The Purpose Of A Statement Of Stock-Holders Equity Is To: The Importance of the Balance Sheet as a Financial

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The Importance of the Balance Sheet as a Financial

The Balance Sheet for accounting is an extremely important and often used statement of entity condition. It shows the extent of entity ownership of assets, liability and equity at a given point in time. This point is the date on the statement. It is a physical representation of the ‘accounting equation.’ The equation states that at any point in time, the assets of the business are equal to the sum of the liabilities and owner’s equity. The equation also forms the basis of the statement structure, which mirrors the three aspects of the equation. The three parts are: 1) assets, 2) liabilities and 3) owner’s equity. Let’s look at each one.

Assets are anything that the business owns. We tend to consider assets to be land, buildings, vehicles, inventory and cash but they are also other things. The adding machines, computers, copyrights, patents, goodwill, time clocks, pens, wrenches, ladders, paper and copy machines are also included. This expands the definition to encompass all that the business has acquired by purchase or by owner contributions.

Liabilities – when doing accounting – on the other hand, are claims against the assets excluding the owner’s equity contributions. These claims can take several forms. Some are both short- and long-term loans, bills for utilities, rent, employee expenses, bonds, taxes and many other items. They reduce the total value of the assets. Interestingly, liabilities are very liquid. They change on a constant basis. For instance, widgets are purchased to sell, the business uses utilities to operate and cash or credit is needed to pay these outside demands.

Finally, there is the Owner’s Equity section of the Balance Sheet. This summarizes, in varying degrees of detail, who owns the business. For instance, if stock is issued, it will show what the stock is valued at and usually how many shares are outstanding. It is not unusual to see differing issues of stock and wide differences in the values. In simple businesses, the equity might just be divided between several partners. Though, the Balance Sheet probably won’t reveal the names of the partners and how much of the business each one owns. The ownership is usually specified in other documents related to the corporate records. But, this section will show an aggregate of the amounts.

The other important parts of the Owner’s Equity, in accounting, are related to the Income Statement. The Net Income, or Net Loss, is part of the equity portion. Typically there are two parts to it representing the previous retained earnings of the entity and another part, which represents present earnings. Together, they show how much the value of the business has increased, or decreased because of entity operations. If the business is operating at a loss, the Owner’s Equity is becoming less valuable and will show that the owners now have less equity that they had previously. If loss condition continues, the business eventually ceases.

The Balance Sheet is an extremely important statement in the accounting and will be found, sometimes several ways, in the company prospectus. It is also provided to various government regulatory agencies. They use them to assure the business is complying with laws, regulations and taxing requirements. Typically, there is an outside audit of this statement along with the Income and Cash Flow statements too. This provides an outside review and an opinion of how well the business is keeping their books. So, the Balance Sheet is an extremely important financial document.

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