Whereas, the liabilities and owner’s equity are the funds through which such resources have been acquired. Sources and Use of FundsĪs per this view, assets are nothing but the resources that are acquired by your business entity to be utilized over a long period of time. And Owner’s Equity is nothing but the capital that belongs to you as an owner. On the other hand, liabilities are the amounts that your business entity owes to external stakeholders like banks, creditors, etc. These resources provide benefits to your business entity for a long period of time, that is, more than one year. Resources and Claims ViewĪccording to this view, assets are resources that your business entity owns on a specific date. There are two views that can help us in understanding the impact of economic events on the company balance sheet. In other words, a company Balance Sheet is a financial statement that calculates the worth of your business (equity) by deducting the amount that your business entity owes (liabilities) from the amount that it owns (assets). It showcases assets, liabilities, and owner’s equity at a specific point in time. Overview: Balance Sheet DefinitionĪs per Balance Sheet definition, a Balance Sheet is one of the fundamental financial statements that provide a true and fair view of your business entity’s financial position as of a specific date. Accordingly, the sum total of assets must be equal to the sum total of liabilities and the owner’s equity. This means that every dollar invested in your business entity’s assets is either provided by the owners or the creditors. So, given the above-mentioned views, a Classified Balance Sheet is prepared by recording the sources of funds (liabilities + owner’s equity) on the left-hand side, and the application of such funds (assets) on the right side of the T-Account. Thus, a Simple Balance Sheet exhibits a list of resources (assets) and how such resources are funded (liabilities). Such resources can be acquired via funding provided either by you as an owner or a group of owners in the form of your investments, by banks in the form of loans, or by suppliers in the form of credit. This is because your business requires resources that have a longer life, that is, more than one year. That is, what your company owns, the amount it owes together with the amount that is invested by its shareholders.įurthermore, the Balance Sheet is also referred to as a Statement that showcases Sources of Funds and the Application of Funds. It basically showcases your company’s assets, liabilities, and shareholder’s equity as on a specific date. What is a Balance Sheet and How Do You Prepare One?Ī Simple Balance Sheet is one of the three fundamental financial statements that give a snapshot of the financial position of your business entity at the end of an accounting period. In this article, we will learn a simple balance sheet definition, how a balance sheet works, balance sheet formula, balance sheet template, elements of the balance sheet, and how to make a balance sheet template. Thus, a simple Balance Sheet gives a true and fair view of your business’s financial position. Such financial statements provide useful information to both internal and external stakeholders regarding financial soundness, performance, and changes in the financial position of a business entity. These include Profit and Loss and Cash Flow Statement. These are called Generally Accepted Accounting Principles (GAAP) that are used by companies to prepare financial statements to record and report accounting information.Īs per GAAP, every business entity is required to prepare the Balance Sheet at the end of an accounting period along with the other fundamental financial statements. The Financial Accounting Standards Board (FASB) has formulated certain widely accepted rules, standards, or procedures for companies to report accounting information.
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