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Elements of Balance Sheet

Accounting, CFA® Exam Level 1

Understanding Balance Sheets Elements of Balance Sheet
This lesson is part 2 of 6 in the course Overview of Financial Statements

The balance sheet describes the financial situation of a business at a given time. It provides us critical information about the value of the firm’s assets, liabilities and the owner’s equity. The balance sheet of a company shows the assets on one side and the liabilities and owner’s equity on the other side in such a way that both sides balance in accordance with the accounting equation.

Assets = Liabilities + Owner’s Equity

Assets: Assets are what a business owns or what is owed to it. It includes items such as cash, accounts receivable, merchandise to be sold, supplies, equipment, and land. Assets also include intangible items such as patents, franchises, and copyrights.

Liabilities: Liabilities are what the business owes to others. Some examples are payments to be made to suppliers, salaries to employees, taxes to government agencies, rent to landlords, mortgage, and loans and interest payments to financial institutions.

Owner’s equity: Owner’s equity is the money that the owners of the business have put into the business. It also includes the owner’s claim on the assets of the business.

To understand a balance sheet better, let us take a look at the elements of balance sheet of a fictitious company, Innovative Products, Inc. The balance sheet is shown on the next page. As you can see, the balance sheet shows all assets on top, and then all liabilities and shareholder’s equity below the assets. This style of presentation is called report form or vertical presentation. Alternatively, balance sheet can also be presented in a horizontal format in which the assets will be shown on the left side, and liabilities and equity will be shown on the right hand side. In a balance sheet, the total assets will always be equal to the sum of liabilities and shareholder’s equity.

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In this Course

Course Home
Elements of Balance Sheet
Balance Sheet in Financial Analysis
Asset Side of the Balance Sheet
Non-current Assets – Investments and Funds
Intangible Assets and Goodwill
Liabilities Side of Balance Sheet
Stockholders’ Equity
Statement of Changes in Shareholder’s Equity
Common Size Balance Sheet
Return to Understanding Balance Sheets

In this Course

  • Elements of Financial Statements
  • Cash Flow Statement
  • Cash Flow Statements – Direct and Indirect Method
  • Significance of Cash Flows

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