WFU Law School
Law & Valuation
3.1 Introduction to Accounting

3.2 Balance Sheet

This section looks at the balance sheet - the most fundamental financail statement. The balance sheet is a detailed look at the basic accounting formula:

Assets = Liabilities + Equity

(where "equity" refers to the net worth or ownership interest in the business).

3.2.1 - Balance sheet items

The balance sheet is a snapshot of a company's -- assets(what it owns), liabilities (what it owes), owners' equity (net worth - what is left over for the owners). (More 3.2.1>>)

3.2.2 - Balance sheet analysis

Balance sheets are a snapshot of company well-being. You can learn a lot by looking at the notes that accountants include with the balance sheet, to give context like scribblings on the back of a photograph. You should also focus on changes between balance sheets over time, to give a sense of direction and motion like a series of images in time-lapse photography. Finally, you can see more by analyzing the ratios of various items in the balance sheet, to measure business well-being like a comparison of colors or shadow in a photograph to decide whether the sun is rising or setting. (More 3.2.2>>)

3.2.3 - Accumulated retained earnings statement

The balance sheet is a static view of the financial sistuaion of the business. It changes from period to period as the business makes or loses money.

Retained earnings is an accountant's term used to refer to earnings retained by the business and not distributed to shareholders as dividends. (Lawyers call this earned surplus.) Earnings kept in the business are accumulated from accounting period to accounting period. (More 3.2.3>>)

From Robert W. Hamilton, Fundamentals of Modern Business 204-08 (1989).


Chapter Subsections
3.1 Introduction to Accounting

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004