The world of finance can be a bit complicated at times, in part because financial professionals often have an interest in portraying matters to be more complex than they actually are. However, one of the more straightforward items in finance is the balance sheet. Put simply, a balance sheet is a statement which gives a picture of the financial condition of an individual or company at a specific moment in time. Balance sheets can be difficult to read if the size of the entity is unusually large; however, all balance sheets share a number of common characteristics.
Balance sheets list the assets, liabilities and equity of an entity. Assets are listed on one side of the sheet and liabilities and equity are listed on the other and the two sides are made to balance out. Assets are typically subdivided by type – i.e. current (or short-term) and non-current (fixed). Examples of current assets include cash, cash equivalents, accounts receivable and inventory. Non-current assets include investment property, intangible assets, biological assets and so forth. Common types of liabilities include accounts payable, promissory notes, corporate bonds, current and deferred tax liabilities and others.
The difference between an entity’s total assets and total liabilities is its ownership equity (or shareholder’s equity). An entity’s equity, which can manifest in a variety of forms, essentially represents its “net worth” or value.
In the United States, balance sheets created by public business entities have to abide by structural guidelines outlined by the Generally Accepted Accounting Principles (GAAP). After balance sheets have been prepared, they undergo a process called Balance Sheet Substantiation in which the internal balances of a business are “reconciled” in order to ensure maximal accuracy.
In summary, balance sheets are an elementary – though exceptionally important – item of financial accounting and provide a valuable glimpse of the financial condition of an individual or company. Balance sheets only start to get tricky when very large companies are involved, and even then balance sheets should never be a source of intimidation.
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