The National Directory of Certified Public Accountants

Ask A CPA - Financial Statements

What Is A Balance Sheet ?

A company's health or financial position is shown on a balance sheet. The balance sheet reflects a business' financial position at a particular date in time. The typical balance sheet displays the business' assets, liabilities and stockholders' equity. Assets and liabilities are classified into current and non-current categories. Assets are normally debit balances and include what a business owns. Current assets generally relates to anything that can be converted into cash within one year. Fixed assets are more permanent, referred to as long term,(more than 1 year) which includes such assets as buildings, land, and equipment. Liabilities are normally credit balances and what the business owes. Current liabilities generally mean anything which is owed within one year. Long term liabilities are debts expected to be paid back after one year, such as mortgages and loans. The difference between assets and liabilities is called stockholders' equity or net worth. Therefore the basic balance sheet equation is - Assets minus Liabilities = Stockholders' Equity or Assets = Liabilities plus Stockholders' Equity. Most audited financial statements are comparative in nature illustrating a period verses a prior year period. Footnotes to the balance sheet are used to achieve adequate, informative disclosure when more detail is required.

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