Types of Balances

The simplest type of balance, the equal-arm, or beam, balance, is an application of a lever. A uniform bar, the beam, is suspended at its exact center on a knife-edge set at right angles to it. The point of support is called the fulcrum. Two pans of equal weight are suspended from the beam, one at each end, at points equidistant from the fulcrum. Since the center of gravity of a uniform bar is at its midpoint, the beam supporting the pans will be in equilibrium, i.e., will balance on the knife-edge. A long pointer attached at right angles to the beam at the fulcrum indicates zero on a scale when the beam is at rest parallel to a level surface. It shows also the extent of swing of the beam on one side or the other, acting somewhat as a pendulum, when the beam is coming to rest. The object to be weighed is placed on one pan, and standard weights are added to the other until the balance of the beam is established again. The unknown weight can then be determined by adding up the standard weights in the pan.

The platform balance is a form of equal-arm balance in which two flat platforms are attached to the top side of the beam, one at each end. Such a balance has a rider, or weight, mounted on a bar that has a calibrated scale, is parallel to the beam, and connects the supports of the two platforms. This rider is moved along the bar, its edge marking decimal fractions of the unit weight.

On the unequal-arm balance the beam is suspended at a point a very short distance from one of its ends. The object to be weighed is placed on this end, and a small known weight is moved out along the longer arm until balance is obtained. The unknown weight is then determined by using a formula involving the known weight and the distance of each weight from the fulcrum. One example of this type of balance is the steelyard, an ancient device still used in underdeveloped nations because of its portability and low cost; since the difference in length of the arms can multiply the effect of the smaller weight by a factor of 100 or more, a small steelyard hung from a tree can be used, for example, to weigh a side of beef.

A spring balance consists of a coiled spring fixed to a support at one end, with a hook at the other to which the body to be weighed is applied. Within the spring's limit of elasticity, the distance through which it is stretched is directly proportional to the weight of the applied body. A pointer and graduated scale attached to the spring convert this distance into a weight reading.

Accuracy of Balances

Although extremely accurate results can be obtained in measuring the weights of minute objects, it is physically impossible to construct any balance perfect enough to yield absolutely accurate determinations. For example, the analytical balance, a type of equal-arm balance, is used for delicate weighing in quantitative chemical analysis and in preparing pharmaceutical prescriptions; it must be kept in a glass case, since its accuracy is easily affected by dust and moisture. A spring balance does not retain its accuracy permanently, for no matter how carefully it is handled, the spring very gradually uncoils even though its limit of elasticity has not been exceeded.

For ordinary purposes the errors are so small that they are considered insignificant, but in chemical analysis it has been necessary to develop methods by which they can be further minimized. A so-called torsion balance, which depends on the twisting of a wire or thread, is employed for weighing, but the term is commonly used to indicate a device for measuring minute electrical and magnetic forces.

See scale.

Even though the United States has many natural resources and the ways and means to use them in manufacturing, it cannot provide its people with all that they want or need. For this reason, the United States participates in international trade, which is the exchange of goods and services with other nations. Without international trade, goods would either cost more or not be available.

Throughout the world, there are substantial differences in the natural resources available. For example, Canada, with its huge forests, is a major producer of lumber and paper products; the Middle East has rich oil reserves; and the coastal regions of the world are leaders in the fishing industry.

Without international trade, each country would have to be totally self-sufficient. Each would have to make do only with what it could produce on its own. This would be the same as an individual being totally self-sufficient, providing all goods and services, such as clothing and food, that would fulfill all wants and needs. International trade allows each nation to specialize in the production of those goods it can produce most efficiently. Specialization, in turn, causes total production to be greater than it would be if each nation tried to be self-sufficient.

Goods and services sold to other countries are called exports; goods and services bought from other countries are called imports. The U.S. Bureau of the Census, Foreign Trade Division, indicates that U.S. exports include such goods as corn, wheat, soybeans, plastics, iron and steel products, chemicals, and machinery, while imports include such goods as chemicals, crude oil, machinery, diamonds, and coffee.

The balance of trade is the difference between the dollar amount of exports and the dollar amount of imports. The United States has many trade partners. Table 1 shows the U.S. balance of trade with three selected nations.

In order to have a trade surplus, a country must export (sell) more than it imports (buys). The opposite of a trade surplus is a trade deficit. This occurs when a country imports (buys) more than it exports (sells). As can be seen from Table 1, a country can have a trade surplus with one country and a trade deficit with another. The Bureau of the Census records indicate that for the month of November 1998 the United States had a trade surplus with such countries as Saudi Arabia, the Netherlands, Australia, and Brazil. During the same month, the United States had a

United States Trade with Selected Countries, 1998

trade deficit with such countries as Japan, China, Canada, and Mexico.

The Bureau of the Census also reports that the United States experienced its first trade deficit (total of all exports minus total of all imports) of the twentieth century in 1971, with a trade deficit of approximately $1.5 billion. A record high trade deficit occurred in 1998, when imports exceeded exports by approximately $230 billion. Table 2 shows the U.S. balance of trade for the years 1960 through 1998. As can be easily seen in the table, the U.S. trade deficit continues to increase.

As stated earlier, total production increases when a nation specializes in the production of those goods it can produce most efficiently instead of attempting to be totally self-sufficient. Allen Smith (1986), states that "a country that can produce a product more efficiently than another country is said to have an absolute advantage in the production of that product" (p. 315). When a nation can use fewer resources to produce the same amount of a product, it has an absolute advantage in the production of that product. For example, Brazil has an absolute advantage over the United States in the production of coffee, and the Middle East has an absolute advantage over the United States in the production of crude oil. Because of its ideal climate, Ecuador can produce bananas more efficiently than the United States; therefore, Ecuador has an absolute advantage over the United States in the production of bananas. However, the United States has an absolute advantage over Ecuador in the production of most products. Both nations benefit by trading those products that each nation can produce more efficiently. Nations usually will not trade with other nations unless there are gains to be made by each nation. However, the gains made will not necessarily be equal.

Smith (1986) also states that "any time a nation has an absolute advantage in the production of two goods or services, the nation has a comparative advantage in the production of that good or service where the absolute advantage is greater" (p. 315). In other words, if a nation has a two-to-one absolute advantage in the production of one product and a three-to-one absolute advantage in the production of another product, the comparative advantage lies with the product with the larger ratio. Smith (1986) also states that "even though a nation has an absolute disadvantage in the production of two products, it has a comparative advantage in the production of that product in which the absolute disadvantage is less" (p. 316). For example, even though a nation has a disadvantage in the production of a certain product, if that disadvantage is small compared to its disadvantage in the production of other products, it still has a comparative advantage with the former product.

When the United States buys goods from another country, it usually pays for the goods in the currency of the exporting country. There are many transactions that involve the exchange of money between nations. The balance of payments is an accounting record of the difference

Trade Balance
Goods on a Census Basis
VALUE IN MILLIONS OF DOLLARS
1960 THRU 1998

between the amount of money that a country receives and the amount of money that it pays out during a year. A positive balance of payments means that a country receives more money in a year than it pays out. Likewise, a negative balance of payments occurs when a country pays out more money than it takes in. Any transaction that involves payments between countries is included in the balance of payments. The largest component of the balance of payments is the balance of trade, but many more financial transactions are included, such as foreign aid to other nations, government support of military personnel stationed in other nations, and money spent by tourists.

The importing and exporting of goods and services are controlled by the U.S. government. Three of the most common barriers to trade are tariffs, import quotas, and embargoes. A tariff is a tax imposed by the government on imported goods. An import quota places a limit on the amount of a product that may be imported or exported during a given period of time. An embargo occurs when the government halts the import or export of a certain product.

BIBLIOGRAPHY

Gottheil, Fred M., and Wishart, David. (1997). Principles of Economics with Study Guide. Cincinnati: South-Western College Publishing.

Smith, Allen W. (1986). Understanding Economics. New York: Random House.

U.S. Bureau of the Census, Foreign Trade Division. http://www.census.gov/foreign-trade/site1/1998.

LISA S. HUDDLESTUN

A balance sheet is a financial report that provides a summary of a business's position at a given point in time, including its assets (economic resources), its liabilities (financial debts or obligations), and its total or net worth. "A balance sheet does not aim to depict ongoing company activities," wrote Joseph Peter Simini in Balance Sheet Basics for Nonfinancial Managers. "It is not a movie but a freeze-frame. Its purpose is to depict the dollar value of various components of a business at a moment in time." Balance sheets are also sometimes referred to as statements of financial position or statements of financial condition.

Balance sheets are typically presented in two different forms. In the report form, asset accounts are listed first, with the liability and owners' equity accounts listed in sequential order directly below the assets. In the account form, the balance sheet is organized in a horizontal manner, with the asset accounts listed on the left side and the liabilities and owners' equity accounts listed on the right side. The term "balance sheet" originates from this latter form, for when the left and right sides have been completed, they should have equal dollar amounts—in other words, they must balance.

CONTENTS OF THE BALANCE SHEET

Most of the contents of a business's balance sheet are classified under one of three categories: assets, liabilities, and owner equity. Some balance sheets, though, also include a "notes" section wherein relevant information that does not fit under any of the above accounting categories is included. Information that might be included in the notes section would include mentions of pending lawsuits that might impact future liabilities or changes in the business's accounting practices.

ASSETS Assets are items owned by the business, whether fully paid for or not. These items can range from cash—the most liquid of all assets—to inventories, equipment, patents, and deposits held by other businesses. Assets are further categorized into the following classifications: current assets, fixed assets, and miscellaneous or other assets. As David H. Bangs Jr. related in Finance: Mastering Your Small Business, "the list of assets starts with cash and ends with the least liquid fixed assets, those that are the hardest to turn into cash. For instance, if you have an item labeled 'good will' on your balance sheet, you'll have to sell the business itself to turn that particular asset into cash."

Current assets include cash, government securities, marketable securities, notes receivable, accounts receivable, inventories, prepaid expenses, and any other item that could be converted to cash in the normal course of business within one year. Fixed assets, meanwhile, include real estate, physical plant, leasehold improvements, equipment (from office equipment to heavy operating machinery), vehicles, fixtures, and other assets that can reasonably be assumed to have a life expectancy of several years. It is recognized, however, that most fixed assets—although not land—will lose value over time. This is known as depreciation. When determining a company's fixed assets, then, a business owner needs to make certain that depreciation is figured into the final value of his or her fixed assets. The net fixed asset value of a company's holdings is calculated as the net of cost minus accumulated depreciation. Finally, businesses often have assets that are less tangible than securities, inventory, or high-speed printers. These are classified as "other assets" and include such intangible assets as patents, trademarks, and copyrights, notes receivable from officers or employees, and contracts that call for them to serve as exclusive providers of goods or services to a client. Writing in Finance for Non-Financial Managers and Small Business Owners, Lawrence W. Tuller defined intangible assets as "any expenditure that adds value to the company but cannot be touched or held."

LIABILITIES Liabilities, on the other hand, are the business's obligations to other entities as a result of past transactions or events. These entities range from employees (who have provided work in exchange for salary) to investors (who have provided loans in exchange for the value of that loan plus interest) to other companies (who have supplied goods or services in exchange for agreed-upon compensation). Liabilities are typically divided into two categories: short-term or current liabilities and long-term liabilities.

Liabilities that qualify for inclusion under the short-term or current designation include all those that are due and payable within one year. These include obligations in the areas of accounts payable, taxes payable, notes payable, accrued expenses (such as wages, salaries, withholding taxes, and FICA taxes) and other expenses that are supposed to be paid off over the next year. Such obligations include the portion of long-term debt that is scheduled to be paid off during the course of the coming year. Long-term liabilities are those debts to lenders, mortgage holders, and other creditors that will take more than one year to pay off.

OWNERS' EQUITY Once a business has determined its assets and liabilities, it can then determine owners' equity, the book value of the business's assets once all liabilities have been deducted. Owners' equity, which is also sometimes called stockholders' equity, is in essence the net worth of the company.

BALANCE SHEETS AND SMALL BUSINESSES

A comprehensive, accurate balance sheet can be a valuable tool for the small business owner or entrepreneur seeking to gain a full understanding of his or her operation. Studying current assets and current liabilities, for instance, can reveal significant information about a company's short-term strength. "If current liabilities exceed current assets, the business may have difficulty meeting its payment obligations within the year," wrote Simini. "In fact, some experts feel that in a well-run company current assets should be approximately double current liabilities." Indeed, balance sheets—if produced on a monthly or quarterly basis and compared with earlier statements—can provide entrepreneurs and small business owners with valuable information on operating trends and areas of developing strength or weakness. "By analyzing a succession of balance sheets and income statements, managers and owners can spot both problems and opportunities," noted Simini. "Could the company make more profitable use of its assets? Does inventory turnover indicate the most efficient possible use of inventory in sales? How does the company's administrative expense compare to that of its competition? For the experienced and well-informed reader, then, the balance sheet can be an immensely useful aid in an analysis of the company's overall financial picture."

Given the balance sheet's value in providing an overview of a company's financial standing at a given point in time, it is understandably one of the primary financial documents demanded by prospective lenders, investors, and business clients. Small business owners, then, need to recognize that the investment of time necessary in compiling balance sheets (which is minimal in most instances because of the proliferation of business software available on the market) is decidedly worthwhile.

FURTHER READING:

Atrill, Peter. Accounting and Finance for Nonspecialists. Prentice Hall, 1997.

Bangs, David H., Jr., with Robert Gruber. Finance: Mastering Your Small Business. Upstart, 1996.

Simini, Joseph Peter. Balance Sheet Basics for Nonfinancial Managers. Wiley, 1990.

SEE ALSO: Annual Report

General terms

• Balance (ability), an ability to maintain balance (see Equilibrioception below).
• Balance (accounting)
• Balance (metaphysics), a desirable point between two or more opposite forces.
• Balance of stereophonic sound.
• Balance beam, a piece of gymnastics apparatus.
• Balance board, a piece of training equipment.
• Balance disorder, the medical description of disordered balance.
• Balance scale, a device to measure the mass of an object.
• Balance wheel, a watch component.
• Engine balance
• Game balance, a concept in game design describing the fairness or balance of power in a game.
• Media balance, the amount of political content in the mass media.
• Tire balance

Specific terms

• Balance (Urdu: Mizan or ميزان), a comprehensive treatise on Islam written by Javed Ahmed Ghamidi, a Pakistani Sunni Islamic scholar.
• Balance (film), a 1989 Academy Award-winning short animated film.
• Balance (networking), a popular piece of software for load balancing.
• Balance (puzzle), a puzzle resembling Sudoku.
• "Balance", a poem by Patti Smith from her book kodak.
• BALANCE Act (H.R. 1066), the Benefit Authors without Limiting Advancement or Net Consumer Expectations Act.
• Balance Bar, a popular nutritional energy bar.

Music

• Balance (band), a 1980s pop/rock group.
• Balance (Van Halen album)
• Balance (Kim-Lian album)

Similar terms

• Ballance, a 2004 computer puzzle game.
• Balanced line (electronics).
• Balancing (or "hard balancing") in international relations.
• Rebalancing (investment), an action to bring investments in line with target asset allocation.

See also

• Chemical equilibrium
• Dynamic equilibrium
• Economic equilibrium
• Homeostasis, the biological balance or systemic equilibrium within a living organism.
• Mechanical equilibrium
• Equilibrioception, the sense of balance or spacial equilibrium in humans and animals.
• Stability (disambiguation)