Companies create a balance sheet at the end of each accounting period to provide a summary of the company’s financial position. It contains a list of the company’s assets, liabilities and equities and follows the standard accounting equation: Assets = Liabilities + Owner’s Equities. Balance sheets are created in two common forms: a report form and an account form.
A balance sheet contains the listings of all account names and balances for asset, liability and equity accounts. Assets are accounts that track things of value that the company owns. Liabilities refer to amounts a company owes to other businesses or individuals. Equity accounts keep track of owner’s investments and the net profits and losses a company incurs. Both types of statements record the same information; it is simply displayed differently.
A balance sheet is often created in a report form. Companies using this type of statement list the three different sections one on top of the other. It begins by listing the statement name, company name and statement date. Below that, list all assets of the company. Underneath the assets, list the liabilities and finally, list all equities. It is called the report form because there are no individual sides. Each category is simply listed in order.
The account form of a balance sheet is more commonly used because it better illustrates the standard accounting equation. To complete a balance sheet in account form, you begin by listing the statement name, company name and date. The statement is then divided into halves. On the left-hand side, list all assets of the company, including a total on the bottom. The right-hand side is used to first list the liabilities and then the equities. A total of these two components is placed at the bottom. The totals from both columns should be equal. This method illustrates that assets are equal to the total of all liabilities and equities.
Both types of balance sheets break down each of the three components into smaller categories. Assets are separated into current and long-term assets. Current assets are items owned that are easily changed to cash in one year or less and include cash, accounts receivable and supplies. Long-term assets, also called fixed assets, are assets of great value that are harder to turn to cash. Included in this category are machinery, equipment and land. Liabilities are separated into current and long-term liabilities. Current liabilities are amounts a business will pay off in less than one year, while long-term liabilities are amounts a company will not pay off in this time frame.