts.
This is the amount that would remain if the company sold all its assets and repaid all its debts. This is exactly the definition of equity.
Inventory example — D. Perroud company (as at 31.12.N)
| Description | Amount (CHF) | Total (CHF) |
|---|---|---|
| Assets (capital employed) | ||
| Cash on hand | 20'000 | |
| Latest PostFinance daily statement | 30'000 | |
| Unpaid customer invoices | 120'000 | |
| Raw materials inventory (steel, brass, silver) | 100'000 | |
| Finished goods inventory (milling machines, grinders) | 70'000 | |
| Various machines and equipment | 230'000 | |
| IT equipment | 20'000 | |
| Vehicles | 80'000 | |
| Tools | 10'000 | |
| Operating building | 800'000 | |
| Total assets | 1'480'000 | |
| – Liabilities (borrowed capital) | ||
| Unpaid supplier invoices | 140'000 | |
| Overdrawn current account at BCV | 130'000 | |
| VAT statement | 10'000 | |
| Mortgage loan from BCV | 500'000 | |
| Total liabilities | – 780'000 | |
| = Net assets (equity) | 700'000 | |
Balance sheet structure: assets and liabilities
By universal convention, assets are on the left and liabilities & equity are on the right. These two columns describe the same wealth from two complementary angles.
How capital is employed: what assets the company owns, what receivables it holds. This is the composition of the wealth.
Where the capital comes from: third parties (liabilities = debts) or owners (equity). This is the origin of the resources.
Assets: two main categories
Converted into cash in less than one year. Cycle: cash → inventory → receivables → cash.
Examples: Cash, Bank, Trade receivables, Inventories
Held and used for more than one year. Lose value over time: this is depreciation.
Examples: Machinery, Vehicles, Buildings, Patents
Liabilities & Equity: three main categories
Debts due within one year.
Ex: Suppliers, VAT due, Bank overdraft
Debts due after one year.
Ex: Mortgage, Long-term bank loan
Owners' funds + accumulated results.
Ex: Share capital, Reserves
From an accounting perspective, the company is a distinct entity from its owners. The funds they have contributed are a claim against the company — with no fixed repayment date during normal operations, but repayable upon liquidation. They are therefore classified under liabilities, in last position (lowest maturity).
Classification order: decreasing liquidity and maturity
Balance sheet items are not arranged randomly. Under Art. 959a CO, assets and liabilities follow strict and symmetrical classification rules.
From the fastest to convert into cash to the most difficult to liquidate. Cash (immediate money) is at the top; the building (complex sale) is at the bottom.
From the most urgent debt to the least urgent. Suppliers (to be paid now) are at the top; equity (never repayable during normal operations) is at the bottom.
Classification of balance sheet items (Art. 959a CO)
Non-current assets should be financed by stable sources: equity + long-term liabilities. Current assets can be financed by short-term liabilities. This rule ensures long-term financial equilibrium.
The five main groups of the balance sheet
Art. 959a CO requires a minimum structure with five main groups: two on the asset side, three on the liability side. This organisation allows for quick, standardised reading of any Swiss balance sheet.
| ASSETS — 2 main groups | |
|---|---|
| ① Current assets (CA) | |
| Cash | 40'000 |
| PostFinance | 80'000 |
| Trade receivables | 170'000 |
| Raw materials inventory | 120'000 |
| Finished goods inventory | 150'000 |
| ② Non-current assets (NCA) | |
| Machinery and equipment | 200'000 |
| IT equipment | 15'000 |
| Vehicles | 70'000 |
| Tools | 5'000 |
| Operating building | 800'000 |
| TOTAL ASSETS | 1'650'000 |
| LIABILITIES & EQUITY — 3 main groups | |
|---|---|
| ③ Short-term liabilities (STL) | |
| Trade payables | 195'000 |
| Bank overdraft | 180'000 |
| VAT statement | 5'000 |
| ④ Long-term liabilities (LTL) | |
| Mortgage | 490'000 |
| ⑤ Equity | |
| Equity | 780'000 |
| TOTAL LIABILITIES & EQUITY | 1'650'000 |
Balance verified: 1'650'000 = 1'650'000. Current assets (560'000) > STL (380'000): D. Perroud is solvent in the short term.
Description of each group
① Current assets (CA)
Cash → purchases raw materials → transforms into finished goods → sold on credit = trade receivables → collected → back to cash. This cycle repeats throughout the year.
② Non-current assets (NCA)
Machinery, Furniture, Vehicles, Tools, Buildings, Land.
Patents, Licences, Software, Goodwill.
Investments, Long-term loans, Held securities.
③ Short-term liabilities (STL)
Debts due within one year: trade payables, bank overdrafts, VAT due, current taxes, social security contributions.
④ Long-term liabilities (LTL)
Debts due after one year: mortgages, long-term bank loans, bonds, provisions for risks and charges.
⑤ Equity
Funds contributed by owners or generated by the business. They constitute the creditors' "safety net". Their composition varies according to the legal form (see section 9).
Opening and closing balance sheets
Accounting life is organised around the financial year (12 months, generally the calendar year). At each end, the company prepares a balance sheet.
Situation at the start of the year. ASSETS = LIABILITIES & EQUITY.
Purchases, sales, collections, payments, depreciation… The situation changes continuously.
New situation. Reveals the result (profit or loss).
The opening balance sheet (as at 1.1.N+1)
| ASSETS | LIABILITIES & EQUITY | ||
| Current assets | Short-term liabilities | ||
| Cash | 20'000 | Trade payables | 140'000 |
| PostFinance | 30'000 | Bank overdraft | 130'000 |
| Trade receivables | 120'000 | VAT statement | 10'000 |
| Raw materials | 100'000 | Long-term liabilities | |
| Finished goods | 70'000 | Mortgage | 500'000 |
| Non-current assets | Equity | ||
| Machinery | 230'000 | Opening capital | 700'000 |
| IT equipment | 20'000 | ||
| Vehicles | 80'000 | ||
| Tools | 10'000 | ||
| Building | 800'000 | ||
| TOTAL ASSETS | 1'480'000 | TOTAL LIABILITIES & EQUITY | 1'480'000 |
In an opening balance sheet, ASSETS always equal LIABILITIES & EQUITY. The previous result has been integrated into equity or distributed.
The closing balance sheet before appropriation of the result (as at 31.12.N+1)
At year-end, a difference of 80'000 CHF appears between total assets (1'650'000) and total liabilities excluding result (1'570'000): this is the profit.
| ASSETS | LIABILITIES & EQUITY | ||
| Current assets | Short-term liabilities | ||
| Cash | 40'000 | Trade payables | 195'000 |
| PostFinance | 80'000 | Bank overdraft | 180'000 |
| Trade receivables | 170'000 | VAT statement | 5'000 |
| Raw materials | 120'000 | Long-term liabilities | |
| Finished goods | 150'000 | Mortgage | 490'000 |
| Non-current assets | Equity | ||
| Machinery | 200'000 | Opening capital | 700'000 |
| IT equipment | 15'000 | ||
| Vehicles | 70'000 | ||
| Tools | 5'000 | ||
| Building | 800'000 | ||
| Profit | 80'000 | ||
| TOTAL ASSETS | 1'650'000 | TOTAL LIABILITIES & EQUITY + RESULT | 1'650'000 |
It is the result (profit or loss) that restores the equality between ASSETS and LIABILITIES & EQUITY: ASSETS − LIABILITIES = RESULT.
Appropriation of the result
Once the result is known, the owner or partners decide on its appropriation.
Increases equity: capital rises from 700'000 to 780'000. Implicit new contribution from the owner.
The owner takes 80'000 CHF in cash. Capital unchanged, cash reduced. The balance sheet automatically rebalances.
Closing balance sheet after appropriation (profit retained in the company)
| ASSETS | LIABILITIES & EQUITY | ||
| Current assets | Short-term liabilities | ||
| Cash | 40'000 | Trade payables | 195'000 |
| PostFinance | 80'000 | Bank overdraft | 180'000 |
| Trade receivables | 170'000 | VAT statement | 5'000 |
| Raw materials | 120'000 | Long-term liabilities | |
| Finished goods | 150'000 | Mortgage | 490'000 |
| Non-current assets | Equity | ||
| Machinery | 200'000 | Final capital (700 + 80) | 780'000 |
| IT equipment | 15'000 | ||
| Vehicles | 70'000 | ||
| Tools | 5'000 | ||
| Building | 800'000 | ||
| TOTAL ASSETS | 1'650'000 | TOTAL LIABILITIES & EQUITY | 1'650'000 |
ASSETS = LIABILITIES & EQUITY once again. The profit integrated into equity restores perfect balance. This balance sheet becomes the opening balance sheet for the next financial year.
The three golden rules — summary
ASSETS = LIABILITIES & EQUITY
Perfect balance. No visible result.
ASSETS − LIABILITIES = RESULT
The result restores the balance.
ASSETS = LIABILITIES & EQUITY
Balance restored through final capital.
The minimum structure under Art. 959a CO
Art. 959a CO prescribes mandatory minimum headings in the order laid down by law.
Assets are classified by decreasing liquidity, liabilities by decreasing maturity. Additional items may always be added if necessary.
| Assets | Liabilities & Equity |
|---|---|
Current assets
|
Short-term liabilities
|
Non-current assets
|
Long-term liabilities
|
Depreciation: a key concept
Depreciation reduces the book value of an asset to bring it closer to its real value. Ex: truck at 80'000 CHF, depreciated at 20%/year → 64'000 CHF after 1 year.
By reducing taxable profit, depreciation retains cash within the company to replace equipment. This is automatic self-financing.
Equity and legal forms
The composition of equity in the balance sheet varies according to the legal form, providing information on governance and ownership structure.
| Legal form | Equity composition | Characteristics |
|---|---|---|
| Sole proprietorship | Equity (single) | Unlimited liability of the owner on personal assets |
| General partnership | Partner A capital Partner B capital | Separate account per partner. Joint and several unlimited liability. |
| Limited partnership | Partner A, B capital Limited partner C | Limited partners: liability limited to their contribution. |
| Sàrl (LLC) | Share capital Legal reserves Profit / Loss carried forward | Min. capital CHF 20'000. Liability limited to contribution. |
| SA (Corporation) | Share capital Legal reserve from capital Legal reserve from profit Voluntary reserves Profit carried forward | Min. capital CHF 100'000 (50'000 paid-in). Limited liability. |
| Association / Foundation | Equity funds Reserves Surplus of revenues | No share capital. No profit distribution to members. |
Summary: everything at a glance
The two fundamental classification principles
From cash (maximum liquidity) to the building (minimum liquidity). The further down, the harder it is to convert quickly into cash.
From trade payables (due now) to equity (not repayable during normal operations). The further down, the more stable the resources.
General summary table
| Concept | Synthétic definition | Legal basis |
|---|---|---|
| Balance sheet | Wealth statement at a given date — ASSETS = LIABILITIES & EQUITY | Art. 959 CO |
| Current assets (CA) | Items convertible into cash in < 1 year | Art. 959a CO |
| Non-current assets (NCA) | Assets held > 1 year, subject to depreciation | Art. 959a CO |
| Short-term liabilities (STL) | Short-term debts (< 1 year) | Art. 959a CO |
| Long-term liabilities (LTL) | Long-term debts (> 1 year) | Art. 959a CO |
| Equity | Owners' funds + accumulated results | Art. 959a CO |
| Decreasing liquidity | Asset order: Cash → Receivables → Inventories → Building | Art. 959a CO |
| Decreasing maturity | Liability order: Trade payables → Mortgage → Equity | Art. 959a CO |
| Depreciation | Decrease in the value of a non-current asset | Art. 960a CO |
| Opening balance sheet | As at 1 January — ASSETS = LIABILITIES & EQUITY | Art. 959 CO |
| Closing balance sheet | As at 31 December — reveals the result | Art. 959 CO |
Mastering the balance sheet is the first step in accounting. The next step: learn how daily transactions (purchases, sales, payments) affect the balance sheet through double-entry bookkeeping.
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