The balance sheet, which is also known as the statement of financial position, shows the assets, liabilities, and stockholders' equity of a company. It is given a date at the end of the accounting period. A big part of the financial statements is the accounting equation: assets equal liabilities plus stockholders' equity. When using a balance sheet, the total of assets, liabilities, and equity must equal the total of assets, liabilities, and equity.
The assets are the first part of the balance sheet. Current assets and long-term assets are the two main types of assets. Current assets are expected to be turned into cash in the next twelve months or one business operating cycle (if longer than a year). Cash is the asset that is most often sold. Stocks and bonds that a company plans to sell in the next year are short-term investments. Accounts receivable are the amounts owed to the company by customers. Notes receivable are amounts that the company expects to get back from a customer who signed a promissory note. On the balance sheet, a company also lists its inventory, which is a current asset. Prepaid expenses are also an asset on the balance sheet because they will help the company in the future.
Plant, property, and equipment, as well as investments and intangibles, are all examples of long-term assets. Plant, property, and equipment (PPE) are things like land, buildings, computers, store fixtures, etc. In the long-term assets part of the balance sheet, depreciation is also shown. It is the amount that PPE has lost value since the beginning of the year. When figuring out the book value of PPE, it is subtracted from the cost of the PPE. Intangible assets are things like patents that can't be seen or touched. Investments are long-term assets because the company doesn't plan to sell them in the next year.
Liabilities are the second part of a balance sheet. Liabilities are also divided into two groups: short-term and long-term. Current liabilities are debts that have to be paid off within a year or one business cycle. Accounts payable is when a company promises to pay a debt from a purchase made on credit. Income taxes payable are what the government calls tax debts. Notes payable are short-term loans that the company has agreed to pay back within a year. Salaries and wages are amounts that are owed to workers. Long-term debts have to be paid back after a year.
The stockholders' equity is the last part of the balance sheet. The stockholders' equity is the company's assets minus its debts. There are two parts to stockholders' equity: capital that has been paid in and earnings that have been kept. The amount of money that stockholders have put into a company is its paid-in capital. Common stock is the most important part of paid-in capital. A company gives stock to its stockholders as proof that they own the company. Earnings from activities that bring in money are called "retained earnings."
I hope this helped you understand how the balance sheet is put together.
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