Notes

Learn about balance sheets. Understand what a balance sheet is, learn what a balance sheet shows, examine its format, and see an example of a balance sheet.
The Balance Sheet
This is Bash:

image of bash
He is a member of the Financial Statements, one of the most popular bands in all of accounting. Bash is quite the character, indeed, always searching for equality in everything he does. Fans of the Financial Statements depend heavily on Bash to always give a solid performance whenever he is called upon. Since there is such an interest in Bash, I thought that we would take a little time to dive into his private life. We will look at what makes Bash who he is, what part he plays in the band and how he ties it all together.

Who is Bash, really? Bash's given name is Balance Sheet. He is the third out of four members of the Financial Statements. Each of the members of the Financial Statements has a specific role in the group. Bash's role is to keep the group balanced. He has a specific equation that he uses to accomplish this task. He calls it his motto. That equation is assets = liabilities + owner's equity. According to Bash, this equation is called the balance sheet equation. Others who have tried using it also call it the basic accounting equation.

Balance Sheet Components
What do all the parts of the equation mean? Bash says that they are actually pretty simple. Assets are the things that he owns that have value to him. Liabilities are the things that he owes. Owner's equity is the amount of personal investment a person has in something. Does that make things clear to you? How about if I give you a few more examples?

The Financial Statements are a band. What are some things a band owns? How about musical equipment, is that something a band owns? Of course it is. Well, if that's something a band owns, then it's an asset. What else does a band own? What about their name? Since the band's name is the Financial Statements and that name is their trademark, then it's also an asset. How about all the money that the band makes? Since they're so popular, I am sure that they make really good money. Yep, you guessed it. That money is an asset.

Now that you know what assets are, let's take a look at liabilities. What are some things that the Financial Statements may owe? They travel to tour dates on a bus. They financed the bus with a local bank and are required to pay monthly payments on the bus. The payment on that bus is a liability. It takes gas to fuel the bus so that the band can travel to concert locations. The fuel for the bus is also a liability. The band also employs several assistants to help with hair, makeup and clothing. The assistants are paid weekly. The pay is a liability for the Financial Statements.

The third part of the balance sheet equation is the owner's equity. Bash said earlier that owner's equity is the amount of personal investment that a person has in something. What type of personal investment would he have in the band? In order for the band to start up, each member had to come up with $2,500 to pool together and buy equipment. Each year, the group agrees to spend money on updating equipment. The initial investment made by Bash and the 25% of the cost of updating equipment is what can be counted as Bash's owner's equity.

Balance Sheet Presentation
How does Bash make everything come together? He does that by using the balance sheet equation and listing not only what every account is, but also what its balance is. On one side of the balance sheet are the assets; on the other side are the liabilities and owner's equity. Everything in the group is divided into these sections.

In the end, the total of all the assets must equal the sum of the totals of the liabilities and owner's equity. If the two sides don't equal, then they are out of balance. That, according to Bash, is when you stop and reevaluate everything that makes you who you are. You examine every single piece of the puzzle until you find what is out of balance, and then, you fix it.

Bash is thankful that even though it seems like a daunting task to undertake, he is able to rely heavily on his managers, GAAP, to guide him. GAAP, short for generally accepted accounting principles, are the standards by which members of the Financial Statements perform their roles. GAAP allows fans to know that things the members of the Financial Statements say are both reliable and comparable, and it allows them to decide whether or not they want to invest in the Financial Statement fan club.

Lesson Summary
The story of Bash and his life have taught us several things about the balance sheet. First, we learned that the balance sheet is a part of the financial statements. The purpose of the balance sheet in the financial statements is to list all the assets, liabilities and owner's equity accounts and their balances. Assets are what we own. Liabilities are what we owe. Owner's equity is how much of a personal investment an owner has placed in something that he owns.

Generally accepted accounting principles, or GAAP for short, are the standards by which items on the balance sheet must be reported. Assets are reported on the left side of the balance sheet, with liabilities and owner's equity reported on the right side of the balance sheet. In order to fulfill the properties of the balance sheet equation, the totals on both sides of the balance sheet must equal. There are distinct groups of people that rely on the balance sheet. Current and potential investors - as well as current and potential creditors - rely on the balance sheet to work closely with the other members of the Financial Statements to give them a performance that they can use to judge whether or not they want to join the fan base and invest themselves in the group. When it is all said and done, it is easy to see why without Bash, the Financial Statements just wouldn't be complete!