The balance sheet is a statement that records entity assets, liabilities, and equity as of the end of the accounting period.
In other words, a balance sheet is known as the statement of financial position. Examining the balance sheet gives the accountants, investors, or business owners insights on the net worth and financial position of the company.
The balance sheet comprises three categories, assets, liabilities, and equity. According to the accounting equation, the balance sheet can be formulated based on the formula stated below.
Asset = Liability + Shareholder Equity
- There are two types of assets - current and fixed assets.
- Current assets are short-term, and they are typically used up in less than a year.
- Eg. Cash and cash equivalents, inventory, account receivables, marketable securities, and prepaid expenses.
- Fixed assets (non-current assets) have a lifespan of more than a year.
- Eg. Buildings, land, office furniture, machinery, and vehicles.
- Liability can be defined as the debt obligations that the company has to pay off.
- There are two types of liability - current liability and non-current liability.
- A current liability, also known as short term liability, are debts that need to be paid off within a year.
- Account payable, interest payable, accrued expenses, short-term loans are classified under the current liability account.
- Non-current liability is also known as a long-term liability, which are any debts that are over a year.
- Eg. Interest and principal on bonds, any pension fund liabilities, capital leases, etc.
Generally, equity refers to shareholder equity, which is the amount of money returned to the company’s shareholders after clearing the payables accounts.
- Shareholder’s equity is inclusive of stocks, additional paid-in capital, retained earnings, and treasury stock.
- The company’s equity can be calculated based on the formula below.
Shareholder’s Equity = Total Assets - Total Liabilities