A balance sheet, also known as the statement of financial position, is one of the basic financial statements. It lists a company’s assets, liabilities, and stockholders’ equity at a given point in time, and it shows that the accounting equation works. It is used to assess a company’s liquidity and solvency.
What it looks like
A balance sheet lists all assets, all liabilities, and all stockholders’ equity. Total liabilities and total stockholders’ equity are added together to show that their total is equal to total assets. Assets and liabilities are both listed in order of liquidity, starting with the most liquid assets (such as cash) and ending with the least liquid assets (such as goodwill). At the top of the list of liabilities, companies usually report their most liquid liabilities – accounts payable and accrued expenses.
Current and noncurrent
Furthermore, assets are usually divided into two categories:
- current assets – those that are most likely to be turned into cash during the next year
- noncurrent assets – assets not listed as current
Similarly, liabilities are broken down into two categories:
- current liabilities – those that are due within one year
- noncurrent liabilities – liabilities that aren’t current, i.e. not due within a year.
There is a special exception for companies with an operating cycle of more than one year. These are companies that typically take longer than a year to make and sell their products, such as wine. These companies would determine their operating cycle, which could last for several years. Their current assets are those likely to be turned into cash within one operating cycle. Current liabilities are due within one operating cycle.
An example
I made up this sample balance sheet:
Accountinator Corporation
Balance Sheet
December 31, 2019
| Assets | Liabilities | ||
| Current assets: | Current liabilities: | ||
| Cash and cash equivalents | $1,000 | Accounts payable | $2,000 |
| Accounts receivable | 3,000 | Accrued expenses | 4,000 |
| Inventory | 5,000 | Income taxes payable | 6,000 |
| Total current assets | 8,000 | Total current liabilities | 12,000 |
| Noncurrent assets: | Noncurrent liabilities: | ||
| Property, plant, and equipment | 7,000 | Mortgage payable | 3,000 |
| Goodwill | 9,000 | Bond payable | 4,000 |
| Total noncurrent assets | 16,000 | Total noncurrent liabiltiies | 7,000 |
| Total assets | $24,000 | Total liabilities | 19,000 |
| Stockholders’ equity | |||
| Common stock at par | 1,000 | ||
| Additional paid-in capital on common stock | 2,000 | ||
| Retained earnings | 2,500 | ||
| Treasury stock | (500) | ||
| Total stockholders’ equity | 5,000 | ||
| Total liabilities and stockholders’ equity | $24,000 |
This particular company has $24,000 in assets, which is equal to total liabilities ($19,000) plus total stockholders’ equity ($5,000).
Here is Apple’s balance sheet.
Note that some balance sheets are presented side-by-side, with assets on the left and liabilities and stockholders’ equity listed on the right, as shown above. Other balance sheets are presented with assets at the top, liabilities in the middle, and stockholders’ equity at the bottom.
Tips for entrepreneurs
The balance sheet provides a useful snapshot of your company’s financial position. Make sure that you do not have too much debt.