The Balance Sheet and Income Statement

balance sheets for dummies

The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements. This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report. The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account. 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.

balance sheets for dummies

A balance sheet is always prepared at the close of business on the last day of the profit period. In other words, the balance sheet should be in sync with the income statement. When you read through your business’s balance sheet, like the balance sheet shown in this figure, you may notice that it doesn’t have a \”punch line\” like the income statement does. The balance sheet is a report that gives a basic snapshot of the company’s finances. This is an important document for potential investors and loan providers.

Field guide to balance sheet line items

Or perhaps you are considering buying stock directly in European or other foreign companies. You need to become more familiar with the financial position format if you want to read reports from foreign companies. Rounding off numbers makes a report easier on the eye, but be sure you know how companies are rounding their numbers before you start comparing financial balance sheets for dummies statements among them. This issue is particularly crucial when you compare a large company with a smaller one. The large company may round to millions, whereas the smaller company may round to thousands. However, the first company’s balance sheet for September 1, 2001, to August 31, 2002, shows the full impact of the attacks on its financial position.

balance sheets for dummies

In financial reporting, the terms “current” and “non-current” are synonymous with the terms “short-term” and “long-term,” respectively, and are used interchangeably. The shareholder’s equity section is essential from the point of view of valuation. Often, financial statements will include a separate statement detailing the changes in shareholder equity.

Balance Sheet: Explanation, Components, and Examples

If he could convert some of that inventory to cash, he could improve his ability to pay of debt quickly in an emergency. He may want to take a look at his inventory, and see what he can liquidate. Maybe he’s got shelves full of books that have been gathering dust for years. If he can sell them off to another bookseller as a lot, maybe he can raise the $10,000 cash to become more financially stable. For instance, if you’re a sole proprietorship, you don’t issue stock—so there’s no line item for company stock. And if you run a dropshipping business, you don’t have inventory—so there’s no line item for inventory.

The situation could be improved considerably if Bill reduced his $13,000 owner’s draw. Unfortunately, he’s addicted to collecting extremely rare 18th century guides to bookkeeping. Until he can get his bibliophilia under control, his equity will continue to suffer. She’s got more than twice as much owner’s equity than she does outside liabilities, meaning she’s able to easily pay off all her external debt. Annie’s Pottery Palace, a large pottery studio, holds a lot of its current assets in the form of equipment—wheels and kilns for making pottery. Equity can also be parts of the business, such as shares, that you’re able to liquidate by selling.


Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. Employees usually prefer knowing their jobs are secure and that the company they are working for is in good health. As noted above, you can find information about assets, liabilities, and shareholder equity on a company’s balance sheet. The assets should always equal the liabilities and shareholder equity. This means that the balance sheet should always balance, hence the name.

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 analyzed over time or comparatively against competing companies, managers can better understand ways to improve the financial health of a company. The balance sheet reports an organization’s assets (what is owned) and liabilities (what is owed). The net assets (also called equity, capital, retained earnings, or fund balance) represent the sum of all the annual surpluses or deficits that an organization has accumulated over its entire history.

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