Balance Sheet or Statement of Financial Position – Definition:
The balance sheet (statement of financial position) is a statement (not an account) which shows financial position of an entity at a certain date. It is one of the most important financial statements prepared by a business. It is a snapshot of what an organization owns (assets) and owes (liabilities) at a specific date.
Types of Balance Sheet:
There are two types of balance sheet. These are given below:
(1) Balance Sheet – Horizontal Style and its Format:
Though sometimes balance sheet is prepared in two sided format, but do not think that it is a ledger account. It is presented in this format purely for ease of understanding. It is actually the expression of the accounting in a more detailed and organized form. We can see that balance sheet prepared below verifies the accounting equation.
It is called balance sheet because its two sides always balance. This makes sense as a business does not own anything at its own and it has to pay for all of its assets by either getting them from owner’s (capital/equity) or borrowing money (liabilities) from outsiders.
(2) Balance Sheet – Vertical Style and its Format:
This is in fact another way of expressing accounting equation. Instead of accounting equation being applied horizontally across the page, it may be written down the page. The two totals are directly underneath instead of being side by side.
An amount in parentheses indicates a negative amount. In this case liabilities which are shown on the other side of the equation are subtracted from assets to determine amount of capital.