Balance Sheet Heading
The heading found at the top of the balance sheet contains the following:
- Company name
- Name of the financial statement: Balance Sheet or Statement of Financial Position
Typically, the balance sheet date is the final day of the accounting period. If a company issues monthly financial statements, the date will be the final day of each month.
The date communicates to the reader that the amounts reported on the balance sheet represent the balances in the company's asset, liability, and stockholders' equity accounts after all transactions up to the final moment of the date have been accounted for.
NOTE: Of the five financial statements, only the balance sheet's heading indicates a point or moment in time, such as December 31, 2022. This date means the amounts shown reflect all transactions up to midnight on December 31, 2022.
The headings on the other four financial statements indicate a span of time (interval of time, period of time) during which the amounts occurred. For instance, the heading of a company's income statement might indicate "For the year ended December 31, 2022". This tells the reader that the amounts reported for sales and expenses are the total amounts for the 365 days of the year.
Financial statements issued between the end-of-the-year financial statements are referred to as interim financial statements. Accounting years which end on dates other than December 31 are known as fiscal years.
Balance sheet heading when a corporation owns multiple corporations
Many large corporations own and control several corporations. When the main corporation issues a comparative balance sheet for the entire group of corporations, the balance sheet heading will state "Consolidated Balance Sheets".
Assets are a company's resources (things the company owns). Their amounts appear on the company's balance sheet if they:
- Were acquired through a purchase or were received through a donation
- Have a future economic value that can be measured and expressed in amounts of currency
- Include prepaid expenses that have not yet expired or been used up
Assets are recorded in the company's general ledger accounts at their cost when they were acquired. In accounting cost means all costs that were necessary to get the assets in place and ready for use. For example, the cost of new equipment to be used in a business will include the cost of getting the equipment installed and operating properly.
(In a company's general ledger, the balances in the asset accounts are normally debit balances. We often visualize the debit balances as appearing on the left side of a T-account. This is consistent with the accounting equation where assets appear on the left side of the equal sign. You can learn more by visiting our topic Debits and Credits.)
Reporting assets on the balance sheet
Some common examples of general ledger asset accounts include Cash, Accounts Receivable, Inventory, Prepaid Expenses, Buildings, Equipment, Vehicles, and perhaps 50 additional accounts.
The general rule (except for certain marketable securities) is that the cost recorded at the time of an asset's purchase will not be increased for inflation or to the asset's current market value.
However, some accounting rules do require some recorded costs to be reduced through a contra asset account. For example, the cost of buildings and equipment used in the business will be depreciated and the amount of the depreciation will be recorded with a credit entry to the contra asset account Accumulated Depreciation. It is also possible that the reported amount of these and other long-term assets will be reduced when their book values (cost minus accumulated depreciation) have been impaired.
The ending balances in the company's related asset accounts will be combined and presented on perhaps 15 lines on the balance sheet. Those combined amounts will appear as lines under the following balance sheet categories:
- Current assets
- Property, plant and equipment
- Intangible assets
- Other assets
A quick definition of current assets is cash and assets that are expected to be converted to cash within one year of the balance sheet's date.
NOTE: The complete definition of a current asset is cash and assets that are expected to turn to cash within one year of the balance sheet's date, or within the company's operating cycle, whichever is longer.
Since most industries have operating cycles of less than a year, our examples will assume that one year is longer than the companies' operating cycles.
The operating cycle for a distributor of goods is the average time it takes for the distributor's cash to return to its checking account after purchasing goods for sale. To illustrate, assume that a distributor spends $200,000 to buy goods for its inventory. If it takes 3 months to sell the goods on credit and then another month to collect the receivables, the distributor's operating cycle is 4 months. Because one year is longer than the 4-month operating cycle, the distributor's current assets includes its cash and assets that are expected to turn to cash within one year.
Here is the current asset section from our sample balance sheets:
Within the current asset section of the balance sheet, we usually see amounts for the following:
- Cash and cash equivalents
- Short-term investments
- Accounts receivable – net
- Other receivables
- Prepaid expenses
Cash and cash equivalents
Cash and cash equivalents appear as the first current asset and will be the combined amount of the following:
Cash which includes the company's checking account balances, currency, checks received but not yet deposited in the bank account, and petty cash.
Cash equivalents include investments that will mature within three months of the date they were purchased. In other words, cash equivalents will be investments where their market values are not likely to fluctuate in the near term. Examples of cash equivalents include 90-day U.S. Treasury Bills and money market accounts.
Short-term investments are temporary investments that do not qualify as cash equivalents but are expected to turn to cash within one year.
Accounts receivable – net
The balance sheet item accounts receivable – net (or trade receivables – net) is the amount in the company's account Accounts Receivable minus the amount in the contra account Allowance for Doubtful Accounts. This net amount is also known as the net realizable value of the company's accounts receivable.
Generally, a company's accounts receivable will turn to cash within a month or two depending on the company's credit terms.
The balance in the general ledger account Accounts Receivable is the sales invoice amounts for goods sold on credit terms minus the amounts collected from these customers. In other words, the balance in Accounts Receivable is the amount of the open or uncollected sales invoices.
The balance in the general ledger account Allowance for Doubtful Accounts is an estimate of the amount in Accounts Receivable that the company anticipates will not be collected.
You can learn more by visiting our topic Accounts Receivable and Bad Debts Expense.
The current asset other receivables is the amount other than accounts receivable that a company has a right to receive. For example, if a company lent an employee $1,000 and the amount is being repaid over a four-month period, the amount owed by the employee as of the balance sheet date will be reported as part of other receivables (or miscellaneous receivables or nontrade receivables).
Another example of other receivables is a corporation's income tax refund related to its recently filed income tax return.
Inventory is likely the largest current asset on a retailer's or manufacturer's balance sheet. The reported amount on the retailer's balance sheet is the cost of merchandise that was purchased, but not yet sold to customers.
In the accounting period when the items in inventory are sold, the cost of the items sold is removed from the asset inventory and is reported on the income statement as cost of goods sold.
In the U.S., a company can elect which costs will be removed first from inventory (oldest, most recent, average, or specific cost). During times of inflation or deflation this decision affects both the cost of the inventory reported on the balance sheet and the cost of goods sold reported on the income statement.
A manufacturer is required to report (on the face of the balance sheet or in the notes to the financial statements) the following ending inventory amounts:
- The cost of the raw materials on hand
- The cost of the work-in-process inventory
- The cost of the finished goods inventory.
You can learn more about inventory and the related cost flows by visiting our topic Inventory and Cost of Goods Sold.
Supplies includes the cost of office supplies, packaging supplies, maintenance supplies, etc. that the company has on hand.
The current asset prepaid expenses reports the amount of future expenses that the company had paid in advance and they have not yet expired (have not been used up).
To illustrate, assume that on December 1, a company pays its $1,800 insurance premium for property insurance covering the next six months of December 1 through May 31. This means that during each of the six months, 1/6 of the $1,800 = $300 will be reported on the monthly income statements. The amount not yet used up (still prepaid) as of each balance sheet date is reported as the current asset prepaid expenses.
Given the above information, the company's December 31 balance sheet will report $1,500 as the current asset prepaid expenses. (This is the original $1,800 payment on December 1 minus $300 that was used up during the month of December. The $1,500 is also calculated as 5 months of unexpired insurance X $300 per month.) On January 31 the current asset prepaid expenses will report $1,200 (4 months still unexpired X $300 per month). On February 28 prepaid expenses will report $900 (3 months of the insurance cost that is unexpired/still prepaid X $300 per month), and so on.
You can learn more about prepaid expenses by visiting our topic Adjusting Entries.