12.5 The Balance Sheet

The , one of three financial statements generated from the accounting system, summarizes a firm’s financial position at a specific point in time. It reports the resources of a company (assets), the company’s obligations (liabilities), and the difference between what is owned (assets) and what is owed (liabilities), or owners’ equity.

The assets are listed in order of their , the speed with which they can be converted to cash. The most liquid assets come first, and the least liquid are last. Because cash is the most liquid asset, it is listed first. Buildings, on the other hand, have to be sold to be converted to cash, so they are listed after cash. Liabilities are arranged similarly: liabilities due in the short term are listed before those due in the long term.

The balance sheet as of December 31, 2018, for Delicious Desserts, Inc., a fictitious bakery, is illustrated in Table 12.1. The basic accounting equation is reflected in the three totals highlighted on the balance sheet: assets of $148,900 equal the sum of liabilities and owners’ equity ($70,150 + $78,750). The three main categories of accounts on the balance sheet are explained below.

Table 12.1: Balance Sheet for Delicious Desserts
Delicious Desserts, Inc.
Balance Sheet as of December 31, 2018
Current assets:
Cash $15,000
Marketable securities $4,500
Accounts receivable $45,000
Less: Allowance for doubtful accounts $1,300 $43,700
Notes receivable $5,000
Inventory $15,000
Total current assets $83,200
Fixed assets:
Bakery equipment $56,000
Less: Accumulated depreciation $16,000 $40,000
Furniture and fixtures $18,450
Less: Accumulated depreciation $4,250 $14,200
Total fixed assets $54,200
Intangible assets:
Goodwill $7,000
Total intangible assets $11,500
Total assets $148,900
Liabilities and owners’ equity
Current liabilities:
Accounts payable
Notes payable $15,000
Accrued expenses $4,500
Income taxes payable $5,000
Current portion of long-term debt $5,000
Total current liabilities $60,150
Long-term liabilities:
Bank loan for bakery equipment
Total long-term liabilities $10,000
Total liabilities
Owners’ equity
Common stock
(10,000 shares outstanding)
Retained earnings $48,750
Total owners’ equity $78,750
Total liabilities and owners’ equity


Assets can be divided into three broad categories: current assets, fixed assets, and intangible assets. Current assets are assets that can or will be converted to cash within the next 12 months. They are important because they provide the funds used to pay the firm’s current bills. They also represent the amount of money the firm can quickly raise. Current assets include:

  • Cash: Funds on hand or in a bank
  • : Temporary investments of excess cash that can readily be converted to cash
  • : Amounts owed to the firm by customers who bought goods or services on credit
  • : Amounts owed to the firm by customers or others to whom it lent money
  • : Stock of goods being held for production or for sale to customers

are long-term assets used by the firm for more than a year. They tend to be used in production and include land, buildings, machinery, equipment, furniture, and fixtures. Except for land, fixed assets wear out and become outdated over time. Thus, they decrease in value every year. This declining value is accounted for through depreciation. is the allocation of the asset’s original cost to the years in which it is expected to produce revenues. A portion of the cost of a depreciable asset—a building or piece of equipment, for instance—is charged to each of the years in which it is expected to provide benefits. This practice helps match the asset’s cost against the revenues it provides. Because it is impossible to know exactly how long an asset will last, estimates are used. They are based on past experience with similar items or IRS guidelines for assets of that type. Notice that, through 2018, Delicious Desserts has taken a total of $16,000 in depreciation on its bakery equipment.

are long-term assets with no physical existence. Common examples are patents, copyrights, trademarks, and goodwill. Patents and copyrights shield the firm from direct competition, so their benefits are more protective than productive. For instance, no one can use more than a small amount of copyrighted material without permission from the copyright holder. are registered names that can be sold or licensed to others. One of Delicious Desserts’ intangible assets is a trademark valued at $4,500. Goodwill occurs when a company pays more for an acquired firm than the value of its tangible assets. Delicious Desserts’ other tangible asset is goodwill of $7,000.


are the amounts a firm owes to creditors. Those liabilities coming due sooner—current liabilities—are listed first on the balance sheet, followed by long-term liabilities.

are those due within a year of the date of the balance sheet. These short-term claims may strain the firm’s current assets because they must be paid in the near future. Current liabilities include:

  • : Amounts the firm owes for credit purchases due within a year. This account is the liability counterpart of accounts receivable.
  • : Short-term loans from banks, suppliers, or others that must be repaid within a year. For example, Delicious Desserts has a six-month, $15,000 loan from its bank that is a note payable.
  • : Expenses, typically for wages and taxes, that have accumulated and must be paid at a specified future date within the year although the firm has not received a bill
  • : Taxes owed for the current operating period but not yet paid. Taxes are often shown separately when they are a large amount.
  • Current portion of long-term debt: Any repayment on long-term debt due within the year. Delicious Desserts is scheduled to repay $5,000 on its equipment loan in the coming year.

come due more than one year after the date of the balance sheet. They include bank loans (such as Delicious Desserts’ $10,000 loan for bakery equipment), mortgages on buildings, and the company’s bonds sold to others.

Owners’ Equity

Owners’ equity is the owners’ total investment in the business after all liabilities have been paid. For sole proprietorships and partnerships, amounts put in by the owners are recorded as capital. In a corporation, the owners provide capital by buying the firm’s common stock. For Delicious Desserts, the total common stock investment is $30,000. are the amounts left over from profitable operations since the firm’s beginning. They are total profits minus all dividends (distributions of profits) paid to stockholders. Delicious Desserts has $48,750 in retained earnings.

Key Takeaways

  • The balance sheet represents the financial condition of a firm at one moment in time, in terms of assets, liabilities, and owners’ equity.
  • The key categories of assets are current assets, fixed assets, and intangible assets.
  • Liabilities are divided into current and long-term liabilities.
  • Owners’ equity, the amount of the owners’ investment in the firm after all liabilities have been paid, is the third major category.


  1. What is a balance sheet?
  2. What are the three main categories of accounts on the balance sheet, and how do they relate to the accounting equation?
  3. How do retained earnings relate to owners’ equity?


Icon for the Creative Commons Attribution 4.0 International License

12.5 The Balance Sheet by Manika Avasthi is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

Share This Book