The balance sheet is a financial statement that summarizes a company's financial positions as of a given date, usually the end of a fiscal quarter or year. Unlike the income statement or statement of cash flows, the balance sheet provides a snapshot of operations, whereas the other financial statements report financial results obtained over the course of an entire period, such as a fiscal quarter or year. The balance sheet is formatted to display the company's assets balanced against its liabilities and shareholders' equity. Total assets always equals total liabilities plus shareholders' equity.
Financial Accounting Standards Board
The FASB holds sway over domestic accounting standards via its Generally Accepted Accounting Principles. The FASB is an independent and private nonprofit trade group mandated by the industry and regulatory bodies with overseeing and providing guidance for the preparation of financial statements in private industry. Regulatory bodies such as the Securities and Exchange Commission and the Public Company Accounting Oversight Board, along with trade groups such as the American Institute of Certified Public Accountants, also influence the issuance of standards. These entities work together, with input from a specific industry, to issue standards. The balance sheet reflects data that flows through from the income statement and reflects the condensed summary of a potentially huge number of journal entries.
Video of the Day
Areas Covered by GAAP
GAAP standards have a huge impact on the balance sheet's format. Complex accounting methodologies are mandated covering the smallest detail. For example, under GAAP rules, the balance sheet title must be either "balance sheet," "statement of financial position," or "statement of financial condition." GAAP also provides guidance regard display, disclosure, recognition and measurement differences. GAAP standards seek to promote uniformity so that a company's balance sheet is presented consistently. Guidance regarding disclosure is provided. For example, GAAP requires that the currency in which the financial statements are prepared is displayed prominently. This applies as much to small companies as to large.
Basic Formatting Requirements
GAAP standards maintain a general requirement for consistent, comparable presentation, using consistent formatting and terminology across time periods and among the financial statements. The level of reporting must be disclosed on the balance sheet so that the reader knows if the balance sheet is consolidated or a parent-only balance sheet. Material items should be denoted as such and be more prominently displayed with respect to form and order than nonmaterial items. An item is material if its misstatement would result in substantial audit risk, or if it represents a high concentration relative to other items on the same financial statement. For example, if a single asset is equal to 20 percent of total assets, it is likely material. Negative figures are required to be clearly viewed. The overwhelming majority of U.S. companies use the basic format where assets are listed so as to visually convey separateness from liabilities and equity. This reinforces the idea of the balance.
On the asset side of the balance sheet, GAAP requires that current assets be reported separately from long-term assets, including fixed assets. Current liabilities must all be reported separately from long-term liabilities. Current assets and liabilities are those are expected to be realized/liquidated within the longer of one year, or a regular business cycle. All assets are presented in descending order within each category, while liabilities are presented in ascending order, based on maturity. In the shareholders' equity section, equity items are presented in descending order based on priority claims in the event of liquidation. For example, preferred stock is listed above -- prior -- to common stock, because preferred shareholders are situated above common shareholders on the liquidation hierarchy.