A balance sheet is an important financial statement. It gives a bird’s eye view of the financial situation of a company at a given point in time, which is usually the end of an accounting period. It comprises of Assets, Liabilities and owners’ equity. At any given point in time, assets must equal liabilities and owners’ equity.
Why is a Balance Sheet Important?
Snapshot: A balance sheet gives a snapshot of a company’s financial position. It is, in effect, the company’s face to the world.
Potential for expansion: A balance sheet is a great tool for a business owner to plan ahead. Based on the statistics, an owner can plan for expansion or firm up the cash position to tide over any imminent crisis. A balance sheet of the past years can help analyze trends of payables and receivables.
To attract lenders: A balance sheet is an important tool along with Profit and Loss statement that is mandatory if you approach for equity funding or need bank loans for your business.
Components of a Balance Sheet
A Balance Sheet details assets, liabilities and owners’ equity.
Assets: These include everything that is owned or owed to the business that is of monetary value. These consist of both long-term and short-term assets. Long-term assets are typically those that cannot be sold off quickly for liquidity. Short-term assets are assets that can be liquidated at a short notice.
Here are some of the components of assets:
Fixed Assets: These are typically land, building, machinery, equipment and vehicles that have monetary value but are not expected to be realized any time in the near future. Except for land, all others have their values depreciated every year.
Short-term assets or Current assets: Cash in checking accounts, Accounts Receivables , Stock investments, and Notes that are due to the company in the near future (within one year) are all of monetary value to the company. These can be liquidated at short notice.
Total assets: These signify the value of your long-term and short-term assets in dollar terms. This will give you an understanding of the worth of your business.
Liabilities and owners’ equity: These include all the money that the business owes to creditors, banks, vendors and others that are payable within the next year. This also includes the owners’ equity.
Some components of liabilities are Accounts Payables, Notes Payables, current liabilities, long-term liabilities (these are owed by the business since more than a year), mortgage note payables and accrued payroll and withholding.
Current liabilities: These comprise of accounts payable, current amount owed to loans, withheld taxes and payroll liabilities. All these are owed by the company in the short term or in the current year.
Long-term liabilities: These are owed by the business in the long-term which is tenure beyond the current financial year. These could include balance on loans, mortgages and leases beyond the current year.
Owners’ equity: These comprise of the initial stockholders’ equity which mostly is the initial money invested into the business.
Stock: This is stock issued as investment into the business. It could be made at the start of the business or later.
Retained Earnings: This is the profit after taxes reinvested in the business after making dividend payouts to the stockholders.
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