The balance sheet shows a snapshot of your company’s financial health. It is organized by assets, liabilities and owners’ equity.
Assets include everything that your business owns with a dollar value, from current assets that may take up to a year to convert to cash to long-term assets like office equipment and land. Liabilities are payment obligations your business has incurred, including recurring expenses and loans. Long-term liabilities include payments on corporate bonds and mortgages.
Assets
Typically, a company’s assets are categorized into two major groups: current and noncurrent. These are further grouped into tangible and intangible resources. The former includes assets you can physically touch, like business vehicles and equipment, while the latter involves resources that don’t have a physical presence, such as copyrights and customer lists.
Current assets are those that can be turned into cash or cash equivalents within a year. This category also includes marketable securities, treasury bills and demand loans. The company’s inventory and accounts receivable are recorded under current assets, as well.
One-time gains and losses are reflected on the asset side of the balance sheet. These are the result of transactions such as sales of real estate or minority stakes in other companies. Also reflected are any taxes that have been accrued but not yet paid, as is often the case with installment sales.
Liabilities
Liabilities are recorded on the right-hand side of the balance sheet and represent a company’s obligations in terms of cash or goods that it owes to another party. These include debts, accounts payable, mortgages and deferred revenue. Companies also record contingent liabilities – those that depend on an uncertain future event – as a footnote in the financial statements.
As with assets, companies list their most liquid items first in the liabilities section of the balance sheet, which is sorted by the timeframe within which they expect to pay them off. These are called current liabilities and include amounts owed on loans, accounts payable, wages and taxes. Other long-term liabilities, such as outstanding bonds and the current portion of a long-term debt, are listed under non-current liabilities.
The balance sheet also includes fixed assets, such as plant, property and intellectual property, that aren’t easily turned into cash but still provide a benefit to the company.
Owner’s Equity
Owner’s equity is the amount of money that owners have invested in a company. It is calculated by adding up the value of assets (property, plant and equipment, inventory, retained earnings) minus the total liabilities. The value of owner’s equity will increase as the company earns a profit and decreases when the owner withdraws funds from the company.
The statement of owner’s equity is a crucial tool for businesses of all sizes and types. It helps businesses understand the financial health of their companies and makes it easier for them to make decisions.
The statement of owner’s equity is prepared at the end of each fiscal year and includes a starting balance, capital contributions, net income or loss, withdrawals, and more. It is also necessary for complying with legal requirements in many countries. Businesses that fail to prepare accurate owner’s equity statements can face legal and financial consequences. In addition, misstating owner’s equity can damage relationships with stakeholders and cause them to lose trust in the company.
Summary
The balance sheet reports a company’s assets, liabilities and owner’s equity at a given point in time. It is one of three core financial statements used by managers and investors to evaluate a business. The other two are the income statement and cash flow statement.
Both the income statement and the cash flow statement provide information about transactions that occurred over a period, while the balance sheet summarizes data from accounts that are further categorized to provide accurate and relevant information. In other words, it includes the net sum of a company’s current and long-term assets, and subtracts its total liabilities from its total owner’s equity. As a result, each side of this equation must equal – or balance – with each other, and this is why the report is called the balance sheet. The measurement issues that affect the balance sheet are, of course, closely linked to the revenue and expense recognition issues that impact the income statement.Bilanz