The Balance Sheet
The balance sheet, also called the statement of financial position, is the third general purpose financial statement prepared during the accounting cycle. It reports a company’s assets, liabilities, and equity at a single moment in time. You can think of it like a snapshot of what the business looked like on that day in time.
The balance sheet is basically a report version of the accounting equation also called the balance sheet equation where assets always equation liabilities plus shareholder’s equity.
Balance Sheet Interpretation and Capital of the Busines
Explain the Balance sheet Interpretation and Capital of the business Format
This statement can be reported in two different formats: account form and
report form. The account form consists of two columns displaying assets
on the left column of the report and liabilities and equity on the right
column. You can think of this like debits and credits. The debit
accounts are displayed on the left and credit accounts are on the right.
of a traditional report that is issued by companies. Assets are always
present first followed by liabilities and equity.
In both formats, assets are categorized into current and long-term assets.
Current assets consist of resources that will be used in the current
year, while long-term assets are resources lasting longer than one year.
Asset Section Similar to the accounting equation, assets are always listed first. The asset section is organized from current to non-current and broken down into two or three subcategories. This structure helps investors and creditors see what assets the company is investing in, being sold, and remain unchanged. It also helps with financial ratio analysis. Ratios like the current ratio are used to identify how leveraged a company is based on its current resources and current obligations.
Here’s a list of the most common accounts in the current section:
- Current
- Cash
- Accounts Receivable
- Prepaid Expenses
- Inventory
- Due from Affiliates
different than the current section because many long-term assets are
depreciated over time. Thus, the assets are typically listed with a
total accumulated depreciation amount subtracted from them.
Here’s a list of the most common long-term accounts in this section:
- Long-term
- Equipment
- Leasehold Improvements
- Buildings
- Vehicles
- Long-term Notes Receivable
assets, and or property that doesn’t fit into the first two.
Here are some examples of these balance sheet items:
- Other
- Investments
- Goodwill
- Trademarks
- Mineral Rights
According to the historical cost principle, all assets, with the exception of
some intangible assets, are reported on the balance sheet at their
purchase price.
In other words, they are listed on the report for the
same amount of money the company paid for them. This typically creates a
discrepancy between what is listed on the report and the true fair
market value of the resources.
For instance, a building that was purchased in 1975 for $20,000 could be worth $1,000,000 today, but it will only be listed for $20,000. This is consistent with the balance
sheet definition that states the report should record actual events
rather than speculative numbers.
Liabilities Section
Liabilities are also reported in multiple subcategories. There are typically two or
three different liability subcategories in the liabilities section:
current, long-term, and owner debt.
and other obligations that will become due in the current period. This
usually includes trade debt and short-term loans, but it can also
include the portion of long-term loans that are due in the current
period.
The current debts are always listed by due dates starting with
accounts payable.
Here’s a list of the most common current liabilities in order of how they appear:
- Current Liabilities
- Accounts Payable
- Accrued Expenses
- Unearned Revenue
- Lines of Credit
- Current Portion of Long-term Debt
in more than one year. Often times all of the long-term debt is simply
grouped into one general listing, but it can be listed in detail.
Here are some examples:
- Long-term Liabilities
- Mortgage Payable
- Notes Payable
- Loans Payable
a traditional bank loan. Investors and creditors want to see this type
of debt differentiated from traditional debt that’s owed to third
parties, so a third section is often added for owner’s debt. This simply
lists the amount due to shareholders or officers of the company.
Equity Section
on the type of entity. For example, corporations list the common stock,
preferred stock, retained earnings, and treasury stock.
Partnerships list the members’ capital and sole proprietorships list the owner’s capital.