Balance Sheet Definition
A balance sheet is a financial statement that summarizes a business or organization’s assets, liabilities, and shareholder’s equity at a specific point in time. A balance sheet gives an overview of what a company owns and owes, as well as the amount of equity available. Balance sheet accounting can be done annually, quarterly, monthly, or weekly depending on a company’s needs, and represents a company’s financial position at the end of a specified date.
Typically, the balance sheet should follow this formula:
- Assets = Liabilities + Equity
Alternatively, it can be represented by this formula:
- Equity = Assets – Liabilities
The main idea behind a balance sheet is that both sides of the equation must match, or “balance out”. A balance sheet is comprised of three main sections: assets, liabilities and equity.
- Assets can be current or fixed; current assets include cash, securities, accounts receivable, inventory, and pre-paid expenses, while fixed assets include long-term investments, supplies, property, and intangible assets.
- Liabilities can be current or fixed; current liabilities include accounts payable, business credit cards, operating lines of credit, taxes owed, wages and payroll, and unearned revenue, while fixed assets include long-term debts, long-term mortgages, deferred tax liability, pensions, and shareholders’ loans.
- Equity (also known as net assets) includes opening balance equity, capital stock, dividends paid, retained earnings, and owner’s draw.
The balance sheet—also known as a statement of financial position—is one of four major financial statements used by accountants and business owners. The other financial statements are income statement, statement of cash flows, and statement of stockholders’ equity.
A balance sheet is an essential financial document that can be used to show a company’s current financial state or to secure financing. Thus, it’s important for balance sheet calculations to be accurate and up to date—sometimes referred to as balance sheet integrity. A good balance sheet is rooted in a solid account reconciliation process and strong internal controls built into the process. Best practices include:
- Prioritizing your balance sheet to identify and focus on high-risk accounts, or the accounts with a high likelihood of errors; this is often referred to as a “risk-based approach”
- Defining a standard operation regarding policies, prioritization, and process across the company
- Utilizing metrics to identify and improve the process
- Reviewing the process for accuracy and efficiency
A standard balance sheet (Source: Intuit Quickbooks)
- What is a Balance Sheet? (Investopedia)
- 5 Simple Ways to Create a Balance Sheet (Intuit Quickbooks)
- Balance Sheet Reconciliations: Focus on Internal Controls over Financial Reporting (CRI)
- Best Practices to Improve Account Reconciliation (Journal of Accountancy)