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What is a balance sheet and why is it prepared?

The balance sheet is prepared in order to report an organization's financial position as of a specified moment, such as midnight on December 31.

A corporation's balance sheet reports its assets (resources that were acquired in past transactions), its liabilities (obligations and customer deposits), and its stockholders' equity (the difference between the amount of assets and liabilities). Some people state that the balance sheet reports the amounts of the assets and the claims against those assets (liabilities and stockholders' equity). Others state that the balance sheet reports a corporation's assets and the amount that was provided by creditors (the liabilities) and the amounts provided by the owners (stockholders' equity).

A classified balance sheet reports the current assets in a section that is separate from the long-term asset. Similarly, current liabilities are reported in a section that is separate from long-term liabilities. This allows bankers, owners, and others to easily compute the amount of an organization's working capital. (Working capital is defined as current assets minus current liabilities.)

The balance sheet has some limitations. For example, land and buildings are usually reported at cost minus the accumulated depreciation of the buildings. If these assets have increased in value, the fair value is not reported due to the cost principle. Also, brand names and trademarks may have significant value, but are not reported on the balance sheet, if they were not acquired in a transaction.

The balance sheet should be read with the other financial statements (income statement, statement of cash flows, and the statement of changes in stockholders' equity) and with the notes to the financial statements.