Key takeaways

The balance sheet is an accounting statement that shows the assets, liabilities, and owner's equity of a company at a specific point in time.

Most countries in the world use balance sheets that are sorted by liquidity.

The balance sheet can provide assistance to users of financial statements in making economic decisions.

Conceptual Understanding

The balance sheet, also known as the statement of financial position, is an accounting statement that shows the assets, liabilities, and owner's equity of a company at a specific point in time.

When preparing the balance sheet, the preparer uses the accounting principle of balance, classifying the company's assets, liabilities, and shareholder's equity as two major categories, "assets" and "liabilities and owner's equity", and compiling them into a specific format through journal entries, trial balances, adjustments, etc.

The content of the balance sheet includes:

There are no clear requirements for the format of the balance sheet of companies in various countries. Currently, the commonly used formats are account format, report format, and financial condition format. As long as the preparation format meets the requirements of regulatory authorities, they are considered formal financial statements.

When preparing the balance sheet, it is necessary to classify all items according to certain standards and arrange them in an appropriate order.

The balance sheet sorted by liquidity is most commonly used in most countries around the world. All items are first divided into three parts: assets, liabilities, and owner's equity, and the order of arrangement is determined by the liquidity of the items.

Assets are arranged in order of liquidity, with the most liquid assets at the beginning and the least liquid assets at the end. Liabilities are arranged in order of their due dates, with those due soonest at the beginning and those due furthest in the future at the end. Owner's equity items are arranged in order of their permanence, with the most permanent at the beginning and the least permanent at the end.

The role of a balance sheet

The balance sheet primarily provides information about the financial position of a company.

The balance sheet can show the total amount and structure of a company's assets on a specific date, indicating the resources owned or controlled by the company and their distribution, such as how much is in the form of current assets, long-term investments, fixed assets, and so on.

The balance sheet can also show the total amount and structure of a company's liabilities on a specific date, indicating how much assets or services the company will need to repay the debts and when, such as the amount of current liabilities, long-term liabilities, and so on.

The balance sheet can also reflect the owner's equity, which is used to determine the capital maintenance and appreciation situation, as well as the degree of liability protection.

In addition, the balance sheet can also provide basic financial analysis data, such as comparing current assets and current liabilities to calculate the current ratio; comparing quick assets and current liabilities to calculate the quick ratio, etc. It can indicate the company's liquidity, solvency, and capital turnover, thereby assisting financial statement users in making economic decisions.