THE BALANCE SHEET

The balance sheet is a snapshot of a company’s financial assets, liabilities, and the value of the company to its owner—often referred to as net worth or equity—at a specific point in time. Balance sheets are commonly prepared at the end of each month and at the end of the fiscal year. A typical balance sheet for a construction company using the percentage-of-completion accounting method is shown in Figure 2-2.

The balance sheet is divided into three sections: assets, liabilities, and owner’s equity. The balance sheet reports the values of each of the accounts in the balance sheet portion of the chart of accounts at the time the balance sheet is printed. For example, the amount reported as cash on the balance sheet in Figure 2-2 comes from account number 110 from the chart of accounts shown in Figure 2-1. To prevent the balance sheet from becoming too complicated multiple accounts may be summarized by combining two or more consecutive accounts into a single line on the balance sheet. Other items on the balance sheet may be calculated from other lines on the balance sheet. For example, the Total Current Assets is the sum of the Cash, Accounts Receivable-Trade, Accounts Receivable-Retention, Costs and Profits in Excess of Billings, Notes Receivable, Prepaid Expenses, and Other Current Assets or accounts 110 through 199 on the chart of accounts in Figure 2-1. Not all companies will use all the accounts shown in Figure 2-1. For example, the construction company in Figure 2-2 does not use the inventory account.

On the balance sheet the relationship between assets, liabilities, and equity is as follows:

Asset = Liabilities + Equity     (2-1)