The balance sheet shows all the things an organization owns (assets) and all the things the organization owes to somebody (liabilities). There is one more category – equity. Equity accounts for ownership of things. For example, retained earnings and designated funds belong to this. I will explain the terms later.
All assets must equal all liabilities and equity. The accountant usually turns this equation a little: equity = assets – liabilities.
Assets (items with a cash value) are being sorted from the most liquid to the least liquid, meaning how easy it is to cash them in. For example, a bank account or petty cash will appear at the top of the balance sheet. Next are CDs (short term investments), followed by investments you plan on holding for longer periods. Next Accounts receivables (money owed to us), and non-cash items such as equipment and land / buildings we own. This list will show the reader the value of all the things an organization owns.
Liabilities are things an organization owes to someone else. The items on this list are also sorted by how soon they have to be paid back. Payroll tax liabilities are higher in the listing than a mortgage. Accounts payable (money you owe for items purchase and not paid) is also on this list.
The last item is equity. The actual ownership value of an organization. This item is tricky to understand and made up by accountants to allow the “double entry” required by the General Accepted Accounting Principles (GAAP). Remember the funny formula I showed earlier. For example, a build owned will show up as an asset because it has a cash value, it also will come under equity because the organization owns it. Another equity item, and unique to non-profits, are designated fund accounts. In this section money is accounted for earmarked for a particular purpose. A congregation might use designated funds for money collected for a youth trip or new choir robes.
The balance sheet is the most abstract of all financial statements. I would recommend taking it for the time being as a reference. As we move along, I will reference this document, and the puzzle pieces will fall into place.
a|hirsch