The balance sheet is an important financial statement that an enrolled agent must review, in a sense it is a snapshot of a firm’s accounting value on a particular date, as though the firm stood momentarily still. The balance sheet has two sides: On the left are the assets and on the right are the liabilities and stockholders’ equity. The balance sheet states what the firm owns and how it is financed. The accounting definition that underlies the balance sheet and describes the balance is: Assets= liabilities+ stockholders equity. Understanding liabilities and shareholder equity is extremely important for an enrolled agent and something you want to be aware of how to do.
We have put a three-line equality in the balance equation to indicate that it must always hold, by definition. In fact, the stockholders’ equity is defined to be the difference between the assets and the liabilities of the firm. In principle, equity is what the
stockholders would have remaining after the firm discharged its obligations, as you will learn in the fast forward academy course. The assets in the balance sheet are listed in order by the length of time it normally would take an ongoing firm to convert them into cash. The asset side depends on the nature of the business and how management chooses to conduct it. Management must make decisions about cash versus marketable securities, credit versus cash sales, whether to make or buy commodities, whether to lease or purchase items, the types of business in which to engage, and so on. The liabilities and the stockholders’ equity are listed in the order in which they would typically be paid over time. Keep in mind that assets and liabilities can change over time and often do. Therefore, if there are major changes in the liabilities of a company or changes in a companies accounting, it is important to make the board and investors aware of the changes.