Financial Statement Basics: What is a balance sheet?

 Financial Statement Basics: What is a balance sheet?


This four-part online series on financial statement fundamentals was created based on the Credit and Finance section of Produce Blueprints' July-August 2022 issue. Click here to read the complete issue online.

What the financial world refers to as "financial statements" are four documents: the balance sheet, income statement (or profit and loss statement), cash flow statement, and statement of owner's equity.

Each is intertwined with the others and required to conduct a thorough analysis of a company's financial status.

The balance sheet displays a company's financial situation as of a particular date. It consists of the owner's equity, obligations, and assets.

Equities are rights or claims against the resources that a firm owns as assets. An organization with $100,000 in assets will also have $100,000 in claims against those assets. Assets = Equities is the connection, expressed as an equation.

Equities can be further broken down into claims made by owners or claims made by creditors. Liabilities refer to claims made by creditors, whereas owner's equity refers to claims made by owners. After that, the formula can be expanded to read assets = liabilities plus owner's equity.

The "fundamental accounting equation" states that assets must equal the total of the liabilities plus the owner's equity. The fundamental structure of a balance sheet, which illustrates the overall flow of this equation, is shown in Table 1.


     

Assets

As shown in Table 1, the asset component of the balance sheet can often be divided into three categories: current assets, fixed assets, and other assets.

Current assets are funds and other resources that can be expected to be converted into cash, sold, or used by the company's operations within a year of the balance sheet date.

Accounts receivable, inventories, marketable securities, and prepaid expenses are a few examples of other current assets.

The ability of a corporation to meet its obligations and expenses depends heavily on its current assets, which are also its most liquid assets (liquidity refers to how easily these assets may be turned into cash).

Fixed assets are material possessions that are employed by the company, have a long lifespan, and are not intended for sale. They could consist of lands, structures, machines, tools, furnishings, and fittings. These assets, which are needed to run the company but are less liquid,

Intangible assets, often known as other assets or intangible property, can be goodwill, patents, and/or trademarks. Various notes due from officers or staff members of the corporation, as well as the cash surrender values of insurance, may also be included. They are also less liquid.

Liabilities

 

The opposite of current assets is current liabilities. They are debts that should be able to be settled within a year, either with current assets already on hand or with other current liabilities.

Accounts payable, the utilization of a credit line, wages and salaries, taxes, and current maturities of long-term debt are some examples of current obligations.

When assessing a company's liquidity, or its capacity to meet payments projected to become due within a year, the link between current assets and current liabilities is crucial.

The chance of paying current liabilities is positive when current assets exceed current liabilities; when the opposite is true, liquidity may be an issue.

Obligations with a one-year payoff horizon are referred to as long-term liabilities. These obligations frequently take the form of a mortgage, car note, or another type of debt connected to bank funding.

Equity

Owner's equity, which represents the owner's claim on the company, is calculated by subtracting all liabilities from all assets. It is the value that remains after deducting all liabilities from all assets.

Owner's equity is essentially an ownership stake that rises with business success or extra paid-in capital and falls with business failure or capital withdrawals. The ideal owner's equity figure is one that is positive and is derived through profits.

The second item in this series will address the important parts of the income statement and how they relate to equity performance, costs, and profitability.

Liquidity

Being able to see the large picture via the specifics of a company's financial statements, or in this case, the company's balance sheet, is essential for managing a business for financial health.

It's critical to understand a company's liquidity and leverage as of the date given. Leverage is the term for the amount of borrowed money that a business uses to increase the size of its asset base.

A company's balance sheet condition will demonstrate its capacity to research and assess financing choices, pay short-term obligations on time, and tolerate unforeseen costs.

 

A comparative balance sheet for the two years of 2020 and 2021 that finish on December 31 is shown in Table 2. As we continue our analysis, we will refer to this table.

*Take note that the basic accounting equation is balanced for each period: as of December 31, 2021, total assets were $350,000, total liabilities were $200,000, and total equity was $150,000. The year 2020 will be the same.

Comments

Popular posts from this blog

Cara meng-export dan import data MYOB

Laporan Keuangan Dalam Akuntansi

Pertanyaan Yang Sering Muncul Saat Interview Kerja