“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:
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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:
560pxis not validConsider 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