Definition of Balance Sheet and Its Components
This free online Accounting Training Tutorial on Balance sheet will help you to understand:
- Meaning & Definition of Balance Sheet
- Components of Balance Sheet
- Balance Sheet Sample
- Balance Sheet on the basis of Accounting Equation
Balance Sheet presents a snap shot of the organization at a given point. Balance sheet is known as the statement of financial position which reports assets, liabilities and owner’s equity of an organization at a particular time. Balance sheet usually reports the assets that a company owned, the liabilities that the company owed to others and the owner’s equity in the net resources. The financial report of the balance sheet is very beneficiary for the company. The rate of return and capital structure of the company are measured and valued on the basis of financial statement of balance sheet. Company’s liquidity, financial position, financial stability could also be determined through evaluating the information of balance sheet. Balance sheet mainly records the assets, liabilities and the owner’s equity of any company which shows the financial position.
The 3 main components of Balance sheet are:
- Assets: Assets are the resources that are owned by any organization. Assets are used by any company to run the operation or production and sales. Assets could be both tangible and intangible. Examples of tangible assets are cash, inventory, land, building, equipment, furniture etc and the intangible assets are patent, copyright. All assets that are reported in the balance sheet should be expressed at monetary term. The monetary amount of assets in the balance sheet helps the accountants to prepare an easily understandable balance sheet. Asset is the most important component of balance sheet because it can bring future benefit and service to the company.
- Liabilities: Liabilities are the existing debts and obligations that a company owed to others. Liabilities of any company can be different like paying cash or service to the customer or any organization. Basically a company could have the liabilities of accounts payable, notes payable, mortgages payable. Accounts payable refers to the amount that a company owed to suppliers. Notes payable refers to the obligation of amount that a company owed to bank or others and mortgage payable means the payable amount of land, buildings which have been purchased on credit. In order to effective quantification of any company the balance sheet records all the liabilities in monetary value. The monetary amount of liabilities will help the accountants to accurately measure the existing debts and obligations of any company.
- Owner’s Equity: Owner’s equity is the claim on total assets of the company which is claimed by the owner or the creditor. Owner’s equity is claimed after all the debts and obligations have been made. Owner’s equity is calculated by subtracting the total assets from total liabilities. Deduction of all liabilities from total assets will be equal to the amount of owner’s equity. Owner’s equity is also known as residual equity and the owner’s equity of corporate balance sheet is sometimes referred as stockholder equity. When a company invested money in the business then owner’s equity increases on the other hand when they withdraw money from the business then it decreases.
Based on these 3 components the balance sheet prepares its report and the relationship among these three components could be shown in this way:
Balance sheet illustrates its financial information on the basis of accounting equation. Accounting equation gives us the idea that in the balance sheet, the total asset must be equal to the summation of liabilities and owner’s equity.