Chapter 6

Reporting Financial Condition in the Balance Sheet


Reading the balance sheet

Categorizing business transactions

Connecting revenue and expenses with their assets and liabilities

Examining where businesses go for capital

Understanding values in balance sheets

This chapter explores one of the three primary financial statements reported by business and not-for-profit entities: the balance sheet, which is also called the statement of financial condition and the statement of financial position. This financial statement summarizes the assets of a business and its liabilities and owners’ equity sources at a point in time. The balance sheet is a two-sided financial statement.

The balance sheet may seem to stand alone because it’s presented on a separate page in a financial report, but keep in mind that the assets and liabilities reported in a balance sheet are the results of the activities, or transactions, of the business. Transactions are economic exchanges between the business and the parties it deals with: customers, employees, vendors, government agencies, and sources of capital. The other two financial statements — the income statement (Chapter 5) and the statement of cash flows (Chapter 7) — report transactions, whereas the balance sheet reports values at an instant in time. The balance sheet is prepared at the end of the income statement period.

Unlike the income statement, the balance sheet doesn’t have a natural bottom line, or one key figure that’s ...

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