A balance sheet is an important tool for any business. Whereas a general ledger is an intricate financial portrait of a business, a balance sheet is a snapshot–a quick look at the organization’s financial status. Because it doesn’t have the full detail of a general ledger, creating a balance sheet isn’t as involved or time-consuming.
Elements of a Balance Sheet
A balance sheet of any business comprises two main areas: equity (revenue) and liabilities.
Equity or assets include cash on hand, receivables, inventory and supplies, operational equipment and material, and property. Because part of the asset list encompasses machinery, whether factory equipment or office equipment, depreciation of that equipment must also be reflected, since each has a limited life expectancy.
Liabilities include payables-amounts owed to others, such as bank loans, invoice installments, business credit card balances, taxes, interest payments, and other external debts. If the company is a publicly held one, stockholders’ dividends are considered liabilities, because dividends are payments owed to others.
In its simplest form, a balance sheet subtracts the total of the liabilities from the total of the assets to generate a figure that reflects the net worth of the company, called “owners’ equity.” Equity consists of the capital invested over time plus profits, called “net income,” or capital generated internally, called “retained earnings.”
Points to Remember
A balance sheet lists the depreciated values of equipment because of the limited useful life period, but it lists the full value of buildings and other permanent structures such as parking garages, although replacing the structures may incur far greater cost than the noted values.
The Liabilities section of a balance sheet omits payroll, because payment to employees is an internal debt, not an external one. Stockholders’ equity or dividends are listed, because those amounts are paid “out of house.”
A balance sheet is not an indicator of projected worth. It does not portray a company’s share of the market to which it caters. It does not indicate industry or market trends nor increases or decreases in market competition.
A balance sheet is an abbreviated tool–a small picture. It does not reflect the company’s net worth and should never be used as such. It cannot incorporate projected figures, growth or expansion, or even employees’ talents and skills-all of which contribute toward a company’s future.
John Wiley & Sons, “Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles,” ©2009. Barry J. Epstein, Ralph Nach, and Steven M. Bragg.
Penguin Group, Inc., “Balance Sheet Basics: Financial Management for Non-Accountants,” 1987, by Ronald C. Spurga (c)1986
Sourcebooks, Inc.;”Accounting for Non-Accountants, 2E.”©2010 Wayne A. Label.