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Breaking Down the Balance Sheet for a Business

1 of 10 in Series: The Essentials of Business Financial Statements

At the end of each accounting period, you take a snapshot of your business’s condition. This snapshot — called a balance sheet — gives you a picture of where your business stands — how much it has in assets, how much it owes in liabilities, and how much the owners have invested in the business at a particular point in time.

What is a balance sheet?

The company name and ending date for the accounting period being reported appear at the top of the balance sheet. The rest of the report summarizes the following:

  • The company’s assets, which include everything the company owns in order to stay in operation.

  • The company’s debts, which include any outstanding bills and loans that must be paid.

  • The owner’s equity, which is basically how much the company owners have invested in the business.

Assets, liabilities, and equity are the key elements that show whether or not your books are in balance. If your liabilities plus equity equal assets, your books are in balance. All your bookkeeping efforts are an attempt to keep the books in balance based on this formula.

Gathering balance sheet ingredients

Following is a balance sheet for a fictitious company that shows just a few key accounts typically found in a balance sheet. These accounts and numbers come from a company’s trial balance worksheet, the details of which are drawn from the final adjusted trial balance.

This balance sheet uses the report format, a one-column layout showing assets first, then liabilities, and then equity. Notice that the total assets of $40,850 balances with the total liabilities and equity.

Company X
Balance Sheet
As of May 31, 2011
Current Assets:
Cash $3,000  
Accounts Receivable $1,000  
Inventory $1,200  
Total Current Assets $5,200
Long-Term Assets:
Equipment $5,050  
Furniture $5,600  
Vehicles $25,000  
Total Long-Term Assets $35,650
  Total Assets $40,850
Current Liabilities:
Accounts Payable $2,200  
  Total Current Liabilities $2,200
Long-Term Liabilities:
Loans Payable $29,150  
  Total Long-Term Liabilities $29,150
Equity:  
Capital $5,000  
Retained Earnings $4,500  
Total Equity $9,500
  Total Liabilities and Equity $40,850
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