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What does a balance sheet tell us?

Author:
Harold Averkamp, CPA, MBA

Definition of Balance Sheet

A balance sheet reports the dollar amounts of a company’s assets, liabilities, and  owner’s equity (or stockholders’ equity) as of midnight of the date shown in the heading.

Examples of Balance Sheet Elements

Assets that are reported on the balance sheet are the company’s resources such as cash, accounts receivable, inventory, investments, land, buildings, equipment, some intangible assets . Generally assets are reported at their cost or a lower amount due to the cost principle, depreciation, and conservatism. The cost principle also means that some very valuable aspects of the company are not listed as assets. For example, a company’s outstanding reputation, its effective management team, and its amazing brand recognition are not reported as assets if they were not acquired in a transaction involving another party or entity.

Liabilities are a company’s obligations as of the balance sheet date and will include loans payable, accounts payable, accrued expenses not yet recorded in accounts payable, warranty obligations, taxes payable, and more.

Stockholders’ equity or owner’s equity reports the amounts that were invested by the owners plus the company’s earnings that the owners chose not to withdraw as dividends or drawings.

Additional Balance Sheet Information

The balance sheet classifications allow the reader to easily compute the amount of a company’s working capital and to determine if a company is highly leveraged.

Every balance sheet that is distributed by a company should include notes (or footnote disclosures). These notes provide important additional information concerning the company’s financial position including potential liabilities not included in the amounts reported on the face of the balance sheet.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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