Companies that issue balance sheets in conformity with generally accepted accounting principles (GAAP) always prepare the financial statement using three broad categories: assets, liabilities and equity, which is the sum of retained earnings and shareholder stock. Having some familiarity with the types of accounts to include in each category will allow you to calculate assets, liabilities and equity with relative ease.
1. Sum the total for the value of all company assets. From the trial balance, you can obtain the balances for each type of asset the company owns. This includes fixed assets, such as real estate and business equipment, accounts receivable, the company’s ending cash balance, marketable securities, such as stocks the company owns in other businesses for investment purposes and the value of inventory, to name just a few. When summing the total of these asset values, be sure to reduce the total by the balance in the accumulated depreciation account.
2. Assess the company’s total outstanding liabilities. The liabilities of a company reflect all debts that it has outstanding as of the balance sheet date. These typically include outstanding loans and promissory notes; the interest accruals on these debts that remain outstanding; the accounts payable account, which reflects the company’s short-term borrowings, such as payments it must make to suppliers; employee salaries that remain outstanding and any amount in the taxes payable account that the company still owes to federal, state and local governments. Add the balances of each account to calculate total liabilities.
3. Calculate retained earnings. The retained earnings account reflects the portion of the company’s income to which shareholders, rather than creditors, have a claim. The account balance is equal to the cumulative amount of net income the company reports each year. Moreover, the balance of retained earnings decreases each time the company makes a dividend payment to shareholders.
4. Sum the values of common and preferred shareholder stock. The sum of the retained earnings account balance and the contributions of capital by shareholders is equal to the total equity the company reports on a balance sheet. Corporations will separately report the amount shareholders contribute to acquire common and preferred stock at par value. You must add to this amount the balances of the “additional paid-in capital” accounts for both categories of stock, which represents the amount shareholders pay for their stock in excess of the stated par value, to arrive at the total stock balance.
- When you complete your separate calculations for assets, liabilities, retained earnings and stock, you can check to ensure you include the correct accounts within each category by using the balance sheet equation. The equation states that assets must always equal the sum of liabilities and equity.
- Corporations whose shares trade on a public stock exchange must prepare various financial statements, including the balance sheet, in accordance with GAAP. As a result, public companies make their financial statements available to the public. Reviewing a number of these balance sheets can also provide insight into which accounts to include with each category.
Items you will need
- Company trial balance
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