It constitutes of real account balances that do not close at the end of accounting year but rather, their balances are carried forward from one accounting period to another.
Hence, the balance sheet comprises of accumulated balances of real accounts that lie under the three major account types: assets, liabilities, and capital.
The entire accounting system is basically based on the following accounting equation:
Assets = Shareholders’ equity + Liabilities
And the balance sheet is literally formatted in the same manner. A balance sheet has two parts, the first part reports the book value of all assets owned by the company, whereas the second part reports a sum value of equity and total liabilities of the company.
Once the balance sheet is properly prepared and formatted, and the bookkeeping and accounting have been done accurately, the value of the assets must equal the equity and liabilities value.
In other words, the total assets balance out the equity and liabilities of the company; hence the name, balance sheet.
Key items of a balance sheet:
Assets are defined as resources owned by a company, having an economic value, which can be controlled to produce future economic benefits. They can be both, tangible and intangible in nature.
In financial accounting, assets can be categorized under two headings i.e. current and non-current. The assets are categorized according to the time period in which the economic benefits will be generated.
- Current Assets: are assets that are expected to generate future economic benefits or convert into cash within the current financial year i.e. 12 months. Examples include cash, bank, accounts receivable, advance paid
- Non-Current Assets: are long-term investments in resources that aren’t expected to generate cash within the current financial year i.e. 12 months.
Liabilities are the amounts of money owed by the company to other individuals, organizations or banks.
These are obligations to be performed by the entity in the future by giving up economic benefits, due to transactions made in the past. Liabilities too are divided into two categories:
- Current Liabilities: are amounts owed by the company due in the current fiscal year i.e. the next 12 months.
- Non-Current Liabilities: are the money owed by an organization over the long-term. However, all non-current liabilities that are going to mature become categorized as current liabilities once twelve months are remaining until maturity.
3) Shareholder’s Equity:
Equity is the amount of money that has been invested in the company by the shareholders or stockholders.
It is also the difference between assets and liabilities implying that in case of liquidation, the amount of money returned to the shareholder would be the leftover amount received from sales of assets after deduction of liabilities cleared.
Accounting is based on a double-entry system meaning that for every debit there is a credit, hence ensuring that the accounting equation or the balance sheet stays balanced at all times.