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What is a Balance Sheet?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 August 2014
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As one of the most basic of all accounting documents, the balance sheet is simply a quick and easy to read summary of the financial condition of an individual, company, non profit organization, or a government department or agency. The focus of this document is to provide a snapshot of all current assets and liabilities of the entity, with an eye to understanding the net worth of the entity.

Sometimes referred to as a statement of condition, the structure of a balance sheet is typically very simple. The most basic version tends to group assets under specific headers on the left side of the document. Assets are identified by name in one column, with a second column immediately following that contains the value of the asset. Often there is a group sub-total, then a grand total of assets at the end of the column. The structure for liabilities follows the same basic pattern. Liabilities are grouped on the right side of the balance sheet, according to standard accounting practices. A value is assigned to each individual liability, then a group sub-total is calculated. The grand total of the current liabilities is recorded at the bottom of the sheet.

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Balance sheets are one of the most useful forms of accounting documents, and can be used in everything from individual home budgets all the way through to multilevel corporations. Persons who sometimes confused by the process of accounting are usually able to read the sheet with no problem. This straightforward approach to financial recording makes it possible for anyone from a teenager who wants to keep up with his or her part time earnings and expenses all the way through to high powered investors to easily understand their current financial state.

Learning to create this type of financial summary is not hard to do. Any basic accounting book will outline the process in just a few steps. There are a number of free balance sheet electronic documents on the Internet that are ready for download. Finally, it is easy to create a balance sheet using the spreadsheet software that is included in the word processing packages that are part of the standard programs on any new computer.

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Discuss this Article

anon193432
Post 6

Can anybody tell me about prepaid expenses?

Frances2
Post 5

@Animalz – Sure thing. I’m a stay at home mom and I control my family’s finances, so I can probably explain it.

Your assets are anything you own that is physical money or is worth money. That includes all cash, stocks, bonds, real estate, etc. you own. Your liabilities are everything you own that’s costing you money. That includes car payments, mortgages, loans you’re either paying off or have in deferment, etc.

For all liabilities, list the full amount of the liability, not your monthly payment amount. So, if you owe $13,000 on your car loan, and you’re paying $300 each month on it, the $13,000 is the liability amount.

The names for everything (all assets and liabilities) will be on the left side. On the right, put how much each item is worth. For example, if your savings account has $100,000 in it, you’d put “$100,000” in the column to the right of the word “Savings”, or something like that, in the assets section. For the car I mentioned earlier, you’d put “$13,000” in the column to the right of “Car”.

Near the bottom of the page, you can also subtract your liabilities total from your assets total, and that will show you how much you or your company is worth (your net worth).

You want your net worth to be a positive number, because if your net worth is negative, you could be in a very bad financial situation and need to start either lowering your liability amount or increasing your asset amount immediately.

Animalz
Post 4

This might be a stupid question, but can someone explain how to read a balance sheet, using really simple words? I read the article, but it’s just not sinking through my skull right now. I need a simpler explanation, if anyone can give one, please.

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