Balance Sheet
The balance sheet is the third financial statement prepared. So, why do we prepare a balance sheet? A balance sheet is prepared to report on the financial condition of a company. It includes the assets, liabilities, and equity of a company at a point in time.
This means that the balance sheet reports the financial condition as of one day, usually December 31,
2008. Remember that the income statement and statement of retained earnings, on the other hand, report on the entire year.
There are two formats for the balance sheet, unclassified and classified.
Regardless of the format chosen, all balance sheets include assets, liabilities, and equity.
In this video we will discuss the classified balance sheet. The classified balance organizes the assets and liabilities into important subgroups while the unclassified balance sheet does not have subgroups.
Before we begin discussing how to prepare the balance sheet, let’s talk about the important categories.
We’ll start with the assets. The assets on the balance sheet are broken into four areas: Current assets,
Long-term Investments, Plant Assets, and Intangible Assets.
Current assets are cash and other resources that are expected to be used within one year or the company’s operating cycle, whichever is longer. Here are some examples of current assets: cash, shortterm investments, accounts receivable, inventory, and prepaid expenses. Current assets are listed on the balance sheet in order of liquidity which means how quickly the asset can be turned into cash. That’s why cash is always listed first on the balance sheet because it’s the most liquid asset.
The next important category of the assets section is the long-term investments. Long-term investments or noncurrent assets are assets that the company expects to hold for more than one year or the company’s operating cycle, whichever is longer. Here are some examples of long-term investments: notes receivables and investments in stocks and bonds.
The third category of assets is plant assets or sometimes called property, plant, and equipment. Plant assets are tangible (that just means that there is a physical presence). They are long term and are used to produce or sell products and services. Some examples of plant assets are: equipment, buildings, and land. Accumulated depreciation also goes in this category.
The last category of assets is the intangible assets. Intangible assets are long-term resources that usually don’t have a physical presence. Some examples of intangibles are patents, trademarks, goodwill, and copyrights.

The liabilities on the balance sheet are also broken down into important subgroups. There are two subgroups – current liabilities and noncurrent liabilities.
Current liabilities are obligations that are due or will be paid within one year or the operating cycle, whichever is longer. Some examples of current liabilities are: accounts payable, wages payable, interest payable, and unearned revenues. Also any portion of long-term liabilities that is due within the year is also included.
The other category of liabilities is long-term liabilities. Long-term liabilities are obligations not due within one year or operating cycle, whichever is longer. Some examples of long-term liabilities are notes payable, bonds payable, and mortgages payable.
Let’s talk finally about the last section, the equity section. The equity section, or the owner’s claims on assets, is made up of two main subgroups – Contributed Capital or Paid in Capital and retained earnings.
Contributed Capital refers to the amount that stockholders invest in the company. It includes common stock and preferred stock.
Retained earnings, the other portion of equity, is income that is not distributed. The retained earnings number used on the balance sheet is found on the statement of retained earnings.
Now that we’ve gone through all of the different categories we’re ready to learn the steps to prepare a classified balance sheet. Step 1 – prepare the heading. Step 2 – complete the assets section, Step 3 – complete the liabilities section, Step 4 – complete the equities section, and Step 5 – add liabilities and equities together and confirm that it balances. Let’s look at the steps in detail.
Step 1 – Record the statements heading
Notice that the heading includes the name of the company, Sally’s Diner, the name of the statement – balance sheet, and the time period, December 31, 2008.
Remember that a balance sheet always represents a point in time which is why the balance sheet only shows December 31, 2008.
In step 2 , we will need to prepare the asset section which includes current assets, long-term investments, plant assets, and intangibles.
Now we will take each subtotal and add all assets together to determine total assets.
In step 3, we will need to prepare the liabilities section which includes current liabilities and long-term liabilities.
Now we will take each subtotal and add all liabilities together to determine total liabilities.

In step 4, we will prepare the equities section. We will list common stock, but where does the retained earnings number come from?
Well, it is found on the Statement of Retained Earnings, the statement that is prepared before this statement.
And in step 5, we will add total liabilities and total equities together to get total liabilities and equities.
Before we’re finished, we need to make sure that the assets equals the liabilities and equities. Sally’s
Diner has total assets of $403,700 and total liabilities and equities of $403,700. We balance!
Preparing a classified balance sheet takes time but remember the steps that you’ve learned, practice a little, and before long you’ll have no problems.