A balance sheet is often referred to as a “statement of financial condition” or a “statement of financial position.” It is issued by a business or entity along with other financial statements, such as the income statement or the statement of cash flows. The balance sheet can help you understand the financial condition of a business at a particular time, but not over a cumulative period. The balance sheet is issued at the end of a reporting period and contains both the assets and the liabilities of a business. Cash is an asset account on the balance sheet.
Cash is reduced by the payment of amounts owed to a company’s vendors, to banking institutions, or to the government for past transactions or events. The liability can be short-term, such as a monthly utility bill, or long-term, such as a 30-year mortgage payment. Payment toward a liability results in a journal entry to decrease cash and also to decrease the liability. The reduced cash balance after this payment will be reflected on the balance sheet at the end of the period in which the payment occurred. A profitable company will never run out of cash.
A business may decide to pay cash to acquire an asset instead of incurring debt. This may be done to keep interest charges at a minimum or to minimize debt obligations, reports Accounting Tools. The cash payment to acquire an asset results in a journal entry that will decrease cash, but will increase the property, plant and equipment account. This reduction of the cash balance will be reflected on the balance sheet at period end.
A prepaid expense is the advance payment for a future benefit that has not occurred. The balance of the prepaid account includes unused portions of any advance payments. A business may pay such expenses as property taxes or insurance premiums in advance of when the actual expenses occur, suggests Corporate Finance Institute. In the case of insurance premiums, the business may be required to pay the entire premium in advance.
As an example, a premium that covers January 2022 to December 2022 may be required to be paid in full on January 5, 2021. This advance payment will result in a journal entry to decrease cash. The reduction of the cash balance as a result of advance payments will be reflected on the balance sheet at period end.
A cash dividend is a payment from a company to its stockholders as a return on their investment in the company. At time of payment, the balance of the cash account is decreased while the dividends payable account is decreased. The reduction of the cash balance for the dividend payment will be reflected on the balance sheet at the end of the period in which the payment occurred.