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Lesson 1: Introduction to Accounting and Business
The Balance Sheet
The balance sheet measures the financial strength of a business at a particular date by comparing assets, liabilities, and stockholders' equity. Essentially, the balance sheet represents the basic accounting equation. The balance sheet is a snapshot of the company's financial position. It is only accurate for a moment in time because it reflects what the company currently owns and owes, as well as the claims of the owners. As soon as the company completes a transaction, the balance sheet will change to reflect the effects of that transaction.
The balance sheet, which illustrates the different components of the accounting equation, is completed after the income statement and statement of retained earnings are calculated. The items from those statements become part of the balance sheet as a component of owners' equity.
Example 1.11
MM TAX has the following account balances for December 20XX, which appear on the balance sheet:
- assets: cash, $19,100; accounts receivable, $2,500; office supplies, $50; and computer, $500
- liabilities: accounts payable, $50
- owner's equity: common stock, $20,000
In addition, the retained earnings of $2,100 from the statement of retained earnings is included in the balance sheet.
The following accounts do not appear on the balance sheet:
- dividends, -$200 (statement of retained earnings);
- fees earned, +$2,500; and
- salary expense, -$200 (income statement).
| Assets | Liabilities | |||
|---|---|---|---|---|
| Cash | $19,100 | Accounts payable | $50 | |
| Accounts receivable | 2,500 | Stockholders' Equity | ||
| Office supplies | 50 | Common Stock | $20,000 | - |
|
Computer
|
500
|
Retained Earnings
|
2,100
|
-
|
|
-
|
-
|
Total Stockholders' Equity |
-
|
22,100 |
| Total Assets |
$22,150 |
Total Liabilities & Stockholders' Equity |
-
|
$22,150 |
Notice that the balance sheet is a snapshot of the financial position of the company. It is only true for one moment in time because as soon as the company completes a transaction, the account balances will change.
Notice that the balance sheet is the depiction of the accounting equation.
The Statement of Cash Flows
This financial statement demonstrates the receipt and use of cash during an accounting period. This statement will be studied in depth in later lessons.