Balance Sheet
Balance Sheet
During an accounting period, a business will generate financial information.
![b01](https://seeaccountingnow.online/wp-content/uploads/2021/12/b01.jpg)
At the period-end, you take this information and prepare an income statement.
![b02](https://seeaccountingnow.online/wp-content/uploads/2021/12/b02.jpg)
The income statement is a report showing how the business performed during the period.
![b03](https://seeaccountingnow.online/wp-content/uploads/2021/12/b03.jpg)
To do this, it shows income, expenses and profit.
![b04](https://seeaccountingnow.online/wp-content/uploads/2021/12/b04.jpg)
At the same time, you prepare a balance sheet
![b05](https://seeaccountingnow.online/wp-content/uploads/2021/12/b05.jpg)
To understand this report, it helps to see how it is formed.
![b06](https://seeaccountingnow.online/wp-content/uploads/2021/12/b06.jpg)
How a Balance Sheet is Formed
When starting a business, the business owner may invest some of their own capital.
![b2](https://seeaccountingnow.online/wp-content/uploads/2021/12/b2.jpg)
The business owner would deposit this money in the business’s bank account.
![b3](https://seeaccountingnow.online/wp-content/uploads/2021/12/b3.jpg)
At the same time, the business owner may borrow money from a friend or relative.
![b4](https://seeaccountingnow.online/wp-content/uploads/2021/12/b4.jpg)
The business owner would deposit this money in the bank, as well.
![b5](https://seeaccountingnow.online/wp-content/uploads/2021/12/b5.jpg)
You could create a balance sheet, right here.
![b6](https://seeaccountingnow.online/wp-content/uploads/2021/12/b6.jpg)
A balance sheet shows a business’s assets, liabilities, and equity.
![b7](https://seeaccountingnow.online/wp-content/uploads/2021/12/b7.jpg)
It is usually prepared at period-end, but it can be prepared at any time,
![b7.1](https://seeaccountingnow.online/wp-content/uploads/2021/12/b7.1.jpg)
No matter when it is prepared, it will provide a snap shot of what the business owns and what it owes at that point in time.
![b7.2](https://seeaccountingnow.online/wp-content/uploads/2021/12/b7.2.jpg)
This is how you track changes in what the business owns or what is owed to it
![b7.1.1](https://seeaccountingnow.online/wp-content/uploads/2021/12/b7.1.1.jpg)
It also allows you track changes in what is owed to others
![b7.1.2](https://seeaccountingnow.online/wp-content/uploads/2021/12/b7.1.2.jpg)
This helps you keep track of how much money is now owed to the owner
![7.1.3](https://seeaccountingnow.online/wp-content/uploads/2021/12/7.1.3.jpg)
Assets
Assets include cash, things owned, and money owed to the business.
![b8.1](https://seeaccountingnow.online/wp-content/uploads/2021/12/b8.1.jpg)
This is the first thing to be shown on a balance sheet.
![b9](https://seeaccountingnow.online/wp-content/uploads/2021/12/b9.jpg)
Cash held at the bank is known as a current asset.
![b10](https://seeaccountingnow.online/wp-content/uploads/2021/12/b10.jpg)
Current assets are either cash or things that can be turned into cash with the coming year.
![b11](https://seeaccountingnow.online/wp-content/uploads/2021/12/b11.jpg)
Liabilites
The balance sheet also shows liabilities.
![b12](https://seeaccountingnow.online/wp-content/uploads/2021/12/b12.jpg)
Liabilities show money owed to others, for loans and so on.
![b13](https://seeaccountingnow.online/wp-content/uploads/2021/12/b13.jpg)
On the balance sheet, they are shown in the liabilities & equity section
![b14](https://seeaccountingnow.online/wp-content/uploads/2021/12/b14.jpg)
If the loan is a long term loan, you list it as a noncurrent liability.
![b15](https://seeaccountingnow.online/wp-content/uploads/2021/12/b15.jpg)
Noncurrent liabilities are expected to be repaid in a year or more.
![b16](https://seeaccountingnow.online/wp-content/uploads/2021/12/b16.jpg)
Equity
The balance sheet also shows equity.
![b17](https://seeaccountingnow.online/wp-content/uploads/2021/12/b17.jpg)
Equity is the difference between assets & liabilities.
![b18](https://seeaccountingnow.online/wp-content/uploads/2021/12/b18.jpg)
It shows how much money the business owes to its owners or shareholders
![b19](https://seeaccountingnow.online/wp-content/uploads/2021/12/b19.jpg)
Theoretically, the business could cash out its assets.
![b20](https://seeaccountingnow.online/wp-content/uploads/2021/12/b20.jpg)
Then it could use this money to pay back any loans etc.
![b21](https://seeaccountingnow.online/wp-content/uploads/2021/12/b21.jpg)
Any money left over would belong to the owner.
![b22](https://seeaccountingnow.online/wp-content/uploads/2021/12/b22.jpg)
Equity is shown in the equity area of the balance sheet.
![b23](https://seeaccountingnow.online/wp-content/uploads/2021/12/b23.jpg)
You list any capital injections under owner’s capital.
![b24](https://seeaccountingnow.online/wp-content/uploads/2021/12/b24.jpg)
If updated correctly, the balance sheet should balance.
![b25](https://seeaccountingnow.online/wp-content/uploads/2021/12/b25.jpg)
You test for this with the formula Assets = Liabilities + Equity
![b26](https://seeaccountingnow.online/wp-content/uploads/2021/12/b26.jpg)
First, you add up the asset side of the balance sheet.
![b27](https://seeaccountingnow.online/wp-content/uploads/2021/12/b27.jpg)
Then you add up the liabilities & equity side.
![b28](https://seeaccountingnow.online/wp-content/uploads/2021/12/b28.jpg)
If correct, the two sides will be equal.
![b29](https://seeaccountingnow.online/wp-content/uploads/2021/12/b29.jpg)
After this, the business owner may use some of the cash to buy equipment.
![b30](https://seeaccountingnow.online/wp-content/uploads/2021/12/b30.jpg)
Once again, you could prepare a balance sheet.
![b31](https://seeaccountingnow.online/wp-content/uploads/2021/12/b31.jpg)
In this case, you would list the equipment as a noncurrent asset.
![b32](https://seeaccountingnow.online/wp-content/uploads/2021/12/b32.jpg)
This is because you expect the equipment to last longer than a year
![b33](https://seeaccountingnow.online/wp-content/uploads/2021/12/b33.jpg)
Next, the business may buy goods to sell
![b34](https://seeaccountingnow.online/wp-content/uploads/2021/12/b34.jpg)
If purchased on credit, the goods would come from a supplier.
![b35](https://seeaccountingnow.online/wp-content/uploads/2021/12/b35.jpg)
The business may then sell some of these goods.
![b36](https://seeaccountingnow.online/wp-content/uploads/2021/12/b36.jpg)
If sold on credit, you record the sale in the customer’s account.
![b37](https://seeaccountingnow.online/wp-content/uploads/2021/12/b37.jpg)
At this point, you could prepare yet another balance sheet.
![b38](https://seeaccountingnow.online/wp-content/uploads/2021/12/b38.jpg)
Suppliers are known collectively as accounts payable
![b39](https://seeaccountingnow.online/wp-content/uploads/2021/12/b39.jpg)
You list accounts payable under current liabilities.
![b40](https://seeaccountingnow.online/wp-content/uploads/2021/12/b40.jpg)
Customers are know as accounts receivable.
![b41](https://seeaccountingnow.online/wp-content/uploads/2021/12/b41.jpg)
You list accounts receivable as a current asset.
![b42](https://seeaccountingnow.online/wp-content/uploads/2021/12/b42.jpg)
After this, the business will add more sales & expenses for the period.
![b43](https://seeaccountingnow.online/wp-content/uploads/2021/12/b43.jpg)
At period-end, you prepare an income statement.
![b44](https://seeaccountingnow.online/wp-content/uploads/2021/12/b44.jpg)
The income statement shows net income or profit for the period.
![b45](https://seeaccountingnow.online/wp-content/uploads/2021/12/b45.jpg)
This profit is transferred to retained earnings via income summary.
![b46](https://seeaccountingnow.online/wp-content/uploads/2021/12/b46.jpg)
Retained earnings are shown in the equity section of the balance sheet.
![B47.1](https://seeaccountingnow.online/wp-content/uploads/2021/12/B47.1.jpg)
If calculated profit is correct, assets will equal liabilities + equity
![b48](https://seeaccountingnow.online/wp-content/uploads/2021/12/b48.jpg)
This means the balance sheet will balance.
![b49](https://seeaccountingnow.online/wp-content/uploads/2021/12/b49.jpg)
© R.J. Hickman 2020