The balance sheet (also known as the statement of financial position) is a financial statement which provides information about a company’s assets, liabilities and shareholders’ equity at a point of time.
Together with the income statement and the statement of cash flows, the balance sheet forms the primary financial statements.
Assets are defined as ‘present economic resources controlled by an entity as a result of past events’. They represent the right to sources of potential economic benefits. Liabilities are defined as ‘present obligations of an entity to transfer an economic resource as a result of past events.’ Equity represents 'the residual interest in the assets of an entity after all liabilities have been satisfied'.
The balance sheet is arguably the most important financial statement because it represents an expanded form of the accounting equation itself, the fundamental identity in accounting.
Assets = Liabilities + Equity
The balance sheet is named so because it lists all assets of a company and shows that their sum is equal to the sum of all liabilities and the shareholders' equity.
Types and format
There are different ways in which a balance sheet can be prepared.
A classified balance sheet is the one that classifies assets and liabilities into current and non-current portions. A non-classified balance sheet lists assets and liabilities in the order of descending liquidity without any current and non-current classification.
An account-form balance sheet is just like a T-account listing assets on the debit (left) side and equity and liabilities on the credit (right) side. A report-form balance sheet lists assets followed by liabilities and equity in vertical format. It often subtracts total liabilities from total assets to arrive at net assets and show it to be equal to the shareholders’ equity.
The following example shows a simple balance sheet based on the post-closing trial balance of Company A.
|As on December January 31, 2011|
|ASSETS||LIABILITIES AND EQUITY|
|Accounts Receivable||5,900||Utilities Payable||3,964|
|Office Supplies||4,320||Unearned Revenue||1,000|
|Prepaid Rent||24,000||Interest Payable||150|
|Total Current Assets||$54,650||Notes Payable||20,000|
|Non-Current Assets:||Total Liabilities||$30,314|
|Accumulated Depreciation||−1,100||Retained Earnings||3,236|
|Net Non-Current Assets||$78,900|
|Total Assets||$133,550||Total Liabilities and Equity||$133,550|