The balance sheet also known as a statement of financial position provides a summary of the company’s assets, liabilities and the amount owned by shareholders. A balance sheet helps to find out the worth of a business.
It helps investors to analyse the company’s assets and its liabilities through which they will be able to make meaningful investment decisions. It tells the investors how much money a company has (assets), how much it owes (liabilities) and the net worth or the book value of the business.
A balance sheet consists of rows and columns that list a company’s assets, liabilities and the amount owned by shareholders. We get to know the financial position of a business by analysing the balance sheet.
The main formula behind the balance sheet is Assets = Liability + Shareholders Equity.
This means that the assets which are used to operate a company are balanced by the company’s obligations and the money brought in by the shareholders.
The assets category is further classified into two types- Current assets and Noncurrent Assets.
Current assets are those types of assets which have a lifespan of one year or less and are liquid in nature meaning that they can be converted into cash easily. The examples of current assets include cash and cash equivalents, inventory, receivables etc. These are liquid and can be converted into cash easily. Receivables are the short term obligations which are owed to the company by its clients for the goods and services provided by the company to them.
Non-current assets are those types of assets that have a lifespan of more than one year and cannot be turned into cash easily. They can be further divided into tangible and intangible assets on the basis of their tangibility. Tangible assets are those assets which have physical existence and include buildings, machinery, furniture etc. Intangible assets are those assets which do not have physical existence and include brand names, trademarks etc.
The liabilities can also be divided into current and non-current liabilities based on the duration of the obligations.
Current liabilities are those obligations which should be met by the company within a year. The examples of current liabilities include short term borrowings, interest payments, payables etc. Payables are the short term obligations which are owed by the company to its suppliers for the supply of raw materials.
Non-current liabilities are those obligations which are due after a period of one year. These include long term borrowings, debentures etc.
Shareholder’s equity is the amount of money invested in the business. It also includes retained earnings which are the company’s profit over the years which has not been distributed to the shareholders in the form of dividend and is reinvested in the business.
From the above balance sheet, we can observe that it is broken into two- Assets, which are on top and Equity & Liabilities, which are at the bottom.
It is also evident from above that the total of assets is equal to the total of liabilities thereby satisfying the formula- Assets = Liability + Shareholders Equity.
We can also observe that the assets and liabilities are organized by how current the account is by starting from the most liquid to the least liquid.
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