A balance sheet is a financial statement that summarizes a company's financial position as of a certain date, usually the end of a fiscal quarter or year. It is formatted to display the company's assets balanced against its liabilities and shareholders' equity. Total assets always equal total liabilities plus shareholders' equity. This is a result of the double entry accounting system, which causes accounting profits to flow from the income statement on through the shareholders' equity section of the balance sheet.
Classified Versus Unclassified Balance Sheet
A classified balance sheet differs from an unclassified balance sheet in that it categorizes the company's assets and liabilities as short term and long term. Categories on the classified balance sheet include current assets, property and equipment, noncurrent assets, current liabilities, noncurrent liabilities and shareholders' equity. An unclassified balance sheet is a more crude work product, usually used for internal reporting, whereas a classified balance sheet is the format typically presented to creditors and investors. A classified balance sheet is also more likely to have been audited and contain accompanying footnotes that provide a substantial amount of important information.
Current and Noncurrent Assets
On both the classified and unclassified balance sheets, assets and liabilities are listed in ascending order of liquidity. However, only classified balance sheets group them by category. Current assets typically consist of cash, inventories, accounts receivable and any other claims on assets that are due within one year. Property and equipment means real estate, fixed assets and leasehold improvements. Fixed assets can vary, but they generally include machinery and equipment, automobiles, and computers and hardware. Noncurrent assets generally consist of all other assets, including long-term receivables, intangible assets and numerous accounting measures, such as deferred taxes.
Current and Long-term Liabilities
The liability section consists of current liabilities and long-term liabilities, both of which include interest-bearing debt; on some balance sheets, long-term debt is broken out separately. Current liabilities typically consist of accounts payable, short-term debt and accrued expenses, such as payroll and other operating expenses. Long-term liabilities include any claim on the company's assets with terms in excess of one year. Debt is a commonly reported long-term liability and can include a wide variety of bank loans.
Total liabilities subtracted from total assets equals total shareholders' equity. Shareholders' equity consists of the par value of common stock issued, paid-in capital and retained earnings. Paid-in capital is simply an accounting measure that denotes the amount in excess of par value that the company's common stock was issued for. Retained earnings increase or decrease by the company's net earnings, less any dividends paid to shareholders. Shareholders' equity, also known as net asset value or book value, is a key measure of shareholder wealth and company health.
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