Accounting is the study of financial transactions. It includes summarizing the information, analyzing it, interpreting and recording them. From small business to a big organization, accounting is used everywhere.
Accounting cycle consists of many steps. First, the transactions are recorded in general journal. They contain debit accounts and credit accounts. Debit must always be equal to credit.
Then t-accounts or ledgers are formed. Accounts with the same name are mentioned in the same t-account. The balance is calculated and balance brought down is recorded so that it can be used further for calculations.
After ledgers, the trial balance is formed. The balance which was brought down is recorded in the specified sections. There are two sections debit and credit.
If total debits equal total credit then the trail is balanced and there is no error. But if the trial doesn’t get balanced, that means there is some error that must be removed to move further.
Financial statements are generated after trial balance. They contain income statements and owner’s equity statements. The net income or loss is calculated in income statement by subtracting expenses from revenues.
The net income or loss is further added or subtracted in capital respectively. Drawings are subtracted from the figure and owner’s equity is calculated. After all this, a balance sheet is generated.
Balance sheet contains assets, liabilities and total equity. It doesn’t show activities over a period. It is just a snapshot of company resources, debts, and ownership. It gives a picture of a business.
It tells what a company owns, how much it is loaned or debt and what the total equity of shareholders is. The balance sheet is the full report of the accounting equation
The balance sheet contains the name of the company, the title of the statement “balance sheet” and time period.
Balance sheet format:
The balance sheet has two formats
- Account form
- Report form
Both have same data recorded, but the arrangement is different. Account form has assets on one side and liabilities and equity on the other side of the sheet whereas report form has assets, liabilities, and equity all on the same side. The information recorded is same.
Assets are always mentioned on first. They are divided into categories from current to non-current assets. It gives the viewer idea that what the company owns, what it is investing in and what will remain unchanged.
Please click to download the attached balance sheet for small business
The first category contains the following information
- Current assets:
- Cash and cash equivalents:
- Prepaid expenses:
- Accounts receivables:
- Due from affiliates:
The second category contains long-term or noncurrent assets. These are depreciated over time, so the amount written contains the depreciated amount subtracted.
- Long-term assets
- Leasehold improvements
- Long-term receivables notes
The third section contains intangible assets and investments.
- Mineral rights
The total assets are the sum of all these categories.
It has two categories short-term or current liabilities and long-term liabilities.
Short-term or current liabilities are those who are to be paid within a year or so.
The long-term liabilities contain all the debts or loans that will be due after a year.
Current liabilities are added to the long-term liabilities to get the total liabilities.
Equity section contains different information for different types of business. If there is a sole proprietorship, then the section will include owner’s capital.
The balance sheet shows that assets must be equal to the debts of the company and the total shareholder’s or single owner’s equity. If they are not, the accounting cycle is not correctly followed, or there is some problem with your recording or calculations.
Photo by Nick Morrison