What is balance sheet?
What is balance sheet?
A balance sheet is a financial statement that lists the assets and liabilities of a corporation at a certain point in time. It is one of the three primary financial statements—the other two being the income statement and cash flow statement—that are used to assess a company’s performance.
Investors and other stakeholders can use a balance sheet as a reference to assess an organization’s financial standing. They can use it to compare current assets and liabilities to assess the company’s liquidity or evaluate its return on investment. A business’s development can also be demonstrated by contrasting two or more balance sheets from various points in time.
Stakeholders might also comprehend the company’s possibilities with the use of this information. When a corporation applies for loans, for instance, the balance sheet might be used as evidence of creditworthiness. Creditors can determine whether the company can satisfy its short-term obligations and how much financial risk it is taking by examining whether current assets are bigger than current liabilities.
Example of a balance sheet
Numerous accounts are shown on a balance sheet and are divided into assets and liabilities. A balance sheet’s format will vary slightly depending on the business, just like it does with any other financial statement. The balance sheet sample that follows shows all the fundamental accounts divided into assets and liabilities to make both sides of the sheet equal.
What are the main elements of a balance sheet?
Assets: A thing that a corporation holds and that is advantageous to its expansion is considered to be an asset. Assets can be categorised according to their usability, physical existence, and convertibility.
1. Convertibility: This refers to how easily an asset can be turned into cash. Assets are further divided into current assets and fixed assets based on convertibility.
- Current assets: Assets that are easily convertible into cash or cash equivalents within a year are referred to as current assets. Examples include stocks, marketable securities, and short-term deposits.
- Fixed assets: Assets that cannot be quickly or easily converted to cash are known as fixed assets. For instance, structures, devices, tools, or logos.
2. Physical presence: There are two categories of assets: physical and intangible.
- Physical assets: Assets that are visible and tactile, such as furniture, office supplies, machinery, and structures.
- Intangible assets: Assets with no physical existence, such as patents, brands, and copyrights, are known as intangible assets.
3. Application: Assets can be divided into operational and non-operating categories.
- Operational assets: Assets that are needed to run a business, or operating assets. for instance, structures, tools, and equipment.
- Non-operating assets: Short-term investments or marketable securities that are not required for ongoing business operations are referred to as non-operating assets.
Liabilities: Liabilities are the debts owed by the business to third parties. This includes loans and other financial commitments that result from commercial dealings. Companies fulfil their obligations by giving the other party a cash refund or a comparable service. On the balance sheet’s right side are the liabilities. Liabilities can be categorised as either current or non-current depending on the situation.
1. Current liabilities: These are obligations or debts that must be paid off within a year. Accounts payable, interest payable, and short-term loans are examples of current liabilities, which are often referred to as short-term assets.
2. Non-current Liabilities: These are debts or commitments with a one-year or longer due date. Bonds payable, long-term notes payable, and deferred tax liabilities are examples of non-current liabilities, sometimes known as long-term liabilities.
What is Owner’s Equity/ Earnings?
Total assets less total liabilities equals owner’s equity. In other words, it is the amount that can be distributed to shareholders following the payment of obligations and the liquidation of assets. One of the most popular ways to show a company’s net worth is through equity. Retained earnings, which represent a predetermined portion of the shareholder equity that must be distributed as dividends, are included in the shareholders’ equity.
Either a positive or negative equity value is possible. If the company’s shareholder equity is positive, then its assets are sufficient to cover its liabilities. If it’s lower than zero, liabilities outweigh assets.
What is General sequence of accounts in a balance sheet?
In accordance with Generally Accepted Accounting Principles (GAAP), current assets and liabilities must be shown separately. Similar to how long-term obligations must be shown separately from current liabilities. Cash, accounts receivable, inventory, and prepayment of expenses are examples of current assets. Long-term investments, fixed assets, and intangible assets are examples of long-term assets.
Long-term liabilities include long-term loans, pension fund liability, and bonds payable, whereas current liabilities include long-term debt, interest payable, salaries, and customer payments.
Liabilities will be placed in ascending order, while asset accounts will be listed in descending order of maturity. Accounts are grouped under shareholder’s equity in decreasing order of importance.
What is the formula & equation of a balance sheet?
The accounting equation, which has assets on one side, liabilities on the other, and shareholder’s equity balancing both sides, is followed by the balance sheet equation.
Assets = Liabilities + Shareholder’s Equity
According to the equation, a business pays for what it owns (assets) by taking from shareholders or investors, taking loans as a service (liabilities), or both (equity).
