The balance sheet, also called the statement of financial position, is the third general purpose financial statement prepared during the accounting cycle. The balance sheet report a company's financial position based on its assets, liabilities, and equity at a single moment in time.
Unlike the income statement, the balance sheet does not report activities over a vast time frame. The balance sheet is essentially a picture a company's recourses, debts, and ownership on a given day. This is why the balance sheet is sometimes considered less reliable or less telling of a company's current financial performance. Annual income statements look at performance over the course of 12 months, where as, the balance sheet only focuses on the financial position of one day.
In this way, the balance sheet show how the resources controlled by the business (assets) are financed by debt (liabilities) or shareholder investments (equity). Investors and creditors generally look at the balance sheet for insight as to how efficiently a company can use its resources and how effectively it can finance them.
The balance sheet can be reported in two different formats: account form and report form. The account form consists of two columns displaying assets on the left column of the report and liabilities and equity on the right column. You can think of this like debits and credits. The debit accounts are displayed on the left and credit accounts are on the right.
The report form, on the other hand, only has one column. This form is more of a traditional report that is issued by companies. Assets are always present first followed by liabilities and equity.
In both formats, assets are categorized into current and long-term assets. Current assets consist of resources that will be used in the current year, while long-term assets are resources lasting longer than one year.
Liabilities are also separated into current and long-term categories.
Like all financial statements, the balance sheet has a heading that display's the company name, title of the statement and the time period of the report. For example, an annual income statement issued by Paul's Guitar Shop, Inc. would have the following heading:
- Paul's Guitar Shop, Inc.
- Balance Sheet
- December 31, 2015
Account Format Balance Sheet
Report Format Balance Sheet
As you can see, the report format is a little bit easier to read and understand. That is why most issued reports are presented in report form. Plus the report form fits better on a standard sized piece of paper.
One thing to note is that just like in the accounting equation, total assets equals total liabilities and equity. This is always the case. If you are preparing a balance sheet for one of your accounting homework problems and it doesn't balances, something was input incorrectly. You'll have to go back through the trial balance and T-accounts to find the error.
Now that the balance sheet is prepared and the beginning and ending cash balances are calculated, the statement of cash flows can be prepared.
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