The primary purpose of a balance sheet is to report an organization's assets and liabilities at a specific point in time. The format is quite simple. All assets are listed first, usually in the order of liquidity, followed by the liabilities. A picture is provided of each future economic benefit owned or controlled by the company (its assets) as well as its debts (liabilities).
The balance sheet shows the company's financial condition on one specific date. All the other financial statements report events occurring over a period of time (often a year or a quarter). The balance sheet discloses assets and liabilities as of the one specified date.
The balance sheet will always balance unless a mistake is made. This is known as the accounting equation:
assets = liabilities + stockholders' equity.
Or if the stockholders' equity account is broken down into its parts,
assets = liabilities + capital stock + retained earnings.
This equation stays in balance for one simple reason: assets must have a source. If a business or other organization has an increase in its total assets, that change can only be caused by (1) an increase in liabilities such as money being borrowed, (2) an increase in capital stock such as additional money being contributed by stockholders, or (3) an increase created by operations such as a sale that generates a rise in net income. There are no other ways to increase assets.
Below is a video that explains the Balance Sheet:
One way to understand the accounting equation is that the left side (the assets) presents a picture of the future economic benefits that the reporting company holds. The right side provides information to show how those assets were derived (from liabilities, from investors, or from operations). Because no assets are held by a company without a source, the equation (and, hence, the balance sheet) must balance:
assets = the total source of those assets.
Assets |
||
Current assets |
||
Cash |
$22,000 |
|
Accounts receivable |
$24,000 |
|
Inventory |
$103,000 |
|
Prepaid rent |
$12,000 |
|
Total current assets |
$161,000 |
|
Noncurrent Assets |
||
Land |
$210,000 |
|
Equipment (land) |
$155,000 |
|
Buildings (net) |
$680,000 |
|
Total noncurrent assets |
$1,045,000 |
|
Total assets |
$1,206,000 |
|
Liabilities and stockholders’ equity |
||
Liabilities |
||
Current liabilities |
||
Accounts payable |
$33,000 |
|
Salaries payable |
$9,000 |
|
Insurance payable |
$15,000 |
|
Total current liabilities |
$57000 |
|
Noncurrent liabilities |
||
Note payable—Third National Bank |
$300,000 |
|
Note payable—State Bank |
$220,000 |
|
Total current liabilities |
$520,000 |
|
Total liabilities |
$577,000 |
|
Stockholders’ equity |
||
Capital stock |
$179,000 |
|
Retained earnings |
$450,000 |
|
Total stockholders’ equity |
$629,000 |
|
Total liabilities and stockholders’ equity |
$1,206,000 |
Check Your Knowledge
A typical balance sheet is shown in the table below for Davidson Groceries. Note that the assets are divided between current (those expected to be used or consumed within the next year) and noncurrent (those expected to remain within the company for longer than a year). Likewise, liabilities are split between current (to be paid during the next year) and noncurrent (not to be paid until after the next year). This labeling guide financial analysis because Davidson Groceries' current liabilities ($57,000) can be subtracted from its current assets ($161,000) to arrive at a figure often studied by interested parties known as working capital ($104,000 in this example). The current assets can also be divided by current liabilities ($161,000/$57,000) to determine the company's current ratio (2.82 to 1.00), another figure calculated by many decision-makers as a useful measure of short-term operating strength.
The balance sheet shows the company's financial condition on one specific date. All the other financial statements report events occurring over a period of time (often a year or a quarter). The balance sheet discloses assets and liabilities as of the one specified date.
Licenses and Attributions
3.4 Reporting a Balance Sheet and a Statement of Cash Flows from Financial Accounting by the University of Minnesota Libraries Publishing is an adaptation of a work whose original author and publisher request anonymity and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International license. © 2015, University of Minnesota. UMGC has modified this work and it is available under the original license.
Accounting Cycle Step 7: Classified Corporate Balance Sheet by Dave Alldredge from YouTube is available under a Creative Commons Attribution 3.0 Unported license. UMGC has modified this work and it is available under the original license.