A balance sheet is a statement of assets, liabilities, and net worth of a company at a particular point in time. It is a snapshot report of the company's financial condition as of a particular date.

For individuals, the fundamental equation of the balance sheet is:

Assets = Liabilities + Net Worth

For corporations, the net worth is usually defined as stockholder's equity. Therefore, the formula changes to:

Assets = Liabilities + Stockholder's Equity

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Assets

Assets are anything that you own. Your house is an asset. Assets are divided into three major classifications:

Current Assets. These are items like cash, marketable securities, accounts receivable, prepaid expenses, and inventory that can be turned into cash within one year. Coins, short-term investments like Treasury bills, and negotiable CDs are also considered assets.

Inventories are usually characterized as current assets because they generally can be converted into cash within a year. Inventories include raw materials, goods-in-process, or finished goods.

Fixed assets. Assets that are not easily converted into cash (illiquid) are fixed assets. These include tangible properties used in the production of income such as land, plants, and equipment. Ordinary plant and equipment are listed at cost less any amount that has depreciated - that is, gone down in value due to estimated wear and tear. Remember: Fixed assets on a balance sheet are shown as cost less depreciation.

Intangible assets. This typical asset classification consists of assets that are not physical in nature. Intangible assets ordinarily would represent a small portion of the corporation's total assets. Examples of intangible assets include goodwill, leases, patents, copyrights, and franchises.

Liabilities

The next part of the balance sheet equation is liabilities. Most people have liabilities — just look at your credit card bills, car payment booklet, or mortgage. For a corporation, a liability represents a financial claim by a creditor against the corporation's assets, and is categorized as either current or long-term.

Current liabilities. These are the amounts owed by the corporation that will come due within one year. They include accounts payable, notes payable, and other payables, such as taxes and dividends that need to be paid.

Long-term liabilities. These are debts that will come due after one year, such as bonds, mortgages on real property, and long-term promissory notes.

Net Worth & Stockholder's Equity

The remaining elements of the equation — net worth and stockholder's equity — mean virtually the same thing. Net worth in a corporation is the owner's equity or claim against the assets.

Capital Accounts

Next on the balance sheet are capital accounts. These include:

Common stock. The number of shares issued and outstanding are listed at the par value, which is an arbitrary dollar amount assigned to a share of stock by the corporation when the stock is issued.

Capital surplus. This represents the amount of common stock sold for above par value at the initial offering. This is part of the net worth of the common stockholders. Also known as "additional paid-in capital."

Retained earnings. Also called earned surplus, it represents total profits less dividends that have been paid. Preferred stock. The usual par value of preferred stock is $100 and is listed on the balance sheet in the stockholder's equity section but is not part of the common equity.

Another item you will find on a balance sheet is total capitalization. This is the invested capital, made up of five components: long-term liabilities, common stock, capital surplus, retained earnings, and preferred stock.

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