A balance sheet, or an accounting balance sheet, is one of the key types of financial statements used by business owners and their accountants to track financial activity and financial health. Along with other major financial statements such as the income statement, the cash flow statement, and the statement of shareholder equity, the balance sheet is designed to give an idea of a company’s financial position at a specific point in time. The balance sheet is also known as the “statement of financial position.”
What Does a Balance Sheet Include?
As a form of financial reporting, a company balance sheet should show three areas of a company’s financial position: assets, liabilities, and owner’s or stockholders’ equity.
A statement of financial position should feature a comprehensive inventory of what a company owns or its total assets. This section of the balance sheet can include cash, temporary investments, long-term investments, accounts receivable, product inventory, supplies or materials, prepaid insurance policies, land, buildings, land improvements, equipment, and company goodwill. Remember to list both short-term assets and fixed assets here. Short-term assets are assets that are expected to be sold, used up, or converted to cash within the current fiscal year. Fixed assets are long-term assets that are purchased with long-term use in mind and are therefore unlikely to be converted to cash in the near future.
The assets category of the balance sheet should also include what are called “contra-assets,” or asset accounts that have credit balances. The most common example is accumulated depreciation on certain fixed assets (such as a building or a piece of equipment) that the business purchased/acquired during a different reporting period.
Note that the assets listed on your balance sheet can be classified in several ways. Categories include: Current Assets; Investments; Property, Plant, and Equipment; Intangible Assets; and Other Assets.
In addition to showing what a company owns, a balance sheet must also reflect what the company owes, or its liabilities.
Think of company liabilities as a claim against assets, or as what enabled a company to own its assets in the first place. This category can include accounts payable, salaries/wages payable, interest owed, income taxes, warranty liability, lawsuits payable, unearned revenues, bonds payable, loans and more. Contra balances exist here too, such as debt issue costs.
Unlike with assets, there are only two technical classifications for liabilities: current liabilities and long-term liabilities. A mortgage or some other type of loan is a long-term liability or long-term debt. The principal paid on the loan, meanwhile, would be classified as a current liability. Other current or short-term liabilities are those where payment of the debt is due within one year.
Owner’s equity/stockholders’ equity
As with liabilities, owner’s equity is considered a source of assets for a company. In a sole proprietorship, this section would highlight owner’s equity; in a corporation with multiple stockholders, it would be shareholders’ equity. This section can include details about stock (common stock, preferred stock), retained earnings, paid-in-capital, accumulated other comprehensive income, company net worth, and more.
In totality, a balance sheet is important for offering a snapshot of a company’s current financial health and its balance between assets, liabilities, and equity. The result is a vital tool that investors and other parties can use to understand how a company operates, what its current financial position is, and whether it is financially stable.