Skip to content Skip to footer

What are balance sheet accounts?

This is because they are expected to be converted into cash within one year’s time. The last type of item that is commonly reported off-balance sheet is goodwill. Goodwill is an intangible asset that is created when one company acquires another. The amount of goodwill is equal to the excess of the purchase price over the fair value of the acquired company’s net assets. This information is important, but it is not part of the balance sheet. The balance sheet is prepared from an organization’s general ledger, and is automatically generated by its accounting software.

As you can see from the balance sheet above, Walmart had a large cash position of $14.76 billion in 2022, and inventories valued at over $56.5 billion. This reflects the fact that Walmart is a big-box retailer with its many stores and online fulfillment centers stocked with thousands of items ready for sale. This is matched on the liabilities side by $55.2 billion in accounts payable, likely money owed to the vendors and suppliers of many of those goods. A balance sheet represents a company’s financial position for one day at its fiscal year end, for example, the last day of its accounting period, which can differ from our more familiar calendar year. Companies typically select an ending period that corresponds to a time when their business activities have reached the lowest point in their annual cycle, which is referred to as their natural business year. In the asset sections mentioned above, the accounts are listed in the descending order of their liquidity (how quickly and easily they can be converted to cash).

When setting up a chart of accounts, typically, the accounts that are listed will depend on the nature of the business. For example, a taxi business will include certain accounts that are specific to the taxi business, in interpretation of cash flow to net income ratio addition to the general accounts that are common to all businesses. So, as you’re creating and analyzing your balance sheet, pay close attention to your accounts receivable because this is money your business is owed.

The total shareholder’s equity section reports common stock value, retained earnings, and accumulated other comprehensive income. Apple’s total liabilities increased, total equity decreased, and the combination of the two reconcile to the company’s total assets. Reading a balance sheet is important in determining the financial health of a company. The balance sheet, also known as the statement of financial position, is one of the three key financial statements.

  • There are 2 main types of accounts in QuickBooks Online; a balance sheet account and an income and expense account.
  • Noncurrent assets include assets that cannot be converted into cash within the next 12 months.
  • Later, the store owner must pay the office supply store’s bill, which he does by reducing assets by $1,000 (since cash balance declines), and paying off the bill (reducing liabilities by $1,000).
  • Setting up a chart of accounts can provide a helpful tool that enables a company’s management to easily record transactions, prepare financial statements, and review revenues and expenses in detail.

Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year. In this example, the imagined company had its total liabilities increase over the time period between the two balance sheets and consequently the total assets decreased. While an asset is something a company owns, a liability is something it owes. Liabilities are financial and legal obligations to pay an amount of money to a debtor, which is why they’re typically tallied as negatives (-) in a balance sheet.

Key Takeaways

It is crucial to note that how a balance sheet is formatted differs depending on where the company or organization is based. If the company wanted to, it could pay out all of that money to its shareholders through dividends. Current assets are typically those that a company expects to convert easily into cash within a year. Balance sheets are useful tools for individual and institutional investors, as well as key stakeholders within an organization, as they show the general financial status of the company. Many of these ratios are used by creditors and lenders to determine whether they should extend credit to a business, or perhaps withdraw existing credit.

  • Current assets have a lifespan of one year or less, meaning they can be converted easily into cash.
  • The total shareholder’s equity section reports common stock value, retained earnings, and accumulated other comprehensive income.
  • The asset information on the balance sheet can be combined with the sales line item on the income statement to estimate the efficiency with which a business is using its assets to produce sales.
  • This account includes the total amount of long-term debt (excluding the current portion, if that account is present under current liabilities).

Details about the value of goodwill and its components are listed in the notes to the balance sheet. Since goodwill impairment is a value judgment, it is important to read the goodwill with notes section of the balance sheet. Continuing with the accounts receivable example, the quality of receivables can often be found in the notes to the balance sheet, which breaks down the receivables by age and credit quality.

How the Balance Sheet Works

Current liabilities are the company’s liabilities that will come due, or must be paid, within one year. To ensure the balance sheet is balanced, it will be necessary to compare total assets against total liabilities plus equity. To do this, you’ll need to add liabilities and shareholders’ equity together. When setting up a balance sheet, you should order assets from current assets to long-term assets. They’re important to include, but they can’t immediately be converted into liquid capital. Liabilities and equity make up the right side of the balance sheet and cover the financial side of the company.


Knowing what goes into preparing these documents can also be insightful. Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks. For this reason, a balance alone may not paint the full picture of a company’s financial health.

The balance sheet equation

Accounts payable is considered a current liability, not an asset, on the balance sheet. Individual transactions should be kept in the accounts payable subsidiary ledger. Accounts receivable are similar to accounts payable in that they both offer terms which might be 30, 60, or 90 days. However, with receivables, the company will be paid by their customers, whereas accounts payables represent money owed by the company to its creditors or suppliers. The shareholders’ equity section includes the amounts paid into the firm by shareholders in exchange for shares in the business, as well as any profits retained in the business.

Categories on the Chart of Accounts

These assets are funds used for the express purpose of earning money passively. Although the management team often directs the activities of its investment accounts, it is not uncommon for a business to utilize the services of an external financial adviser for this purpose. This statement is a great way to analyze a company’s financial position.

How to Read a Balance Sheet

To begin, know that reconciling your balance sheet involves comparing your balance sheet accounts to another source. Alternatively, a business brokerage account allows companies to purchase securities, such as stocks, bonds and real estate investment trusts, or REITs. Although exceptional gains can be had by placing money in this type of account, deposits are not safeguarded against total loss.

After the crisis is averted and your shelves are restocked, you receive an invoice for payment. This payment is considered an accounts payable (and is an accounts receivable for the supplier). You’re legally obligated to pay it in a timely fashion to your supplier. Any investment accounts held by an organization is also included on the balance sheet.

Investors and lenders also use it to assess creditworthiness and the availability of assets for collateral. Balance sheets of small privately-held businesses might be prepared by the owner of the company or its bookkeeper. On the other hand, balance sheets for mid-size private firms might be prepared internally and then reviewed over by an external accountant. Businesses should be wary of companies that have large discrepancies between their balance sheets and other financial statements.

When viewed in conjunction with the other financial statements, it generates a clear picture of the financial situation of a business. In particular, the balance sheet can be used to examine four types of metrics, which are noted below. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations. It shows what belongs to the business owners and the book value of their investments (like common stock, preferred stock, or bonds). A company usually must provide a balance sheet to a lender in order to secure a business loan.

Balance sheets are one of the most critical financial statements, offering a quick snapshot of the financial health of a company. Learning how to generate them and troubleshoot issues when they don’t balance is an invaluable financial accounting skill that can help you become an indispensable member of your organization. A company’s balance sheet is one of the most important financial statements it produces—typically on a quarterly or even monthly basis (depending on the frequency of reporting). Investors, business owners, and accountants can use this information to give a book value to the business, but it can be used for so much more. Balance sheets are important because they give a picture of your company’s financial standing.

Leave a comment