The balance sheet is a financial reporting statement which shows a company’s financial position or “net book worth.” Unlike other financial statements which report results over a specified time frame, the balance sheet presents a company’s financial position as a “snapshot” at an exact point in time. A balance sheet represents the basic accounting equation: assets = liabilities + owner’s/stockholder’s equity. Note that by using basic algebra, you can subtract “liabilities” or “owner’s/stockholder’s equity” from assets and have the same result from the equation.
An intuitive way to think of the accounting and balance sheet equation is:
assets (what the company owns)
liabilities (what the company owes to creditors)
equity (what the company is worth)
There are region specific reporting standards such as United States Generally Accepted Accounting Principles and International Financial Reporting Standards which are issued by reporting regulators and government bodies that provide guidance as to how the balance sheet should be formatted. Under US GAAP and IFRS, the balance sheet format of public companies should be presented in the following way:
Cash and Cash Equivalents
Accounts Receivable, net of allowance for doubtful accounts
Property, Plant, and Equipment, net of depreciation
Investments Accounted for Using the Equity Method (between 20-50% ownership)
Notes Payable – Current
Income Tax Payable
Other Long-Term Liabilities
Total Liabilities and Equity (needs to equal total assets):
As shown above, the balance sheet breaks out “current” and “long-term” assets and liabilities. Classifying current vs. long-term assets and liabilities can be a little tricky to those who are first introduced to accounting. The US GAAP and IFRS standards define “current assets” as cash and all other assets that are reasonably expected to be converted into cash (liquidated) within the next year. This includes short-term investments and accounts receivable balances from customers which are expected to be liquidated within one year as well as inventory that is expected to be sold to customers for payment within one year. Current liabilities are defined as debts and obligations which are due to creditors within one year.
It is important to note that the assets on the balance sheet above are presented at “book value” instead of “market value.” For instance, on the “property, plant, and equipment” line of the balance sheet, a company that owns a building originally purchased twenty years ago would present the original cost of the building less the accumulated depreciation taken on the building over the twenty years of ownership. Even though the market value of the building may be much higher than it was twenty years ago, the company must still report the asset at its original cost less depreciation taken.