Balance sheet accounts represent the information of a company’s transactions. These transactions are categorized as cash, liabilities, and equity. These accounts are basically helping the owners, employees, shareholders, and investors to get the overall view of the company’s financial health.
Balance sheet accounts serve to record and sort transactions that relate to the company’s assets, liabilities, and owner’s equity of stockholders. The balances in these accounts as of the final moment of an accounting year will be reported on the company’s end-of-year balance sheet.
The balance sheet accounts are known as permanently and genuine accounts since at the close of the accounting year, the balances of the account will not shut. Instead, the balances that are left are carried forward and will be the balances at the beginning of the following year’s accounting year. (This differs from accounts in the income statement that are shut at the end of each accounting year, and will start the year following with no balances.)
Understanding the information about accounts on the balance sheet is very critical. If you are a business owner this will help you get a clear picture of whether your business is in profit or a loss.
In this article, I will discuss, what are balance sheet accounts? and what information they contain.
let’s dive in…
What is a balance sheet?
A balance sheet is a snapshot of a company’s financial situation at a particular point in time. Normally balance sheets are prepared at the end of the fiscal year to check the performance of a company over a year.
Accounts on balance sheet provide pivotal information about the direction in which the business is headed, you will get information about Assets, Liabilities, and owner’s or shareholder’s equity.
What are balance sheet accounts?
Balance sheet accounts are used to sort out the financial data of a business. Sorting helps business owners and investors to get a clear picture of how much debt the company has and how much cash in hand is available.
Accounts on the balance sheet include cash, temporary investments, Accounts receivable, inventory, land, lease, taxes, account payable, debt, and other important information.
How do balance sheet accounts work?
The balance sheet is a key to financial modeling and accounting. It gives a picture of how a company is performing financially at a particular time. Balance sheet accounts alone, do not provide the trends of how a company will perform in the future. That is why it is used along with income statements and cash flow statements.
If you are an investor, balance sheet accounts will give you a sense of how well the finances of a company are performing at a particular point in time. You can use the data from balance sheet accounts to calculate the debt to equity ratio as well as the acid test ratio.
Accounts on balance sheets fit into one basic equation Assets= Liabilities + Equity. The asset is everything that company owns, liability is everything that a company owes, equity is the share of the owner or shareholders. Both sides of the equation have to be balanced on a balance sheet.
What are the main components of a Balance Sheet?
This equation is self-explanatory and contains the juice of the whole balance sheet
Assets = Liabilities + Equity
These are the main categories around which balance sheet information revolves. What are balance sheet accounts? well, these three are the main balance sheet accounts. These are further divided into sub-categories.
Let’s talk about them one by one
Assets are on the left of the equation, Assets are everything that a company or a business owns. It belongs to the business. Assets can be both short-term and long-term.
Accounts on the balance sheet under assets are arranged in order of ease of liquidity. Liquidity means the ease of converting an asset to cash without affecting its market value.
So the easier it is to convert an asset to cash, the higher this account would be on the balance sheet. Following are the accounts on a balance sheet under assets.
- Cash and Cash Equivalents: These are the most liquid assets and can be converted to ready cash immediately. For example, treasury bills and hard cash.
- Accounts Receivables: The amount that a company owes to a customer for some product or service and is receivable within a short period of time.
- Inventory: Every product or the raw material that is used to create the finished product will come under this account on the balance sheet.
- Investments: These can be both short-term and long-term. Short-term investments or securities are those that can be converted to cash within a year and long-term securities or investment accounts on a balance sheet is that can not be converted to ready cash within one year.
- Tangible Assets: The assets that are fixed and have some physical form, like land, equipment, building, etc.
- Non-tangible assets: Including brand name, copyrights, goodwill, etc.
If a business is bound to pay someone legally, it comes under the liabilities on a balance sheet. Liabilities include bonds, loans, accounts payables, mortgages, leases, taxes, etc.
Just like Assets, liabilities can also be accounted for as current liabilities and non-current liabilities.
Current liabilities are those which are payable within the period of one year. This includes interest payable, wages payable, dividend payables, customer prepayments, etc.
Non-current liabilities are those that a business is obliged to pay not within a year. For example, Long term taxes, lease payments over 5 years, and deferred taxes.
Equity is also on balance sheet accounts. It is also called shareholder’s equity. It is the amount invested by the shareholders or the owner to become the owner of the business.
What are balance sheet accounts?
Following are the balance sheet accounts
Cash on the balance sheet is under the sub-category of Assets. it is considered a current asset of a company. The money that you are receiving for selling things from your inventory goes in the Cash account of the balance sheet.
This is also called a short-term asset because this cash will then again be used to cover other expenses.
2- Temporary investments
Your balance sheet accounts will also contain information about the temporary investments that your company has made, these investments are also an asset of the business as they can be converted to cash almost immediately.
These short-term or temporary investments are also known as marketable investments, and the examples include, treasury bills, CDs, Money Market accounts, High yield savings accounts.
3- Accounts Receivables
Businesses often work on credit. You sometimes will have to provide goods in advance and will get the money after the products have been delivered. This amount is also included in current assets. Your balance sheet accounts will show this money as accounts receivables.
This is the amount that your customers owe you and will pay in a short period of time.
4- Allowance for doubtful accounts
Allowance for doubtful accounts on a balance sheet is a contra asset account that a company considers a bad debt. Imagine you have a business and you have provided some goods on a credit to your customer.
Now for some unknown reason, your customer is unable to pay the money, this amount that a business is unable to collect is represented as allowance for doubtful accounts on a balance sheet. It is a bad debt that a company considers uncollectable.
Balance sheet accounts also represent the current inventory that a business has. This account represents all the raw material that a company has, products under the completion phase, and the finished goods.
This account on balance sheet is also a sub-category of Current Assets as the inventory can be converted to money almost immediately.
Investment is also the account on the balance sheet. These are the funds that a company or a business has invested in other firms or companies. Investments can be both short-term and long-term.
Short-term investments can include, CDs, High yield savings accounts, treasury, or bond funds. If a company decides to invest in real estate, stocks, ETFs, bonds, etc, these are long-term investments.
When you are looking at accounts on balance sheet, you will see the land that is owned by a business is written under the non-current asset section of the balance sheet. It is because land can not be converted into liquid funds immediately.
The land has the longest span of conversion. Land is also an important asset to a business.
8- Accumulated Depreciation
On the balance sheet account, you will also see the accumulated depreciation. it is a contra asset on a balance sheet. When a business buys a fixed asset, its full value is written on the balance sheet. However, over the period of time, the value of that asset depreciates and is shown as accumulated depreciation on the balance sheet.
9- Accounts Payable
Accounts payable is the amount that the company has to pay to someone. Accounts payable come under the main category of liabilities as the business owes this money to someone.
10- Payroll expense
If you are running a business then you must have some employees working for you. These employees need to be paid depending on your company’s policy.
Payroll expenses are also considered a liability. Payroll expenses are the payments in the form of salary that a business is obliged to pay it’s employees for their services.
11- Retained Earnings
Accounts on balance sheet also represent retained earnings of a business, these are in the form of equity. retained earnings are the profits that a company has made over a period of time and this profit is held by the company for future use.
These were some key elements that a balance sheet account contains. However, there are other accounts on balance sheets too.
Example of a Balance Sheet
If you still have some questions about what are balance sheet accounts. The example balance sheet of Walt Disney will help you understand easily, and you can see all the accounts on balance sheet. You can also check the detailed balance sheet of Apple Inc. here.
What accounts go on balance sheets?
Three main accounts that go on balance sheet are assets, liabilities, and Shareholder’s equity. These are the three major categories which are then further divided into sub-categories.
What is the purpose of balance sheet?
Business owners and investors use the balance sheet along with other metrics to gauge the financial health of any organization. The purpose of a balance sheet is to provide a snapshot of the financial situation of a business at a particular point in time.
Another purpose of balance sheet is to check the liquidity of a business, which is how quickly assets can be converted to ready cash. To make it really simple, the purpose of a balance sheet is to show what your business owns and owes.
How do you write a balance sheet?
First of all, to write a balance sheet you will need to have all the information, I mean all of the financial information of a business. Then you can start writing a balance sheet.
Follow these steps to write a balance sheet
Step 1- Divide your balance sheet into two main sections.
Step 2- Assets will go in the top section.
Step 3- Identify all the assets that a business has. This includes both current assets and noncurrent assets.
Step 4- Start writing the current assets first, the hierarchy should be the assets that are easy to convert to cash go first, and then the rest follow.
Step 5- Write down all the non-current assets
Step 6- Sum up all the values of current and non-current assets to get the value of the total assets.
Step 7- Now write the second section of the balance sheet. This includes what your business owes.
Step 8- Write down all the liabilities of a business. Start writing from current liabilities first and then write the non-current liabilities.
Step 9- Sum up all the liabilities to get the value of total liabilities.
Step 10- Write the Equities or shareholder equities
Step 11- Sum up all the equities to get the total value
If this number is positive it means your business has equity, which means if you sell this business right now, you and the shareholders will walk away with some cash in their pockets.
Which account is not on a balance sheet?
Off-balance sheet assets account is not on a balance sheet. This includes assets and liabilities that are not shown on a company’s balance sheet such as OBS of operating lease or leaseback agreement.
What are 3 types of assets?
The 3 types of assets are
- Current Assets
- Investment Assets
- Non-Tangible Assets
The balance sheet is a very important financial document, that provides a lot of information about the financial situation of a company, it helps business owners to decide whether their policies are working or not. It also helps the investor to decide if they should or should not invest in a company.
Although the balance sheet contains information based on past events which are not always the right indicators of a company’s success in the future, still it is very important and serves as a cornerstone in the financial data of a company.
I hope now you know what are balance sheet accounts. Leave your thoughts in the comment section. Your suggestions are always helpful and serve as a guideline to me.