Financial Statements-Balance Sheet
The Balance Sheet and Accounting Financial Statements
The balance sheet is an important financial statement that is released on an annual basis by companies; it demonstrates that the accounting equation is in balance.
There are four types of financial statements that are important to businesses that they complete on a periodic basis. Generally, these statements are compiled annually. These financials include the income statement, balance sheet, statement of cash flows, and statement of retained earnings. One of the most important financial statements is the balance sheet.
What is the Balance Sheet?
The balance sheet is essentially a picture of how a firm is doing at any given point in time. Rather than being over a range of time, like the income statement and other financial statements, the balance sheet represents a single moment in the company’s history. The balance sheet functionally shows the accounting equation is in balance for that company, and shows how much of the firms assets are equity or liability-related. The accounting equation is that assets equal liabilities plus owner’s (or stockholder’s) equity.
The accounting equation is the foundation that all accounting is based on. By keeping the accounting equation in balance by using double entry accounting, a firm’s books are able balance and most importantly, be reconciled. Reconciliation is important for internal controls and auditing purposes.
Accounts Included on the Balance Sheet
The balance sheet divides a company’s assets and liabilities into long-term and current accounts. Long-term asset accounts may include items like property, equipment, and intangible assets such as a brand name. Current asset accounts include items such as cash and cash equivalents. For an asset to be considered current, it generally has to be something that can be turned into cash in less than one year.
Liability accounts are also divided into long-term and current accounts. These are accounts which the company uses to show what types of debts they owe on and how much they are in debt. Liability accounts may include items such as long-term notes and accounts payable. Again, as with current assets, to be considered a current liability an account must be due to be paid in less than one year.
Equity accounts relate to the number and par value of shares the company has outstanding. These accounts will also show the value of items like treasury shares and options where applicable. If the company is not a corporation, for example is owned by a partnership or sole proprietor, these accounts will show the company’s equity as divided by the individuals or companies that own it.
Of all the corporate accounting information a company may put out every year, the balance sheet is one of the most important. It can help to reveal potential financial difficulties a company may have in its future by allowing investors and other interested parties a picture of the company’s past.
Related Articles:
Financial Statements: The P & L: The Income Statement or Profit and Loss Statement
GAAP and Accounting Standards: An Explanation of Generally Accepted Accounting Principles (GAAP)
Accounts Used in Accounting: How to Classify Accounts as Assets, Liabilities, or Equity
