Balance Sheet

The balance sheet (BS) is one component of the financial statements. A standard set of financial statements includes the balance sheet, income statement, statement of cash flows, and associated footnotes. These statements can be issued on a daily, monthly, quarterly, or annual basis. If accounting is the basic language of business, then financial statements are the fundamental scorecards that report organizational performance, and the balance sheet is the operational snapshot of an organization's financial situation at a particular point in time (for example, organization X's balance sheet as of December 31, 2008). The income statement and statement of cash flows depict the activities of the organization over a period of time (such as organization X's income statement for the year ending December 31, 2008).

A typical balance sheet has three sections: assets, liabilities, and owners’ equity. Assets are resources the organization owns that will provide the organization with future benefits (that is, that have a quantifiable monetary value), such as cash, equipment, and buildings. Liabilities are organizational obligations that will require future cash outlays, such as accounts payables, pension liabilities, and long-term debt. Owners’ equity has several components. Owners’ equity includes the cumulative effect of common and preferred stock transactions and retained earnings. Retained earnings represent, since the organization's inception, the total net income earned less any dividends that have been paid to owners.

[Page 36]The balance sheet also has an order (structure) to how individual elements are classified. For example, all asset entries are listed on the balance sheet in order, from current to long-term assets. Current assets are those assets that are the most liquid (can most easily be turned into cash). So on a typical balance sheet, items such as cash and accounts receivable are listed under current assets, whereas items such as property, plant, and equipment are listed under long-term assets. Liabilities are also classified from current to long term on the balance sheet.

Another way to look at the balance sheet is in equation form: Assets = liabilities + owners’ equity. Under the dual-entry system of accounting, assets must always equal liabilities plus owners’ equity. So if assets equal $100,000, liabilities equal $30,000, and owners’ equity must equal $70,000. In other words, this equation says that all company assets, accumulated throughout the years, are owned (or claimed) by some entity. A portion of the assets is claimed by creditors (these are liabilities), and some of the assets are claimed by the owners (owners’ equity).

Although financial statements, including the balance sheet, are based on a number of different assumptions, it is important that health care professionals understand that accounting financial statements provide valuable data that are reliable, comparable, and consistent. In addition, financial statements provide us with timely data that enhance our ability to assess future cash flows, assist in decision making (an information role), and monitor debt covenants and bonus arrangements (a stewardship role).