Balance Sheet
A point-in-time financial statement showing what a business owns (assets), what it owes (liabilities), and the residual claim of owners (equity), with the fundamental equation Assets = Liabilities + Equity.
Detailed Explanation
The balance sheet is grouped into current items (within 12 months) and long-term items. Common assets include cash, accounts receivable, inventory, fixed assets, and goodwill. Common liabilities include accounts payable, accrued expenses, deferred revenue, current and long-term debt. Equity sections vary by entity: retained earnings and common stock for corporations, members' capital for LLCs, partners' capital for partnerships. Lenders watch debt-to-equity and current ratio; owners watch equity growth over time.
Key Points
- A snapshot at a single point in time, not a period.
- Built on the equation Assets = Liabilities + Equity, which must always balance.
- Split into current (within 12 months) and long-term items.
- Lenders watch the current ratio and debt-to-equity; owners watch equity growth.
- Pairs with the P&L (period) and cash flow statement to form the three core statements.
Practical Example
A business has $300,000 of assets (cash, receivables, equipment) and $180,000 of liabilities (a loan and payables). Equity is the $120,000 difference. If next year assets grow to $350,000 and liabilities fall to $150,000, equity rises to $200,000, showing the owner's stake increased by $80,000.
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Profit and Loss Statement (P&L / Income Statement)
A financial report summarizing revenue and expenses over a period of time (month, quarter, year) to show net profit or loss.
Bookkeeping
The systematic recording, classification, and reconciliation of a business's financial transactions to produce accurate financial statements.
Chart of Accounts
The structured list of every account a business uses to record financial transactions, organized into assets, liabilities, equity, revenue, and expenses.
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