Accounting balance sheet

1. 9.Balance Sheet
Definition: The term balance sheet refers to a financial statement that reports a company's
assets, liabilities, and shareholder equity at a specific point in time. In short, the balance sheet is
a financial statement that provides a snapshot of what a company owns and owes, as well as the
amount invested by shareholders.
Key Components:
1. Assets:
Assets are resources owned by a company that have economic value and can provide future
benefits. Assets are usually classified as:
o Current Assets: Short-term assets that are expected to be converted into cash or used up
within a year.
Examples: Cash, accounts receivable, inventory, prepaid expenses.
o Non-Current Assets: Long-term assets that provide benefits over multiple years.
Examples: Property, plant, and equipment (PPE), intangible assets (patents, trademarks), and
investments.
2. Liabilities:
Liabilities represent obligations or debts a company owes to external parties. They are also
categorized as:
o Current Liabilities: Obligations due within one year.
Examples: Accounts payable, short-term loans, accrued expenses.
o Non-Current Liabilities: Long-term obligations not due within a year.
Examples: Bonds payable, long-term loans, deferred tax liabilities.

2. 3. Equity:
Equity represents the residual interest in the company’s assets after deducting liabilities. It is also
known as shareholders' equity or net worth. Components include:
o Common Stock: Initial and additional investment by owners or shareholders.
o Retained Earnings: Cumulative net income that has been reinvested into the business.
o Other Reserves: Such as revaluation reserves or other comprehensive income.
Formula: The balance sheet is based on the fundamental accounting equation:
Assets = Liabilities + Equity.
The balance sheet is divided into two sides:
o Left side: Outlines all of a company's assets
o Right side: Outlines the company's liabilities and shareholders' equity
A balance sheet should always balance, meaning that assets must always equal liabilities plus
equity. If liabilities are higher than assets, it means that the business is losing money.
10.Notes to the financial statements
Definition: The notes to the financial statements are an integral part of the financial reporting
process. They provide detailed explanations, supplementary information, and disclosures about
items listed in the financial statements.
Purpose of Notes:
1. Clarify Accounting Policies: Explains the rules and principles used to prepare financial
statements (e.g., depreciation methods, inventory valuation).
2. Explain Unusual Transactions: Provides details on one-time or extraordinary events
(e.g., lawsuits, mergers).

3. 3. Provide Context: Adds depth to numbers by explaining their background, helping
stakeholders understand the company’s financial status better.
Examples of Notes:
o Accounting Policies: For instance, stating whether the company uses straight-line or
declining balance depreciation.
Example: "The company uses the straight-line method for depreciating its fixed assets."
o Contingent Liabilities: Obligations that depend on future events, such as lawsuits,
guarantees or pending claims.
Example: "The company is involved in litigation with potential damages of $500,000."
o Breakdown of Revenue/Expenses: Provides details on how revenue is generated or
expenses incurred.
Example: "Revenue is derived 60% from domestic sales and 40% from exports.
These notes make financial statements easier to trust and understand.