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 also referred to as a statement of financial position because it reflects a company's solvency and financial position. The International Accounting Standards Board, 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, while liabilities 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 above accounts 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 to preferred 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.