Defining the Balance Sheet

A balance sheet or statement of financial position is a summary of the financial balances of a business as of a specific date, such as the end of its financial year. A balance sheet is sometimes described as a “snapshot of a company’s financial condition.”

A standard balance sheet has three parts: assets, liabilities and ownership equity indicating the net worth of the company at a certain point in time.  A balance sheet dated May 30, 2008 contains account balances as of that day and is a snapshot of the company’s finances at that point.

Assets = Liabilities + Owner’s Equity

A balance sheet has to balance.  This means that assets must equal liabilities plus owner’s equity.  Assets are resources such as cash, inventory, and accounts receivable that are owned by or owed to the company. Liabilities and owner’s equity are claims to those assets. Essentially, the value of everything owned minus the money owed to others leaves the value of the owner’s rights to the business.

You’ll usually see balance sheets formatted in one of two ways—the account form which lists assets on the left and liabilities and owner’s equity on the right or the report form which lists the assets first and the liabilities and owners equity next in vertical arrangement. Examples of both are listed below.

Balance sheets are often more detailed than the basic examples shown.  On many balance sheets assets and liabilities are separated into long-term and short-term categories and entries are included for accumulated depreciation along with allowance for doubtful accounts.