The Balance Sheet Decoded: 30 Essential Accounting Terms

The balance sheet is one of the most important financial statements for any business, providing a snapshot of a company's financial health at a single point in time. For professionals in any department, understanding its key components is crucial for making informed decisions. This guide will decode 30 essential accounting terms you'll find on a balance sheet.

These terms form the foundation of financial literacy. The BizVoc app has dedicated decks for Accounting and Finance to help you master this critical vocabulary with spaced repetition.

The Accounting Equation: Assets = Liabilities + Equity

Everything on the balance sheet revolves around this fundamental equation. Let's break down each component.

Assets (What a Company Owns)

• Current Assets

  Assets that are expected to be converted into cash within one year.

  Cash, accounts receivable, and inventory are the primary current assets for our retail business.
• Cash and Cash Equivalents

  The most liquid assets, including currency, bank deposits, and short-term, highly liquid investments.

  The company maintains a healthy level of cash and cash equivalents to cover immediate expenses.
• Accounts Receivable (AR)

  Money owed to the company by its customers for goods or services already delivered.

  We need to improve our collection process to reduce our outstanding accounts receivable.
• Inventory

  The value of goods available for sale.

  The high level of inventory suggests a potential slowdown in sales.
• Prepaid Expenses

  Payments made in advance for goods or services to be received in the future (e.g., insurance, rent).

  Our annual insurance premium is recorded as a prepaid expense and recognized monthly.
• Non-Current Assets (or Fixed Assets)

  Long-term assets that are not expected to be converted into cash within a year.

  The factory building and machinery are the company's main non-current assets.
• Property, Plant, and Equipment (PP&E)

  Tangible, long-term assets used in business operations.

  The company invested $5 million in new PP&E to upgrade its production line.
• Depreciation

  The expense of using an asset over time. It represents the reduction in value of a fixed asset.

  The annual depreciation on our vehicle fleet is calculated using the straight-line method.
• Goodwill

  An intangible asset representing the excess of the purchase price of a company over the fair market value of its identifiable net assets.

  Goodwill from the acquisition appeared on our balance sheet for the first time this year.
• Intangible Assets

  Non-physical assets such as patents, trademarks, copyrights, and goodwill.

  The company's brand recognition is a significant, though unquantified, intangible asset.

Liabilities (What a Company Owes)

• Current Liabilities

  Obligations that are due within one year.

  We have sufficient current assets to cover our current liabilities.
• Accounts Payable (AP)

  Money the company owes to its suppliers for goods or services received.

  The accounts payable department ensures that all vendor invoices are paid on time.
• Accrued Expenses

  Expenses that have been incurred but not yet paid (e.g., salaries, taxes).

  Wages for the last week of the month are recorded as an accrued expense.
• Short-Term Debt

  Loans or other borrowings that are due within one year.

  The company took out a short-term debt facility to manage seasonal cash flow needs.
• Notes Payable

  A written promissory note. Under this agreement, a borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined period.

  The company has a significant amount of notes payable due in the next quarter.
• Unearned Revenue

  Money received by a company for a service or product that has not yet been delivered or provided.

  Annual subscriptions are initially booked as unearned revenue and recognized over the 12-month period.
• Current Portion of Long-Term Debt

  The portion of long-term debt that must be paid within the next year.

  Next year's principal payment on our main loan is listed under the current portion of long-term debt.
• Non-Current Liabilities

  Obligations that are not due within one year.

  Long-term bank loans and bonds payable are our primary non-current liabilities.
• Long-Term Debt

  Loans and other obligations with a maturity of more than one year.

  The company issued long-term debt to finance the construction of its new headquarters.
• Bonds Payable

  A form of long-term debt where a company issues bonds to investors.

  The interest on the bonds payable is paid semi-annually.
• Deferred Tax Liability

  Taxes that are assessed or due for the current period but have not yet been paid.

  Differences in depreciation methods for tax and accounting purposes created a deferred tax liability.

Equity (The Owners' Stake)

• Shareholder Equity

  The corporation's owners' residual claim on assets after deducting liabilities. It's the net worth of the company.

  A history of profitability has led to strong shareholder equity on the balance sheet.
• Common Stock

  Represents ownership shares in a corporation, giving shareholders voting rights.

  The company has 10 million shares of common stock outstanding.
• Preferred Stock

  A class of ownership that has a higher claim on assets and earnings than common stock, usually with no voting rights.

  Investors in the preferred stock receive a fixed dividend.
• Additional Paid-In Capital (APIC)

  The excess amount that investors pay over the par value of a stock.

  The APIC account increased significantly after the recent stock offering.
• Retained Earnings

  The cumulative net earnings or profits of a company after accounting for dividend payments.

  We plan to reinvest our retained earnings back into the business to fund growth.
• Treasury Stock

  Stock that the issuing company has repurchased from the open market, reducing the number of outstanding shares.

  The purchase of treasury stock is a common way to return capital to shareholders.
• Dividends

  A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.

  The board declared a quarterly dividend of $0.25 per share.
• Book Value

  The net asset value of a company, calculated as total assets minus intangible assets and liabilities.

  The company's stock is currently trading at three times its book value.
• Working Capital

  The difference between current assets and current liabilities. It's a measure of a company's short-term liquidity.

  Positive working capital indicates a company can meet its short-term obligations.

Improve Your Financial Fluency with BizVoc

Understanding these terms is a critical step towards financial literacy. Whether you're in finance or just want to better understand business performance, consistent practice is key. For more, check out our list of 50 essential finance terms.

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