Companies issue balance sheets annually to inform owners of the financial position of the company at the end of the fiscal year. A balance sheet is a major financial statement for a company. At its most basic, a balance sheet calculates a company’s assets and its liabilities. It also reports on the difference between them, which is the company’s equity.
Assets and Liabilities
Assets are reported in the first section of a balance sheet. Assets are things that the company owns, such as real estate, equipment, cash, company stock or product. Liabilities are what the company owes. This would be things like debt, value of outstanding stock or unfilled orders. If the assets are greater than the liabilities, then the company has a value beyond its income expenses.
When a corporation prepares its balance sheet, one section will be stockholders’ equity. This is the difference between a corporation’s assets and its liabilities. This is also called the corporation’s “book value.” This is also known as total equity or if the business is a sole proprietorship, it is called owner’s equity. Revenue automatically increases stockholders’ equity because it is either held as cash, invested in the company or used to pay off liabilities. Expenses automatically decrease stockholders’ equity because they increase a company’s debt.
Stockholders’ Equity Section
A corporation’s stockholders’ equity section of a balance sheet will include information on paid-in capital, retained earnings, treasury stock and accumulated other comprehensive income. However, what is required in this section can vary somewhat depending on what state the corporation has its headquarters in. This is due to differences in state laws.
Company assets are generally reported at less than their actual value because of accounting principles. This means that stockholders’ equity does not necessarily represent the value of the corporation if it were to be sold off because chances are that the assets would sell for more than they are listed for on the balance sheet.