Balance sheets show the assets and liabilities of a business at one particular date. The type of balance sheet a company creates depends on what it wants to report. Two basic forms of balance sheets are common, the report type and the account type. Businesses further modify these two forms to show comparisons and detailed information.
Balance sheets follow the basic accounting principle that assets equal liabilities plus equity. Although companies customize the data based on individual preferences, generally they include cash, accounts receivable, fixed assets and accounts payable, among others. The balance sheet is used to show owners, investors and creditors the business's ability to meet debt obligations by detailing current liquidity. Balance sheets work like a financial report card showing areas where the business is prospering and areas that need improving.
A balance sheet in the account form will list assets on the left side of the page and liabilities and equity on the right. The totals of the two columns at the bottom of the information will match when the accounts are balanced. When using the report format, the assets of the business are listed, followed by the liabilities and equity. Sometimes, the report format shows the liabilities subtracted from the assets, with the bottom line of the data listing equity.
A Popular Type
A comparative balance sheet is used to evaluate account balances at more than one point in time. For example, a company may want to present account information for three years. A comparative balance sheet displays those end-of-year balances side-by-side for easier evaluation. Comparative balance sheets show whether or not the company's net worth is increasing and whether or not debt obligations are decreasing. A comparative balance sheet may also be constructed in classified format.
Classified and Unclassified
A classified balance sheet, the most popular type, breaks accounts down into subcategories. For example, assets may be separated into fixed assets like real estate and equipment, intangible assets like patents and copyrights, and current assets like cash and accounts receivable. Unclassified balance sheets do not use these subcategories. Instead major assets are listed by liquidity with cash first, followed by a listing of liabilities with current accounts payable first and subsequent liabilities ordered by due dates.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.