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Understanding the Balance Sheet
Written by: Wayne LabelArticle Overview: This article will give you a basic idea about the balance sheet. What is balance sheet, what are the components that make up a balance sheet? How do accountants classify it and what are the transactions that have an effect on it? You will learn the basic balance sheet equation which is true for a small business and multinational corporation.
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Understanding the Balance Sheet
What is balance sheet? Have you ever wondered? Who needs it and why? Web sites like his have numerous articles and blogs describing the subject. Books like Accounting for Non-Accountants, offer detailed information on financial statements and their components.
If you look at the financial statements that General Motors filed with SEC and the one that your neighborhood grocer's small business accountant created for tax purposes, you may think that balance sheets have nothing in common. The reality is that, they both follow the same equation: assets=Liabilities+owner's (stockholder's) equity. It is a concept taught in every basic accounting course.
We will discuss each one of these 3 components separately. But before starting, we have to clarify some of the key facts. First, balance sheet is created at a certain date and it represents the figures on that date. All the components that make up a balance sheet are presented at a historical cost, price that was paid for them when purchased.
Assets are anything of value that company owns. To be listed as an asset, it has to: be controlled (owned) by the company, for example land, building and so on. It has to have a value for the company, for example truck, which is used to generate income; and it has to have a measurable value; for example used equipment; company has a receipt that states the cost of the equipment purchased.
Assets are further divided in to short term (ones that will be used or converted in to cash within one year), they are called current assets and long term assets. Long term assets are expected to last for more than a year or be converted into cash after a year. Intangible assets are the ones that cannot be touched. Example is patent that has been purchased.
Liabilities are also divided in to two parts. Current and long term; current liabilities are the obligations that mature within a year, and long term ones mature after one year.
Owner's equity can be created from two sources: owner's investment and the retained earnings that is affected by a profit or a loss that company makes as a result of business operations.
Transactions that affect the balance sheet can be summarized as follows: if a company purchases a new truck by making a cash down payment and the rest is financed, than current assets decrease by the down payment amount, long term assets increase by the total purchase price of the truck and the long term liabilities increase by the amount financed. The key to understanding the balance sheet equation is that, assets and liabilities and owner's equity totals increase equally.
This is just a short summary of a basic idea behind the balance sheet. Debates continue on the basic concepts of financial reporting; on how to make accounting reporting more ethical and reduce possibility of an accounting fraud.
We hope that you learned more about the balance sheet and now are able to understand one when you will look at it. Learning these principles will be beneficial to anyone who is a small business owner or plans to own one in the future.
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Article Tags: accounting for nonaccountants, accounting fraud, assets, Balance Sheet, basic accounting course, ethical, liabilities, owners equity
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About the Author: Wayne Label RSS for Wayne's articles - Visit Wayne's website  Click here to visit Wayne's website   Defining and Understanding the Corporation and Its Accounting An Accounting Overview for NonAccountants The Importance of Cash Flow US and International Financial Regulations Exploring the Ins and Outs of Double Entry Accounting |
Related Forum Posts
Re: Sources of Cash
- Thanks for the help. The items will be recorded in the Balance Sheet. But why does the Balance Sheet always balances. Is there a specific reason
Re: Sources of Cash
- Thank you for guidance and direction. Is there a simpler way of understanding the Balance Sheet and all the components that are to be recorded.
Re: Getting *back* to the next step
- Take time out to enjoy life, family, friends before you get back to the 'next step'. I know a lot of people can lose focus on the task at hand by taking a break, but balance is key. Balance is integral to maintaining overall success in business and life!
Re: Balance - Make time for things you love
- Balance in life is important, and one generally is more productive work wise when they take the occasional break to smell the roses or read a book that has nothing to do with work but is just for enjoyment. A little time spent with the family is also a worthwhile
pass time.
MichelleJ
Re: Balance - Make time for things you love
- I agree to the importance of balancing a person's life. I know several people who seem to think that they were just put on earth to "bring home the bacon" and they'll do it at any cost. As a result, many of their marriages have suffered and children have been almost neglected. We once had a great guest speaker at one of our teacher in-services and he hit this very hard, as teachers tend to easily fall into the catagory of Live Off Balance; especially those that also coach. I will never forget his valuable motivational speech and have tried to keep my life balanced ever since. I look forward to checking into this subject futher and going to the links mentioned when I have more time. That's for letting us know about it.
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