Accounting For Dummies®, 4th Edition

5.1. Understanding That Transactions Drive the Balance Sheet

NOTE

A balance sheet is a snapshot of the financial condition of a business at an instant in time — the most important moment in time being at the end of the last day of the income statement period. If you read Chapter 4, you'll notice that I continue using the same business example in this chapter. The fiscal, or accounting, year of the business ends on December 31. So its balance sheet is prepared at the close of business at midnight December 31. (A company should end its fiscal year at the close of its natural business year or at the close of a calendar quarter — September 30, for example.) This freeze-frame nature of a balance sheet may make it appear that a balance sheet is static. Nothing is further from the truth. A business does not shut down to prepare its balance sheet. The financial condition of a business is in constant motion because the activities of the business go on nonstop.

The activities, or transactions, of a business fall into three basic types:

• Operating activities: This category refers to making sales and incurring expenses, and also includes the allied transactions that are part and parcel of making sales and incurring expenses. For example, a business records sales revenue when sales are made on credit, and then, later, records cash collections from customers. Another example: A business purchases products that are placed in its inventory (its stock of products awaiting sale), at which time ...