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Breaking down the balance sheet

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Last editedJun 20212 min read

The balance sheet provides a quick snapshot of a company’s financial standing. Along with the cash flow statement and income statement, it gives accountants a good idea of the money flowing in and out of a business. So, what does a balance sheet show exactly, and what type of format does it use? We’ll break it down below. 

Understanding the balance sheet

There are two main sides to any balance sheet, including assets on one side and liabilities plus equity on the other. The balance sheet’s name comes from its purpose, which is to ensure these two sides are equally balanced. This concept is expressed with the balance sheet formula:

Assets = Liabilities + Equity

You can update your balance sheet at the end of each accounting period, considering what you’ve invested in the business, how much is owed to creditors, and what you have in assets. This gives you a clearer idea of just where your business stands.

What does a balance sheet show?

We’ll take a closer look at each of these balance sheet components below, but generally speaking a balance sheet shows you several things. It outlines the assets your company controls, along with who they belong to:

  • If they belong to someone else, they’re considered liabilities.

  • If they belong to the business owner or shareholders, they’re considered equity.

Putting this all together shows you why the total amount of assets must be equal to liabilities plus equity.

While an income statement shows how the business is performing over time, a balance sheet provides a fixed view of financial health on the day in question. This is why you’ll usually prepare it at the end of an accounting period, when the books should be accurately updated.

Balance sheet accounts

We’ve established that the main balance sheet accounts include assets, liabilities, and equity. Let’s break this down further by looking at what would be included in each of these sections.

1. Assets

Balance sheet assets include anything of value controlled by your business. These assets might not be directly owned by the business – this category should include accounts receivable to include money that’s owed to the business even if it hasn’t been paid yet. Assets can also include items purchased on loan that still haven’t paid off yet.

Current assets include any items with a lifespan under one year, like cash, inventory, and accounts receivables. Non-current assets include liquid items such as machinery and computers, as well as intangible assets like copyrights and patents. Depreciation should also be factored in when calculating the value of non-current assets on the balance sheet.

2. Liabilities

Balance sheet liabilities include any debts owed to others, from credit card balances to auto loans. Long-term liabilities include debts or other financial obligations owed at least one year after the balance sheet’s date. Current liabilities include any obligations that are due within the year, like accounts payable and interest payments.

3. Equity

In addition to balance sheet liabilities and assets, the final component involves owner’s equity. Whether the business is owned by one individual or a group of shareholders, equity equals what would be left over if you liquidate all assets and paid off all debts. Whatever remains should total the owner’s equity.

Balance sheet example

Let’s put all the components together in the following balance sheet example. Provided that you include all relevant accounts, you can use any type of balance sheet format you like. Here’s what one might look like with a dual-column balance sheet format, but you could also use a single or triple-column layout if preferred.

Balance Sheet for Company XYZ

Date: 10/31/2020

 

 

Assets

Liabilities

Cash                                $15,000

Accounts Payable $25,000

Equipment                     $10,000

Business Loan       $10,000

Inventory                       $30,000

Total Liabilities:        $35,000

Accounts Receivable    $20,000

 

Total Assets:                      $75,000

Equity:                    $40,000

As you can see from this balance sheet example, the total of all assets is $75,000. If you add together the total liabilities at $35,000 and equity at $40,000, this also equals $75,000 which means that the balance sheet equation works. At a glance, this company seems to be in decent financial health with more assets than liabilities, leaving plenty of equity for the owners.

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