The Balance Sheet for accounting is an extremely important and frequently used statement of the entity’s condition. It shows the extent of the entity’s ownership of assets, liabilities and equity at any given time. This point is the date of the statement. It is a physical representation of the ‘accounting equation’. The equation states that at any time, the assets of the company are equal to the sum of the liabilities and the equity. The equation also forms the basis of the sentence structure, which reflects all three aspects of the equation. The three parts are: 1) assets, 2) liabilities, and 3) equity. Let’s take a look at each one.
Assets are everything the company owns. We tend to think of assets as land, buildings, vehicles, inventory, and cash, but they are other things as well. Also included are adding machines, computers, copyrights, patents, goodwill, watches, pens, keys, ladders, paper, and photocopiers. This broadens the definition to encompass anything the business has acquired through purchase or owner contributions.
Liabilities, when accounting is done, on the other hand, are claims against assets that exclude the owner’s capital contributions. These statements can take various forms. Some are short and long-term loans, utility bills, rent, employee expenses, bonuses, taxes, and many other items. They reduce the total value of assets. Interestingly, liabilities are very liquid. They change constantly. For example, appliances are bought to sell, the business uses utilities to operate, and cash or credit is needed to pay for these external demands.
Finally, there is the Equity section of the owner of the Balance Sheet. This sums up, in varying degrees of detail, who owns the business. For example, if shares are issued, it will show the value of the shares and typically how many shares are outstanding. It is not unusual to see different stock issues and large differences in values. In simple businesses, the share capital could be divided among several partners. However, the balance sheet will likely not reveal the names of the partners and how much of the business each owns. Ownership is generally specified in other documents related to corporate records. But, this section will show a total of the amounts.
The other important parts of the owner’s equity, in accounting, are related to the income statement. Net Profit, or Net Loss, is part of the equity portion. Generally, it has two parts that represent the entity’s past retained earnings and another part that represents present earnings. Together, they show how much the value of the business has increased or decreased due to the entity’s operations. If the business is operating at a loss, the owner’s equity becomes less valuable and will show that the owners now have less equity than before. If the loss condition continues, the business eventually ceases.
The Balance Sheet is an extremely important statement in accounting and will be found, sometimes in various forms, on the company’s prospectus. It is also provided to various government regulatory agencies. They use them to make sure the business is complying with laws, regulations, and tax requirements. Usually there is also an external audit of this statement along with the income and cash flow statements. This provides an external review and opinion of how well the company keeps its books. So the Balance Sheet is an extremely important financial document.