“A balance sheet is a statement of the financial position of a business which states the assets, liabilities and owner’s equity at a particular point in time. In other words, the balance sheet illustrates your business’s net worth.” [1]
A balance sheet is sometimes called a ‘statement of financial position’ or a ‘statement of net worth’. Just like an income statement, a balance sheet helps to illustrate aspects of the financial health of a business. The balance sheet is often considered a ‘snapshot’ of a company’s financial status, because “assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year” [2]. If a business owner wants to arrange additional finance (for example, with a bank and/or investors), or is planning on selling the business and needs to determine its net worth (where net worth = assets – liabilities), then an up-to-date balance sheet is essential [3].
In a balance sheet, “total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance” [4].
Read the following texts:
You may also find this video helpful:
Consider the simple balance sheet below for Acme Widgets for the consecutive years 2017 and 2018, then answer the quiz below.
Balance Sheet
| Item |
2018 |
2017 |
Item |
2018 |
2017
|
| Assets |
|
|
Liabilities |
|
|
| Cash |
13,000 |
9,000 |
Accounts payable |
500 |
400
|
| Accounts receivable |
2,500 |
3,500 |
Accrued wages |
1,500 |
1,000
|
| Equipment |
5,000 |
4,500 |
Taxes payable |
2,500 |
2,500
|
| |
|
|
Total current liabilities |
4,500 |
3,900
|
| |
|
|
Long term debt |
7,000 |
8,000
|
| |
|
|
Owner’s equity |
??? |
???
|
| Total Assets |
20,500 |
17,000 |
Total Liabilities and
Owner’s equity |
20,500 |
17,000
|
- What should the owner’s equity value be for 2017?
- 5,100
- That’s right! Well done. (Owner’s Equity = Total Assets – Total Liabilities)
- 5,200
- Try again. Remember, Owner’s Equity = Total Assets – Total Liabilities
- 5,300
- Try again. Remember, Owner’s Equity = Total Assets – Total Liabilities
- 5,400
- Try again. Remember, Owner’s Equity = Total Assets – Total Liabilities
- What should the owner’s equity value be for 2018?
- 7,000
- Try again. Remember, Owner’s Equity = Total Assets – Total Liabilities
- 8,500
- Try again. Remember, Owner’s Equity = Total Assets – Total Liabilities
- 9,000
- Yes, correct. (Owner’s Equity = Total Assets – Total Liabilities)
- 9,500
- Try again. Remember, Owner’s Equity = Total Assets – Total Liabilities
References
- ↑ The balance: Small business
- ↑ Wikipedia
- ↑ The balance: Small business
- ↑ Entrepreneur
“A balance sheet is a statement of the financial position of a business which states the assets, liabilities and owner’s equity at a particular point in time. In other words, the balance sheet illustrates your business’s net worth.” [1]
A balance sheet is sometimes called a ‘statement of financial position’ or a ‘statement of net worth’. Just like an income statement, a balance sheet helps to illustrate aspects of the financial health of a business. The balance sheet is often considered a ‘snapshot’ of a company’s financial status, because “assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year” [2]. If a business owner wants to arrange additional finance (for example, with a bank and/or investors), or is planning on selling the business and needs to determine its net worth (where net worth = assets – liabilities), then an up-to-date balance sheet is essential [3].
In a balance sheet, “total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance” [4].
Required reading
Read the following texts:
You may also find this video helpful:
Consider the simple balance sheet below for Acme Widgets for the consecutive years 2017 and 2018, then answer the quiz below.
Balance Sheet
Owner’s equity
Quiz
References
Content is available under the
Creative Commons Attribution Share Alike License.
Privacy Policy | Authors