The Purpose of the Balance Sheet

The balance sheet is a snapshot in time of everything a company owns and everything it owes at a particular moment. The things the company owns are called assets. The things it owes are called liabilities (when they are owed to outside parties) and equity (when they are owed to the owners of the business).

Notice that the total assets and the total liabilities and equity balance; that is to say, debits equal credits. Because assets have debit balances and liabilities and owner's equity have credit balances, we can also say that:

 

            ASSETS = LIABILITIES + OWNER'S EQUITY

 

This is called the fundamental accounting equation. Although the concept itself is important to learn, the name is not.

You will find that every balance sheet (and this goes for all of the financial statements) will look a little different. Some accountants prefer not to use any dollar signs. Some like to have assets on one page and liabilities on the next. Regardless of how it looks, though, the fundamental accounting equation still holds.

Understanding Balance Sheet

A balance sheet tell investor how much a company has and how much it owes.

Balance sheet is one of the important document in financial statements. A balance sheet show how a company financial condition stands at a given moment or a particular date. A balance sheet tell investor how much a company has and how much it owes. What the company has is shown on the asset side and what it owes is shown on the liability side. The assets consist of the physical properties of the company, such as plants and equipments, cash it holds or cash equivalent such as bonds or stocks, assets include intangible assets such as good-will which normally given an arbitrary value. The sum of all these items makes up the total assets of the company shown at the bottom of the balance sheet.

Assets and Liabilities

The difference between the total assets and total liabilities is what the company worth or net worth of the company.

Liabilities not only shown the debts of the company but also reserves of various kinds and the equity or ownership interest of the stockholders. Debts incurred in the ordinary course of business appear as accounts payable. Formal borrowings are listed as bonds or notes outstanding. The stockholders' interest is shown under the liability side as capital and surplus because they stand for money owed by the company to its stockholders. The total assets and the total liabilities are always equal on the balance sheet because the capital and surplus items are worked out at whatever figure is needed to make the two side balance.