Balance Sheet Basics
One of the financial statements you will run into most likely several times during your career is a balance sheet. The balance sheet reports three things: Assets, Liabilities, and Stockholders’ equity. The ‘basic accounting equation’ essentially governs the whole sheet.
Assets = Liabilities + Stockholders’ equity
Any alterations from the data and we are just looking at an algebra equation. If liabilities go down, then either assets has to go down or stockholders’ equity has to go up. That’s where the statement gets the name ‘Balance Sheet.’
It’s also important to notice that a balance sheet is for a point in time. It’s often called a snapshot of a company’s financial standing. Which is a good way to think of it. You can see where money is at, where it is owned, and where it is owed.
You will have two main sections in your balance sheet. The Assets for the first, and the Liabilities and Stockholders’ equity for the second. Both of these two pieces will equal each other or the SEC and stockholders will get upset at the company and it’s poor accounting.
Now Let’s take a look at the first section, Assets. Assets are defined as anything that your company owns that is worth money. (Notice this isn’t the same definition you will find in Rich Dad Poor Dad!) They are organized from their proximity to cash. Cash comes first, then the asset that is most easily converted to cash. Accounts receivable (people or businesses who owe your company money) are generally next in line, followed by supplies, and then property that you own.
In the next section we see two subsections Liabilities and Stockholders’ Equity.
The money that your company owes to others is called your liabilities. The liabilities are generally put into order by the time period in which they expect to be paid. Everything to be paid within the year are first from highest amount to lowest. Followed by those that will be paid in more than one year, once again from highest to lowest.
We come to the Stockholder’s Equity next. This is the book value of the company’s stock, and not the market’s idea of it’s value. (Which might be a good way to help pick out undervalued stocks if you can find them.)
Let’s take a look at a mockup of a ballance sheet.
|
Aridni Balance Sheet December 31, 3000 (In Gazillions of Planet Aridni Dollars) |
Assets |
|---|---|
|
Cash Accounts Receivable Supplies Equipment Property |
50,000 10,000 15,000 25,000 100,000 |
|
Total Assets |
200,000 |
|
Liabilities and Equity |
|
|
Liabilities |
|
|
Notes Payable Accounts Payable |
10,000 |
|
Total Liabilities |
15,000 |
|
Stockholders’ Equity |
|
|
Common Stock Retained Earnings |
150,000 35,000 |
|
Total Equity |
185,000 |
|
Total Liabilities and Equity |
200,000 |
You can see that both sides ballance at 200,000 Gazillion Planet Aridni Dollars. The header gives the important information about the type of information and puts it into context. Next, there is the information!
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[...] presents Balance Sheet Basics posted at Aridni, saying, “Thanks for [...]
February 23rd, 2007 | #
Your expression of the accounting equation is a mathematical impossibility. The correct expression is:
Assets + Liabilities + Owners’ Equity = 0
The zero balance that these figures sum to allows for the balance sheet to be in balance (an equal amount of debits and the opposites of debits, credits). For a full explanation why this must be the case see my book “The Tao of Financial Information.” In short, balance is mathematically expressed by a combining to zero.
March 26th, 2007 | #
The previous comment is not a personal criticism, all textbooks teach your version of the accounting equation. However, the textbooks are wrong and result of their careless use of algebra has a negative effect on the economies of the world.
March 26th, 2007 | #
[...] presents Balance Sheet Basics posted at Aridni, saying, “Thanks for [...]
March 27th, 2007 | #
This has really helped me understand the basics of the balance sheet as it used easy every day language that i understsnd and not the technical accounting language! Thanx keep it up.
October 12th, 2007 | #
Glad that it was helpful to you Sophia.
October 12th, 2007 | #
I have learnt some great skills mainly on balance sheet ratio analysis. I am finding it so helpful comparing companies
March 4th, 2008 | #
What are you doing if you have Inventory and a bulding at your stockholder balancesheet?
Thank you
April 4th, 2008 | #
Very nicely explained article, thanks for that. I’m studying for my CFA exam due in Dec and there is an entire book covering companies financial statements. With all that utterly boring stuff about accounting principles and GAAP and IFRS thrown in you tend to lose sight of the basic concepts that you explained here.
Thanks,
December 3rd, 2011 | #