Financial Accounting Notes


Financial Statements


What is Balance Sheet:

The purpose of a balance sheet is to show the financial position of a given business entity at a specific date. Every business prepares a balance sheet at the end of the year, or at the end of each month. A balance sheet consists of a listing of the assets, the liabilities, and the owner’s equity of a business.


Balance Sheet as at September 1, 2002

Now let us briefly describe several features of this balance sheet. First, the heading sets forth three things: (1) the name of the business entity, (2) the name of the financial statement, and (3) the balance sheet date. The body of the balance sheet also consists of three distinct sections: assets, liabilities and owner’s equity.
Finally, notice that the amount of total assets ($300,000) is equal to the total amount of liabilities and owner’s equity (also $300,000). This relationship always exists in fact, the equality of these total is one reason that this financial statement is called a balance sheet.

1. Assets:

Assets are economic resources, which are owned by a business and are expected to benefit future operations. Assets may have definite physical form, as do buildings, machinery, and an inventory. On the other hand, some assets exist not in physical or tangible form but in a form of valuable legal claims or rights; examples are amounts due from customers, investments in government bonds, and patent rights.
In listing assets inside the balance sheet notice that cash is always listed first among the assets, followed by notes receivable, accounts receivable, supplies, and any other assets that will soon be converted into cash or consumed in business operations. Following these relatively liquid assets are the more permanent assets, such as land, building, and equipment.


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