The balance sheet, also called the statement of financial position, is a financial statement which shows the company’s assets, liabilities, and owner’s equity at a point in time.
The balance sheet must balance. That is, the total of assets must equal the sum of liabilities and equity. One way to think of the balance sheet is that it shows the company’s resources (assets) and the financial claims against those resources (liabilities and equity).
A company’s assets are resources which are expected to provide future economic value beyond the current accounting period. Assets can be classified as current assets and long-term assets. Current assets are those assets whose economic benefit will be exhausted within the greater of one year or the firm’s operating cycle. Conversely, long-term assets are those assets expected to produce economic benefits beyond one year or the firm’s operating cycle.
Liabilities represent obligations of future monetary payment or the delivery of goods or services. Like assets, liabilities are classified as current or long-term. Current liabilities are those obligations which must be settled within the greater of one year or the firm’s operating cycle. Long-term liabilities are those obligations which must be satisfied in a period beyond one year or the firm’s operating cycle.
Owner’s equity is the residual between assets and liabilities. Owner’s equity represents the owner’s claim on the assets of the business, funded by contributed capital and retained earnings (profits retained in the business rather than distributed as dividends).
