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.
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.
- Accounting Info: U.S. GAAP Codification of Accounting Standards
- The CPA Journal: Dual Reporting Under U.S. GAAP and IFRS
- Infosys: Part I -- Financial Information
- New York Society of Certified Public Accountants: Exhibit 2 - Basic Formats and Forms
- The CPA Journal: Current Materiality Guidance For Auditors
- Southeast Missouri State University: Materiality
- Financial Accounting Standards Board: About Us
- Photo Credit Prykhodov/iStock/Getty Images
Who Founded the GAAP?
If you're an accountant or studying accounting as a profession, you have probably heard of the GAAP (Generally Accepted Accounting Principles). This...
Difference Between a Classified & an Unclassified Balance Sheet
A balance sheet is one of four primary financial statements created in most organizations. A balance sheet is a statement that contains...
What Is Capitalized Cost on a Balance Sheet?
Utility bills are listed as expenses on a business's balance sheet. But what if you pay your company's power bill a year...
How to Record an Accrued Bond Interest Expense on a Balance Sheet
A company records accrued bond interest expense on its balance sheet when it issues bonds to raise funds. The bonds may be...
How Does Work in Progress Effect the Balance Sheet?
Work-in-Progress is an inventory item found in most manufacturers' financial reporting. It is an important piece of the manufacturing process because cost...
What Are Prepaid Expenses/Prepaid Revenues and How Are They Reported on the Balance Sheet?
If the global economy, millions of individuals prepay for goods and services -- whether it be for travel reservation or insurance coverage,...
Presenting Stock Warrants on a Balance Sheet
Warrants are securities that allow the owner to buy a set number of shares of common stock at a price higher than...
How Do Convertible Bonds Affect a Balance Sheet?
A balance sheet is a financial document that corporations share with investors to help them value the company. The balance sheet lists...
How to Present Deferred Tax Assets & Liabilities on a Balance Sheet
Deferred tax assets and liabilities are the direct results of deferred taxes, which are based on temporary differences in recorded revenues or...
How to Create a Classified Balance Sheet
In order to create a classified balance sheet, there need to be three components, including assets, liabilities and owner's equity. Find out...