The balance sheet informs the reader of a company’s financial position as of one moment in time. It allows someone—like a creditor—to see what a company owns as well as what it owes to other parties as of the date indicated in the heading. This is valuable information to the banker who wants to determine whether a company qualifies for additional credit or loans. Others who would be interested in the balance sheet include current investors, potential investors, company management, suppliers, some customers, competitors, government agencies, and labor unions.
Assets are things that the company owns. They are the resources of the company that has been acquired through transactions and have future economic value that can be measured and expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. Examples of asset accounts that are reported on a company’s balance sheet include:
- Petty Cash
- Temporary Investments
- Accounts Receivable
- Prepaid Insurance
- Land Improvements
Usually, asset accounts will have debit balances.
Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word “payable” in their account title. Along with owner’s equity, liabilities can be thought of as a source of the company’s assets. They can also be thought of as a claim against a company’s assets.
Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the company defers the reporting of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits.
Examples of liability accounts reported on a company’s balance sheet include:
- Notes Payable
- Accounts Payable
- Salaries Payable
- Wages Payable
- Interest Payable
- Other Accrued Expenses Payable
- Income Taxes Payable
- Customer Deposits
- Warranty Liability
- Lawsuits Payable
- Unearned Revenues
- Bonds Payable
Liability accounts will normally have credit balances.
Owner’s (Stockholders’) Equity
Owner’s Equity—along with liabilities—can be thought of as a source of the company’s assets. Owner’s equity is sometimes referred to as the book value of the company, because owner’s equity is equal to the reported asset amounts minus the reported liability amounts.
“Owner’s Equity” are the words used on the balance sheet when the company is a sole proprietorship. If the company is a corporation, the words Stockholders’ Equity are used instead of Owner’s Equity. An example of an owner’s equity account is Molly Snow Capital (where Molly Snow is the owner of the sole proprietorship). 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
- Accumulated Other Comprehensive Income
Both owner’s equity and stockholders’ equity accounts will normally have credit balances.
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