Overview of Financial Statements

Read each section in this chapter, which explains the purpose of the balance sheet, income statement, and the cash flow statement. It also is a guide to where you will find financials on publicly traded companies. You should get as much practice working on these statements as you can, since they are the fundamental information on any organization. Make the connections between each financial statement. The more you understand the connectivity of these statements, the better understanding you will have of how the entire accounting system works, which is important if you want to understand the overall operations of any company.

The Balance Sheet

Defining The Balance Sheet

A balance sheet reports a company's financial position on a particular date.

Learning Objective

  • State the purpose of the balance sheet and recognize what accounts appear on the balance sheet

Key Points

  • The balance sheet summarizes a business's assets, liabilities, and shareholders' equity.
  • A balance sheet is like a photograph; it captures the financial position of a company at a particular point in time.
  • The balance sheet is sometimes called the statement of financial position.
  • The balance sheet shows the accounting equation in balance. A company's assets must equal their liabilities plus shareholders' equity.


  • asset
    Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities).

  • liability
    An obligation, debt, or responsibility owed to someone.

  • balance sheet
    A balance sheet is often described as a "snapshot of a company's financial condition. " A standard company balance sheet has three parts: assets, liabilities, and ownership equity.

Balance Sheet

The balance sheet, sometimes called the statement of financial position, lists the company's assets, liabilities,and stockholders' equity (including dollar amounts) as of a specific moment in time. That specific moment is the close of business on the date of the balance sheet. A balance sheet is like a photograph; it captures the financial position of a company at a particular point in time. The other two statements are for a period of time. As you study about the assets, liabilities, and stockholders' equity contained in a balance sheet, you will understand why this financial statement provides information about the solvency of the business.

The Balance Sheet
If an error is found on a previous year's financial statement, a correction must be made and the financials reissued.

The balance sheet is a formal document that follows a standard accounting format showing the same categories of assets and liabilities regardless of the size or nature of the business. Accounting is considered the language of business because its concepts are time-tested and standardized. Even if you do not utilize the services of a certified public accountant, you or your bookkeeper can adopt certain generally accepted accounting principles (GAAP) to develop financial statements. The strength of GAAP is the reliability of company data from one accounting period to another and the ability to compare the financial statements of different companies.

Balance Sheet Formats

Standard accounting conventions present the balance sheet in one of two formats: the account form (horizontal presentation) and the report form (vertical presentation). Most companies favor the vertical report form, which doesn't conform to the typical explanation in investment literature of the balance sheet as having "two sides" that balance out.

Whether the format is up-down or side-by-side, all balance sheets conform to a presentation that positions the various account entries into five sections:

Assets = Liabilities + Equity

• Current assets (short-term): items that are convertible into cash within one year

• Non-current assets (long-term): items of a more permanent nature

• Current liabilities (short-term): obligations due within one year

• Non-current liabilities (long-term): obligations due beyond one year

• Shareholders' equity (permanent): shareholders' investment and retained earnings

Account Presentation

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). Similarly, liabilities are listed in the order of their priority for payment. In financial reporting, the terms "current" and "non-current" are synonymous with the terms "short-term" and "long-term," respectively, so they are used interchangeably.

Each of the three segments on the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory, and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry.