Balance Sheet Introduction

Balance Sheet Introduction

A Balance Sheet is fundamentally a statement of financial position as of a certain date. A balance sheet can be prepared for an individual, a partnership, a corporation or any other entity that has assets and debts.

Balance sheets are typically compiled to report to owners or other interested parties such as lenders, exactly what the company looks like financially at a given point in time. In order to have amounts to report, an entity would need a financial record keeping system that would show balances at the end of a day, week or whatever reporting timeframe was needed.

A basic balance sheet will have three sections; assets, liabilities, and owner's equity. A balance sheet is so named because it must be "balanced" using the formula; assets minus liabilities equals owner's equity.

The simplest business reporting will typically be done on the "cash basis." Cash basis means simply that a record is made of a transaction, e.g. a sale of goods, when cash changes hands. Let's assume that John Doe borrows $5,000 from the bank to start a small business selling his childhood collection of baseball cards. John needs the $5,000 to pay rent on a small storefront and pay for electricity in the store until things get going. John has valued his collection conservatively at $10,000. Before any sales are made or expenses paid, John's balance sheet would look like this:

   Cash$ 5,000
   Card Collection$10,000
   Bank Loan$ 5,000
Owner's Equity$10,000

Every transaction in John's business will have an effect on his balance sheet. As sales are made, there is an increase in cash and a decrease in the value of the card collection. For example, if John sells a card that he valued at the start of the business at $1.00, for $2.00, he has made a profit of $1. Profit or loss is the result of business operations where all expenses and revenue are netted to show the final result. The profit John earned selling the card adds to his equity, balancing the statement.

Accounting has long realized that not all businesses have the luxury of operating on a strictly cash basis. As a result businesses have amounts that are due to them, as when sales are made on credit, and they owe money to other businesses when they buy on credit. These amounts are called receivables and payables and are also reported on a balance sheet so that on a given date, an accurate picture of the business will be reported.

As businesses are incorporated, many other complexities can show up in the balance sheet. Corporations sell ownership shares, typically in classes of stock. The stock will be shown in the equity section along with any restrictions or reservations that may be placed on them.

by Jim Marconi, 2012

Income Statement Intro
Balance Sheet Intro
Statement of Cash Flows
Zero Based Budgeting
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