In accounting, it’s important to understand the different types of financial statements in order to be able to use them properly. The first important financial statement is the balance sheet. A balance sheet is an accounting tool that shows a company’s financial position at a certain point in time. In this post, we will discuss some general terms such as balance sheets and classified balance sheets.
A classified balance sheet groups together similar assets and liabilities and makes it easier for the user to read. Classified balance sheets help managers determine if the company has enough assets to pay its current debts as they are due and also the claims of creditors on the company’s total assets.
Balance sheets should be balanced and filled out correctly, with the correct category for each transaction.
A classified balance sheet will have assets and liabilities and stockholders’ equity grouped together.
Next we will go over the different types of assets and liabilities and how to accurately record accounting transactions. Recall that the basic accounting equation is: assets= liabilities + stockholders equity. This equation must always balance, and that is why we call this sheet a balance sheet.
Introduction to types of assets and liabilities:
Current Assets: Current assets are assets that a company or organization expects to use within one year
(or the operating cycle). Examples include office supplies, yearly insurance, and inventory.
Long-term investments: Long term investments are investments that will be held for longer than a year. Examples include stocks, bonds, land, or buildings.
Property, plant, and equipment: These are assets with a relatively long useful life that are being currently used. Examples include the building, vehicles, furniture, and land. Most of these items are subject to depreciation.
Intangible Assets: These are assets that are valuable to the company, but have no physical state. Examples include customer lists, brands, trademarks, rights, and goodwill.
Current liabilities: These are liabilities, or debts, that the company is obligated to pay within the coming year. Examples: rent, accounts payable, wages payable, etc.
Long-term liabilities: These are obligations the company expects to pay after one year. Examples include mortgages payable, long-term notes payable, bonds payable, etc.
Stockholder’s Equity: Stockholder’s equity contains two parts: retained earnings and common stock. Common stock is recorded as the investments of assets into the business by stockholders. Retained earnings is recorded as the income retained for actual use in business.
There are many more accounts that can be found on the balance sheet, however these are some of the biggest and most important categories.
Learn more about financial statements in our Accounting tutorial.