The balance sheet is a summary of the financial balances of a
company and reflects the company's solvency and financial position.
LEARNING OBJECTIVES [ edit ]
Give examples of who would use the balance sheet
Name the two types of balance sheets and identify which accounts are listed on the balance sheet
KEY POINTS [ edit ]
The balance sheet captures the financial position of a company at a particular point in time.
The balance sheet lists a company's assets, liabilities, and stockholders' equity (including dollar
amounts) at a specific moment in time.
There are two types of balance sheets, classified and unclassified.
A balance sheet is used externally and internally.
TERMS [ edit ]
classified balance sheet
a summary of a company's assets, liabilities, and equity
equity
Ownership interest in a company, as determined by subtracting liabilities from assets.
liabilities
An amount of money in a company that is owed to someone and has to be paid in the future, such
as tax, debt, interest, and mortgage payments.
asset
Items of ownership convertible into cash; total resources of a person or business, as cash, notes
and accounts receivable; securities and accounts receivable, securities, inventories, goodwill,
fixtures, machinery, or real estate (as opposed to liabilities).
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Introduction to the Balance
Sheet
The balance sheet is one of the four basic
financial statements companies prepare
each accounting cycle. The balance sheet
is a summary of the financial balances of a
sole proprietorship, a
business partnership, a corporation, or
other business organization, such as
an LLC or an LLP. The balance sheet is
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also referred to as a statement of financial position because it reflects a
company's solvency and financial position. The International Accounting StandardsBoard,
along with country specific organizations and companies set the guidelines for the
appearance of the balance sheets.
What Period Does the Balance Sheet Cover
A balance sheet is like a photograph in that it captures the financial position of a company at
a particular point in time. More specifically, it captures the financial position at the end of
business on the day the balance sheet is run .
The Balance Sheet
If an error is found on a previous year's financial statement, a correction must be made and the financials
reissued.
What Items Appear On the Balance Sheet
The balance sheet lists a company's assets, liabilities, and stockholders' equity (including
dollar amounts) as of a specific moment in time. Assets are the total resources of the
business including cash, notes and accounts receivable, whileliabilities are anything the
company owes to someone, such as debt, mortgage or interest payments. The stockholder's
equity or just equity refers to the ownership interest in a company. The stockholder's equity
is determined by subtracting liabilities from assets.
There are two types of balance sheets, classified and unclassified.
Unclassified balance sheets have three major categories: assets, liabilities, and stockholder's
equity. The main categories of assets are usually listed first, and typically in order
of liquidity (for example, cash on hand appears aboveaccounts receivable). Liabilities are
listed after assets. The difference between assets and liabilities is referred to as equity.
According to the accounting equation, equity must equal assets minus liabilities. Equity is
either calculated as proprietary or residual. For residual
equity dividends topreferred shareholders are deducted from net income before calculating
residual equity holders' dividend per share.
A classified balance sheet has the same three major categories of assets, liabilities, and
stockholder's equity, but it breaks those categories down further to give a better idea of
the profitability and strength of the company.
Who Uses a Balance Sheet
Both internal and external users use the balance sheet. The balance sheet is valuable because
it shows the magnitude of the company's financial obligations. If its debts are too high, for
instance, a business may not be able to grow. The balance sheet also demonstrates how
liquid the business is. An investor or business may want to ensure that the company's
resources are not overly invested in assets that cannot be easily converted into cash in case of
an unexpected expense. Finally, the balance sheet shows the book value of the owners' stake
in the business. For an outside investor, this information can be especially useful in
determining an appropriate price for an ownership share in the business.