Balance Sheet: Explanation, Components, and Examples

In this case, the users can use the balance sheet, together with other financial statements, such as income statement and statement of cash flows, to make a business decision involving the company. For example, lenders may decide whether to provide a new loan or more loans to the company only after looking at financial statements and other ratios, such as liquidity ratio and gearing ratios. This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report. The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account.

In the accounting period when the items in inventory are sold, the cost of the items sold is removed from the asset inventory and is reported on the income statement as cost of goods sold. The balance sheet is one in a set of five financial statements distributed by a U.S. corporation. To get a complete understanding of the corporation’s financial position, one must study all five of the financial statements including the notes to the financial statements. While you get info on equity, assets, and liabilities, they don’t offer details on profitability or cash flow. For example, it won’t explain where your money is coming from or going.

Until the company delivers the services or goods, the company has an obligation to deliver them or to refund the customer’s money. When they are delivered, the company will reduce this liability and increase its revenues. Accounts payable represents the amounts owed to vendors or suppliers for goods or services the company had received on credit. The amount is supported by the vendors’ invoices which had been received, approved for payment, and recorded in the company’s general ledger account Accounts Payable. Since no interest is payable on December 31, 2024, this balance sheet will not report a liability for interest on this loan.

Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure. All assets that are not listed as current assets are grouped as non-current assets. A common characteristic of such assets is that they continue providing benefit for a long period of time – usually more than one year.

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For example, when a corporation borrows money from its bank, the bank loan was a source of the corporation’s assets, and the balance owed on the loan is a claim on the corporation’s assets. In the U.S., a company can elect which costs will be removed first from inventory (oldest, most recent, average, or specific cost). During times of inflation or deflation this decision affects both the cost of the inventory reported on the balance sheet and the cost of goods sold reported on the income statement.

• When setting up a balance sheet, you should order assets from current assets to long-term assets.
• Current liabilities are sometimes known as short-term liabilities.
• Liabilities are what the company owes in the business including accounts payable, interest payable and notes payable, etc.
• Notes payable may also have a long-term version, which includes notes with a maturity of more than one year.
• For mid-size private firms, they might be prepared internally and then looked over by an external accountant.

Hence, the cumulative cost of the treasury stock appears in parentheses. Other accrued expenses and liabilities is a current liability that reports the amounts that a company has incurred (and therefore owes) other than the amounts already recorded in Accounts Payable. Liabilities (and stockholders’ equity) are generally referred to as claims to a corporation’s assets. However, the claims of the liabilities come ahead of the stockholders’ claims. Goodwill is an intangible asset that is recorded when a company buys another business for an amount that is greater than the fair value of the identifiable assets. To illustrate, assume that a corporation pays $5 million to acquire a business that has tangible and identifiable intangible assets having a fair value of $4 million.

The balance sheet is a report that summarizes all of an entity’s assets, liabilities, and equity as of a given point in time. It is typically used by lenders, investors, and creditors to estimate the liquidity of a business. The balance sheet is one of the documents included in an entity’s financial statements. Of the financial statements, the balance sheet is stated as of the end of the reporting period, while the income statement and statement of cash flows cover the entire reporting period.

Example of a balance sheet using the account form

Assets are what the company owns in the business including cash, accounts receivable, inventory and equipment, etc. Balance sheets in various types of companies, whether it is manufacturing, trading, or service company, have three main components which are assets, liabilities, and equity. Additionally, they all follow the same accounting equation which is assets equal liabilities plus equity. The amount of other comprehensive income is added/subtracted from the balance in the stockholders’ equity account Accumulated Other Comprehensive Income. A distribution of part of a corporation’s past profits to its stockholders.

Current assets include cash and all assets that can be converted into cash or are expected to be consumed within a short period of time – usually one year. Examples of current assets include cash, cash equivalents, accounts receivable, prepaid expenses, advance payments, short-term investments, and inventories. According to Generally Accepted Accounting Principles (GAAP), current assets must be listed separately from liabilities. Likewise, current liabilities must be represented separately from long-term liabilities. Current asset accounts include cash, accounts receivable, inventory, and prepaid expenses, while long-term asset accounts include long-term investments, fixed assets, and intangible assets.

Assess your ability to meet financial obligations

A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account. At a corporation it is the residual or difference of assets minus liabilities. The account Retained Earnings provides the connection between the balance sheet and the income statement. Treasury stock is a subtraction within stockholders’ equity for the amount the corporation spent to purchase its own shares of stock (and the shares have not been retired). The current liability deferred revenues reports the amount of money a company received from a customer for future services or future shipments of goods.

• As the credit balance increases, the book (or carrying) value of these assets decreases.
• Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year.
• Beneath the assets are the liabilities followed by stockholders’ equity.
• Many of these ratios are used by creditors and lenders to determine whether they should extend credit to a business, or perhaps withdraw existing credit.
• Now that we have seen some sample balance sheets, we will describe each section of the balance sheet in detail.

Other intangible assets

Pay attention to the balance sheet’s footnotes in order to determine which systems are being used in their accounting and to look out for red flags. When the balance sheet is prepared, the liabilities section is presented first and the owners’ equity section is presented later. Now that the balance sheet is prepared and the beginning and ending cash balances are calculated, the statement of cash flows can be prepared. This form balance sheet definition in accounting is more of a traditional report that is issued by companies. Assets are always present first followed by liabilities and equity.

A dividend is not an expense on the corporation’s income statement. This is the period of time that it will be economically feasible to use an asset. Useful life is used in computing depreciation on an asset, instead of using the physical life.

The headings on the other four financial statements indicate a span of time (interval of time, period of time) during which the amounts occurred. For instance, the heading of a company’s income statement might indicate “For the year ended December 31, 2024”. This tells the reader that the amounts reported for sales and expenses are the total amounts for the 365 days of the year. Here’s an example to help you understand the information to include on your balance sheet. In the example below, we see that the balance sheet shows assets (such as cash and accounts receivable), liabilities (such as accounts payable, credit cards, and taxes payable), and equity.

In the account form (shown above) its presentation mirrors the accounting equation. That is, assets are on the left; liabilities and stockholders’ equity are on the right. Balance sheets outline a company’s finances for managers, investors, and regulators. Ultimately, what a balance sheet is matters less than what it can do. By weighing assets against liabilities, reading balance sheets paints a picture of business performance.

Liabilities Section

He doesn’t have a lot of liabilities compared to his assets, and all of them are short-term liabilities. Ecord the account name on the left side of the balance sheet and the cash value on the right. This account includes the amortized amount of any bonds the company has issued.