Balance Sheets

April 13, 2006

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The balance sheet is a statement of your company's relative wealth or financial position at a given point in time. It's often referred to as a "snapshot" because it gives you a fairly clear picture of the business at that moment, but does not in itself reveal how the business arrived there or where it's going next. That's one reason why the balance sheet is not the whole story — you must also look at the information from each of the other financial statements (and at historical information as well) to get the most benefit from the data.

Along with other financial information, balance sheet data is frequently analyzed and put into perspective through the construction of business and financial ratios. In many cases, ratios are constructed for each balance sheet (and income statement) for a number of years, so that you can make comparisons and spot important trends.

The balance sheet consists of three categories of items: assets, liabilities, and stockholders' or owners' equity.

Assets. Assets are generally divided into two groups — current assets and fixed (long-term) assets. They are usually presented in order of liquidity, with current assets (cash and those that will be converted to cash within one year) appearing first. For instance, current assets would normally look this way in the balance sheet:

Cash	$ X
Short-term investments and marketable securities	$ X
Accounts and notes receivable	$ X
Inventories	$ X
Prepaid expenses	$ X
Other current assets	$ X

Fixed assets (those that will not be converted to cash within one year) usually are presented after current assets and look something like this:

Land	$ X
Buildings	$ X
Machinery and equipment	$ X
Capitalized leases	$ X
(Less accumulated depreciation and amortization)	$ X
Deferred charges	$ X
Other fixed assets	$ X

Liabilities. Liabilities are normally presented in order of their claim on the company's assets (i.e., liabilities due within one year are presented before liabilities due several years from now).

The liability section of the balance sheet might look something like this:

Current Liabilities
Accounts payable	$ X
Notes payable	$ X
Income taxes currently payable	$ X
Current portion of long-term debt	$ X
Other current liabilities	$ X
Total current liabilities	$ X
Long-Term Liabilities
Long-term debt	$ X
Capital lease obligations	$ X
Deferred income taxes	$ X
Other long-term liabilities	$ X
Total long-term liabilities	$ X

Equity. Stockholders' equity (or owner's equity or net worth) is presented properly when each class of ownership is presented with all its relevant information (for example, number of shares authorized, shares issued, shares outstanding, and par value). If retained earnings are restricted or appropriated, this also should be shown.

Stockholders' equity for an incorporated business normally would take this form:

Stockholders' Equity:
Preferred stock, $20 par value (authorized 1,000 shares; issued and outstanding 500 shares)	$ X
Common stock, $15 par value (authorized 10,000 shares; issued and outstanding 5,000 shares)	$ X
Additional paid-in capital, common stock	$ X
Retained earnings	$ X