The balance sheet reports the balances of financial accounts at the end of the period. It plays an important role in the financial reports published by companies periodically. Balance sheet readers want to know how much the company owes to other entities and what the company’s net worth equals. The company calculates the value of each account at the end of the period and uses this value on the balance sheet.
Balance Sheet Accounts
The balance sheet accounts include asset accounts, liability accounts and equity accounts. These account balances are permanent and remain in the financial records until a financial transaction occurs removing them. For example, if the company purchases a vehicle, it keeps the vehicle balance in the financial records until the company sells the vehicle. The balance in temporary accounts reset each period. The company uses different methods of determining the value of each balance sheet account.
The company records each asset at its actual cost when it acquires the asset. This cost includes the purchase price, freight charges, installation costs and legal fees. The company adjusts fixed asset balances by considering accumulated depreciation. The company records depreciation each period, which remains in the financial records and reduces the net fixed asset balance. When the company purchases securities in another company as an investment, it considers the fair market value of these assets to determine the value. At the end of each period, the company researches the selling price of these securities. It revalues these assets using the current selling price.
Liabilities appear in the financial records at their current value or as the value which the company owes to another entity. When the company borrows money, it records the principal balance as the liability. As it pays off the loan, this balance decreases. If the company issues a bond, it records the bond along with a premium or discount. A premium increases the net value of the bond; a discount decreases the net value of the bond. The company amortizes the premium or discount throughout the life of the bond, changing the net value of the bond.
The equity account balances change based on the activities recorded. The capital stock account balances come from the actual amount paid by investors. These balances remain unchanged. The retained earnings account increases when the company records net income and decreases when the company records a net loss.
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