Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 561

Financial Statements

Chapter 18

Lesson 18.3

Student Guide

The Balance Sheet

A balance sheet describes the financial situation of a company at a specific point in time. (Think about it

being a snapshot of a company at a particular time.) The balance sheet lists the assets of a business and

the sources of those assets. The name balance sheet comes from the accounting equation. Remember in

Chapter 5, you determined the accounting equation must always be in balance. One way to make sure you

balance is to use the accounts in the accounting equation to develop a balance sheet. This equation is also

a way to represent a company’s net worth.

A balance sheet can be prepared at any point in time to show the assets, liabilities, and owner’s equity for a

company.

The heading on the balance sheet specifies four things:

n    the name of the company

n    the name of the financial statement

n    the date

n    unit of measure

Note the date on the balance sheet is on a specific date. Also, notice the three major headings: Assets,

Liabilities, and Owner’s Equity.

Elements

Assets are the economic resources owned by a company. The number of asset accounts varies depending

on the nature of a company’s organization. Current assets are assets that are normally turned into cash

within a year, while plant and equipment are assets that are used in transacting business and are more

long term in nature. Every asset on the balance sheet is measured at the total cost incurred to acquire it.

Balance sheets do not show the amounts for which assets could currently be sold.

Liabilities are the company’s debts or obligations. Current liabilities are those that must be paid shortly.

Long-term liabilities are those that will be paid over a long period of time (more than one year). The ac-

counts payable category arises from the purchase of goods or services from suppliers. The notes payable

section results from cash borrowings based on a formal written debt contract with a lending institution,

such as a bank.

Owner’s (stockholder’s) equity indicates the amount of financing provided by owners of the business

as well as earnings. The investment of cash and other assets in the business by the owners is called

contributed capital. The amount of earnings (profits) reinvested in the business (and thus not distributed

to stockholders in the form of dividends) is called retained earnings.

Assets = Liabilities + Owner’s Equity