Balance Sheet

The Balance sheet is the first of the three main accounting documents. This document provides a single day snapshot for the business in three main headings. It is basically a statement of what is owned by the business, and who owns it. The Assets must be equal to the combined value of both the Liabilities and the Owner Equity.

Assets

Assets are things which can be owned such as anything that can be considered property. This includes both physical and non-physical objects that range from cars and printing presses to intellectual property such as patents and copyrights. One thing that won’t be found here are things that cannot be owned, such as the employees and their associated skill sets. Assets are broken down into three main categories, current assets, fixed assets, and other assets.

  • Current Assets
    • Current assets consist of cash and other things that turn into cash during the normal course of business.
    • Examples include Cash, Inventory, and Accounts Receivable.
  • Fixed Assets
    • Fixed assets consist of items that require an act of volition to convert into cash.
    • Examples include Vehicles, Real Estate, Buildings, Tools, Computers and Furniture. While they are all worth something, they are not converted to cash on a day to day basis.
  • Other Assets
    • This is the catchall for the rest of the assets.
    • Examples include Patents, Copyrights, and Goodwill (Goodwill is not items given away for donation, it is the leftover amount paid for another business beyond the amount of its actual assets).

Liabilities

That which is owed, Liabilities are effectively the bills and loans that the company currently owes. They are divided into two sections, Current and Other.

  • Current Liabilities
    • Current Liabilities consist of things that require cash now or in the near future. If you borrow money from a friend for coffee this morning, and plan to repay it tomorrow morning, it’s a current liability.
    • Examples include Accounts Payable (bills received), Notes Payable (short term agreements where the total balance is due in the near future), Advance Payments (Retainers and other prepaid orders), and other accrued expenses.
  • Other Liabilities
    • Other Liabilities is the residual category, if it is owed, and not currently due, it’s here. If you borrow money from your parents for college, and they expect it paid back someday, it goes here.
    • Examples include Vehicle Loans, Mortgages, Student Loans, and Medical Bills.

Owner Equity

Owner Equity is the category for listing what stake the owner or owners of the company have invested in the company. Owner equity is a bit more confusing than the previous categories due to the split between owner types. There are effectively two different options here; the first is for small business, the other (significantly more complicated) for corporations.

  • Partnership and Sole Proprietorship Equity
    • For these two business models, the Owner Equity section effectively consists of an account for each partner, and reflects the total amount invested in the business by that owner.
  • Corporate Equity
    • For the corporation, Owner Equity is where we find the amount of money invested in the company by its various shareholders.
    • Examples include Preferred Stock (first chance at dividends), Common Stock (Gets second chance at dividends), Excess Contributions (aka, Paid in Capital, Capital Surplus), and Retained Earnings (Accumulated earnings not released as dividends).
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