Did you know that every publicly traded business has to publish a balance sheet? The balance sheet is a document that shows a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It is one of three financial statements that businesses are required to file, and it is important for owners and investors to understand what it is telling them about the business. In this blog post, we will discuss ASC 210: The Basics of the Balance Sheet. We will explain assets, liabilities, and shareholders’ equity, and we will discuss when offsetting is allowed. Stay tuned!
What is GAAP?
GAAP is a common set of accounting principles, standards, and procedures. Public companies in the United States must follow GAAP when they compile their financial statements. The Financial Accounting Standards Board (FASB) maintains GAAP. The board issues new rules as necessary to ensure that GAAP remains up-to-date.
Where Can I Research GAAP?
FASB provides free online access to the Accounting Standards Codification, which is the only authoritative source for US GAAP. FASB and the AICPA also provide access to other authoritative literature that supplements the GAAP Hierarchy.
To access the Accounting Standards Codification, visit asc.fasb.org. Anyone can access the codes using a basic account. For more advanced features you can set up a professional account. If you work at a company subject to GAAP rules, your company likely has a professional account.
What is ASC 210?
ASC 210 is a set of guidelines that public companies in the United States must follow when compiling their financial statements. The guidelines cover the basics of the balance sheet.
The Balance Sheet is a snapshot of a company’s assets, liabilities, and equity at a point in time. Assets are the resources of a company including items such as cash, real estate, and inventory. Liabilities are amounts you owe to other parties such as loans and vendor payments. Stockholder’s equity is the value of the company excluding liabilities.
ASC 210 also includes a section on offsetting, which explains when it is allowed and why it is important.
ASC 210-10: Overall
This section walks through the rules for constructing a balance sheet or statement of financial position (used interchangeably in the codes). Most importantly, this section defines that assets must be split into current assets and current liabilities to avoid aggregating at too high a level.
This section also sets definitions for the sections required on the balance sheet such as cash, inventory, and working capital.
ASC 210-20: Offsetting
In general, you can’t offset assets and liabilities in a financial statement (i.e. reducing the value of a building by the amount of the mortgage on the building, but not listing the mortgage as a liability). The codes allow offsetting when the right of setoff exists. Right of setoff is when the debt holder has the right to discharge the debt by applying an amount against the debt that they owe.
Recent changes to GAAP require companies to disclose offsets in their financial statements by reporting both the gross and net amounts in their external reporting package.
Why Does It Matter?
The presentation and disclosure of financial statements can have a major impact on the decisions made by users of those statements. For example, if a company or individual is considering investing in another company, the investor will want to know whether that company is a going concern.
ASC 210 follows the framework set by ASC 205 and requires companies to adequately disclose their account balances. Most critically, companies can’t aggregate balances at too high a level. You can’t just list “Assets,” you have to at least list current assets (inventory) separately from fixed assets (buildings). The more complex your business, the more disclosures the codes require.
This section ensures that investors have enough information to make informed decisions and that companies cant mask their performance.
In short, ASC 210 is a set of guidelines that public companies in the United States must follow when compiling their financial statements. The guidelines cover the basics of the balance sheet, which is a snapshot of a company’s assets, liabilities, and equity at a point in time.
ASC 210 is important because it ensures that investors have enough information to make informed decisions and that companies can’t mask their performance. Following these guidelines is crucial for public companies in the United States.
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