The balance sheet also referred to as the statement of financial position presents a company’s financial position at the end of a specified date. An audited company balance sheet is usually required by law and is also often demanded by lenders, suppliers, investors and taxation authorities. To be considered valid, a balance sheet must give a true and fair view of a company’s state of affairs by providing a snapshot of its financial status at a particular point in time. A standard company balance sheet has three parts: assets, liabilities and owner’s or shareholder’s equity.
Assets are things a company owns i.e. resources a company has acquired through transactions. Assets have future economic value that can be measured and expressed in dollars that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit. Asset accounts will normally have debit balances.
Assets = Liabilities + Owner’s Equity
Examples of asset accounts reported on a company’s balance sheet include: cash and cash equivalents, property, equipment, land, land improvements, buildings, accounts receivable, inventory, supplies, intangible assets (such as goodwill), temporary investments, prepaid expenses etc.
Liabilities are obligations of a company and include amounts owed to creditors for a past transaction. Liabilities usually have the word “payable” in their account title. Together with owner’s equity, liabilities can be thought of as a source of or a claim against a company’s assets. Liability accounts will normally have credit balances.
Liabilities = Assets – Owner’s Equity
Examples of liability accounts reported on a company’s balance sheet include: notes payable, accounts payable, wages payable, interest payable, other accrued expenses payable, income taxes payable, salaries payable, tax, deferred tax, customer deposits, warranty liability, unearned revenues, bonds payable etc.
Owner’s or Shareholder’s Equity
Owner’ or Shareholders’ Equity is part of the company’s liabilities i.e. funds “owing” to shareholders (after payment of all other liabilities).
Examples of stockholders’ equity accounts include: common stock, preferred stock, paid-in capital in excess of par value, paid-in capital from treasury stock, retained earnings etc.
Owner’s Equity = Assets – Liabilities