2. Balance sheet statement
The second financial statement: the balance sheet
The purpose of your balance sheet is to provide a snapshot of what the company owns (assets), and how it paid for what it owns (liabilities and equity), at a given point in time.
Your balance sheet consists of three categories: assets, liabilities, and shareholder’s equity.
It follows the equation:
“Current” categories refer to items that will materialize over the next year, whereas “non-current” (“fixed”) items last beyond the fiscal year.
"Receivable" categories refer to when others owe you money, and "payables" categories refer to when you owe others money.
There is an important distinction between your balance sheet and your three other financial statements: Your balance sheet is a snapshot of your company’s holdings at a given point in time, while your other statements include values that describe performance over a period of time.
This is because your balance sheet indicates what is owned/owed at a point in time, which is typically communicated with “start period” and “end period” values.
Items generally go on your balance sheet instead of your income statement when it relates to investing (assets), holding short-term assets or liabilities (working capital) or financing (liabilities/shareholder's equity). If it's income or expenses, it will typically go on the income statement.
There are rules for when a transaction goes on the income statement vs. the balance sheet. Account names are often self-explaining and help determine where transactions go. If in doubt, you can always ask someone accounting savvy!
For good measure, here are the requirements for when something can be classified as an asset or liability
- Must be a result of a past transaction
- Must involve a future obligation (cash/good/service)
- Must be measurable with reasonable accuracy
Examples: loans, money owed to suppliers (accounts payable), taxes owed, deferred revenue (i.e. goods or services that have been paid for but haven't been delivered yet)
The three balance sheet categories (assets, liabilities, shareholder’s equity) can be divided into subcategories that you can forecast values for in your budget.
If you are interested in exploring more balance sheet accounts, the standard chart of accounts in your accounting tool typically includes a long list of assets, liabilities, and shareholder’s equity accounts.