A company’s Balance Sheet is a financial statement that reports the company’s financial position on a specific date. A company will also use an Income Statement and Statement of Cash Flows to measure its financial performance.
The balance sheet reports the company’s assets, liabilities, and equity. It reflects the “accounting equation”, which means total assets equals liabilities plus owners’ equity.
Assets (A) = Liabilities (L) + Owners’ Equity (OE)
Owners’ equity takes on different meanings depending on the company’s legal and organizational structure. Three of the most common entity types are corporations, LLCs, and partnerships.
- Corporation: Shareholders’ Equity
- Partnership: Capital Accounts
- Limited Liability Company (LLC): Members’ Equity
The balance sheet should always balance. If the accounting equation (A = L + OE) does not balance, then something is wrong with the company’s general ledger.
The asset section consists of current assets, noncurrent assets, property, plant & equipment (PPE), and intangible assets. The balance sheet lists the assets in order of liquidity, with the most liquid assets at the top.
The liability section consists of current and noncurrent liabilities, with the current liabilities listed first.
The owners’ equity section is listed last on the balance sheet. The categories within owners’ equity will depend upon the legal and organizational structure. Some example categories are the following:
- Corporations: Common Stock, Preferred Stock, Additional Paid In Capital (APIC), Retained Earnings, Treasury Stock
- Partnerships: Capital Contributions, Capital Distributions, Total Capital
- Limited Liability Company (LLC): Members’ Capital