Introduction to Balance Sheet

The accounting balance sheet is one of the major financial statements used by accountants and business owners. (The other major financial statements are the income statement, statement of cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the statement of financial position.

The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time. For example, the amounts reported on a balance sheet dated December 31, 2012 reflect that instant when all the transactions through December 31 have been recorded.

Because the balance sheet informs the reader of a company's financial position as of one moment in time, it allows someone like a creditor to see what a company owns as well as what it owes to other parties as of the date indicated in the heading. This is valuable information to the banker who wants to determine whether or not a company qualifies for additional credit or loans. Others who would be interested in the balance sheet include current investors, potential investors, company management, suppliers, some customers, competitors, government agencies, and labor unions.

We will begin our explanation of the accounting balance sheet with its major components, elements, or major categories:

Assets

Liabilities

Owner's (Stockholders') Equity

Assets are things that the company owns. They are the resources of the company that have been acquired through transactions, and have future economic value that can be measured and expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent.

Examples of asset accounts that are reported on a company's balance sheet include:

Cash

Petty Cash

Temporary Investments

Accounts Receivable

Inventory

Supplies

Prepaid Insurance

Land

Land Improvements

Buildings

Equipment

Goodwill

Bond Issue Costs

Etc.

Usually asset accounts will have debit balances.

Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as a source of the company's assets. They can also be thought of as a claim against a company's assets. For example, a company's balance sheet reports assets of $100,000 and Accounts Payable of $40,000 and owner's equity of $60,000. The source of the company's assets are creditors/suppliers for $40,000 and the owners for $60,000. The creditors/suppliers have a claim against the company's assets and the owner can claim what remains after the Accounts Payable have been paid.

Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the company defers the reporting of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits.

Examples of liability accounts reported on a company's balance sheet include:

Notes Payable

Accounts Payable

Salaries Payable

Wages Payable

Interest Payable

Other Accrued Expenses Payable

Income Taxes Payable

Customer Deposits

Warranty Liability

Lawsuits Payable

Unearned Revenues

Bonds Payable

Etc.

Liability accounts will normally have credit balances.

Contra liabilities are liability accounts with debit balances. (A debit balance in a liability account is contrary—or contra—to a liability account's usual credit balance.) Examples of contra liability accounts include:

Discount on Notes Payable

Discount on Bonds Payable

Etc.

Date: 2015-12-18; view: 751