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Balance sheet extension and balance sheet shortening
Like the asset and liability swap, the lengthening and shortening of the balance sheet are types of balance sheet changes. In this post we explain why!
- Balance sheet changes: Balance sheet extension Balance sheet shorteningin the text
- Balance sheet extension examplein the text
- Balance sheet shortening examplein the text
Balance sheet changes: Balance sheet extension Balance sheet shortening
As you probably know, balance sheets are split into assets and liabilities. To repeat briefly: the assets side provides information on how the financial resources are used. The liabilities side provides information about the origin of the capital.
Every business transaction, for example the purchase of a machine, has an impact on the balance sheet total. These changes can be divided into four basic cases: the asset swap, the liability swap, the balance sheet extension and the balance sheet shortening. In this article, we will limit ourselves to explaining to you, using examples, what the balance sheet extension and shortening is all about.
Balance sheet extension example
When the balance sheet is extended, one asset item and one liability item on the balance sheet increase by the same amount. It is best to look at a specific business case for the balance sheet extension. Imagine buying raw materials on account from a supplier for € 10,000. The first question you should always ask yourself is “Which items on the balance sheet are affected?” In our case, the value of the raw materials increases by € 10,000.
As you know, the commodities position is an asset. At the same time, the payables to deliveries and services increase by the same amount. This is a liability item. In this way, an asset item and a liability item increase by the same value, in our case by € 10,000, and the balance sheet is "extended" or the balance sheet total increases.
Balance sheet shortening example
The opposite of the extension is the shortening of the balance sheet. In this case, one asset item and one liability item decrease or decrease by the same amount. Again, an example will help you to understand the topic better. This time you pay a supplier debt by bank transfer. Affected are the liability item “Liabilities from trade” and the asset item “Bank”. Both decrease by the same amount. Thus, the balance sheet is “shortened”, so to speak, or the balance sheet total decreases.
Now you have understood what is meant by the extension and the shortening of the balance sheet. Just remember that when you renew, the value of an asset and a liability item increases and the balance sheet total increases, while the total assets remain unaffected. This is exactly the same with the balance sheet shortening, only that the two balance sheet items and thus the balance sheet total decrease.
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