A balance sheet summarizes the financial balances of an individual or organization as at a specific date, such as the end of its financial year. A corporation's balance sheet reports its assets, liabilities, and stockholders equity. A balance sheet is often described as a snapshot of a company's financial condition and it's the only financial statement which applies to a single point in time of businesses calendar year. The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a person or business. Total assets must always equal the sum of liabilities plus owner's equity. This equation must always be balanced. In fact, the balance sheet is nothing more than a statement of this equation. Assets are items at economic value owned by an individual or corporation that are either tangible or intangible in nature. Tangible items or things of value like cash, securities, accounts receivable, inventory, office equipment, real estate, and so forth. Intangible items or things of value that have no physical form, like patents, trademarks, copyrights, and goodwill. We'll explain them a bit more in a minute. From an accounting perspective, assets are divided into three categories; current assets, fixed assets, and intangible assets. Current assets are cash and items that can be readily converted into cash, like inventory and accounts receivable. Fixed assets are long-term assets that are relatively permanent, things of value like real estate and equipment. They can also be converted into cash, but not as quickly as current assets. Intangible assets are long-term assets that have no physical form but do have value, like patents, trademarks, copyrights, and goodwill. A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention. A trademark is assemble word or words that are legally registered to represent a company or product. The Coca Cola logo is a great example. A copyright is a type of intellectual property that gives us owner the exclusive right to make copies of a creative work like a book or a piece of music, and goodwill is the value of a company's brand name; a solid customer base, good customer relations, good employee relations, and proprietary technology. Liabilities are obligations that legally bind a company to settle a dept. In other words, what accompany owes to others, and one is liable for a debt, they are responsible for paying the debt. A liability is recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period. Here are some examples of you're liability accounts, accounts payable shows the amount of company owes for items or services purchased on credit. Salaries payable reports the amount of salaries earned by a company's employees and which have not yet been paid by the company. Unearned revenues report amounts received in advance of providing goods or services. When the goods or services are provided, this account balance is decreased. Income taxes payable reflects the amount of income taxes currently due to the federal, state, and local governments. Owner's equity equals a company's assets minus it's liabilities. In other words, what the company is worth after paying its debts. It is sometimes referred to as the book value of the company. To see how this works, just rearranged the basic accounting equation so that it now reads owner's equity equals assets minus liabilities. We refer to owner's equity differently based on the type of the organization. The term owner's equity is used on the balance sheet when the company is a sole proprietorship or partnership. A sole proprietorship has just one owner and a partnership has several owners. An example of an owner's equity account is Jane Doe capital, where Jane is the business owner. If the company is a corporation, the words stockholder's equity are used instead of owner's equity. A corporation is a company that is a legal entity separate from its owners. Ownership is evidenced by shares of stock. Examples of stockholders equity accounts include common stock, preferred stock, and retained earnings. Both common and preferred stop represent a piece of ownership in a corporation or give investors the opportunity to profit from the success of the business. The main difference between them is preferred stock gives no voting rights to shareholders, while common stock does. Retained earnings is the corporation's past earnings that have not yet been distributed to its stockholders. Here's a simple example of a balance sheet. Notice that the total assets equals total liabilities plus equity, just as they should.
