The balance sheet

A Balance Sheet is a fundamental financial statement that provides a snapshot of a company's financial position at a specific point in time. It summarizes what a company owns (Assets), what it owes to others (Liabilities), and the owners' stake in the company (Equity).

A Balance Sheet shows a company's financial structure and health at a particular date. It lists and categorizes the company's assets, liabilities, and equity, following the fundamental accounting equation:

Assets = Liabilities + Equity

The items that go on a balance sheet are:

• Assets: Resources owned by the company that have future economic value (e.g., Cash, Accounts Receivable, Inventory, Property, Plant & Equipment, Intangible Assets like Goodwill). Assets are typically listed in order of liquidity (how easily they can be converted to cash).
• Liabilities: Obligations the company owes to external parties (e.g., Accounts Payable, Salaries Payable, Loans Payable, Deferred Revenue). Liabilities are typically listed by when they are due (current vs. non-current).
• Equity: The residual interest in the assets of the entity after deducting all its liabilities (e.g., Common Stock, Retained Earnings). It represents the owners' stake.

The main purposes of a Balance Sheet are to:

• Show the financial health and stability of a company at a specific moment.
• Help stakeholders (investors, creditors, management) assess the company's ability to meet its obligations (liquidity and solvency).
• Provide insights into the company's capital structure (how it's financed - debt vs. equity).
• Serve as a basis for calculating various financial ratios.

To read a Balance Sheet:

1. Look at the date to understand the specific point in time the statement represents.
2. Review the Assets section, understanding the types of resources the company owns (Current Assets are liquid, Non-Current Assets are long-term).
3. Examine the Liabilities section, noting the company's obligations (Current Liabilities are due within a year, Non-Current Liabilities are due later).
4. Analyze the Equity section to see the owners' investment and accumulated profits (Retained Earnings).
5. Verify that the accounting equation holds true: Total Assets must equal the sum of Total Liabilities and Total Equity.
6. Compare figures over different periods to identify trends.

Preparing a Balance Sheet involves summarizing all account balances from the general ledger at a specific date. The basic steps are:

1. Determine the reporting date.
2. Gather the ending balances for all asset, liability, and equity accounts.
3. List and categorize Assets (Current and Non-Current) and calculate total assets.
4. List and categorize Liabilities (Current and Non-Current) and calculate total liabilities.
5. List Equity accounts (like Common Stock, Retained Earnings) and calculate total equity.
6. Ensure that Total Assets = Total Liabilities + Total Equity.

Accounting software automates this process, but it can also be prepared manually or using spreadsheet software like Excel.

Retained Earnings is an equity account on the Balance Sheet that represents the cumulative total of net income earned by the company since its inception, minus any dividends paid out to shareholders. It's the profit that has been "retained" and reinvested in the business.

It's calculated as: Beginning Retained Earnings + Net Income (or - Net Loss) - Dividends Paid = Ending Retained Earnings. The Net Income/Loss figure comes from the Income Statement for the same period.

Net Income is calculated on the *Income Statement* for a specific period, not directly on the Balance Sheet, which is a snapshot at a point in time. However, you can *infer* the Net Income for a period if you have Balance Sheets for the beginning and end of that period, and information about dividends paid. By comparing the Retained Earnings on the two balance sheets and adding back any dividends paid during the period, you can determine the Net Income (or Loss).

Calculation: Net Income = Ending Retained Earnings - Beginning Retained Earnings + Dividends Paid

Accounts that measure activity over a period, rather than value at a point in time, do not appear on the Balance Sheet. These are typically accounts from the Income Statement (Revenue and Expense accounts).

Examples include: Sales/Revenue, Cost of Goods Sold, Salaries Expense, Rent Expense, Depreciation Expense, Utilities Expense, Marketing Expense. Net Income (the result of revenues minus expenses) does impact the Balance Sheet via Retained Earnings, but the expense and revenue accounts themselves are not listed on the Balance Sheet.

Goodwill is an intangible asset that appears on the Balance Sheet when a company acquires another company for a price higher than the fair value of its identifiable net assets (Assets minus Liabilities). It represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized (e.g., reputation, customer base, synergy).

Accumulated Depreciation is a contra-asset account that appears in the Assets section of the Balance Sheet, usually under Non-Current Assets. It represents the total depreciation expense recorded for an asset (like property, plant, or equipment) up to a specific date. It reduces the book value of the asset it's associated with.

Dividends themselves (as a payment transaction) do not appear as a line item on the Balance Sheet like assets or liabilities. However, when dividends are declared or paid, they reduce the company's Retained Earnings, which *is* an account on the Equity section of the Balance Sheet. So, while not listed explicitly, they impact the value of the Retained Earnings line.

A classified balance sheet is a balance sheet that separates assets and liabilities into distinct categories: current and non-current (or long-term). This classification makes it easier for users to assess the company's liquidity (ability to meet short-term obligations) and long-term solvency (ability to meet long-term obligations and survive over time).