Funda’s of the Balance Sheet

My understanding of balance sheet as with my other class mates during my +2 stage was that balance sheet is an account which never balances during exams leaving you unbalanced when your exam results are out !!!!

That was a lighter side of the balance sheet but as a concept “A balance sheet reveals a company's assets, liabilities and owners' equity (net worth)”. The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements. It is important to note that a balance sheet is a snapshot of the company’s financial position at a single point in time. How the Balance Sheet Works

The main formula behind balance sheets is:
Assets = Liabilities + Shareholders Equity
This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.

• Hence, assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets.

Owners' equity, referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.

• Types of Assets

Current Assets: Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes are: cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks.

Accounts receivable consists of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit, which then are held in this account until they are paid off by the clients.
Inventory represents the raw materials, work-in-progress goods and the company’s finished goods

Non-Current Assets: Non-current assets, are those assets that are not converted into cash easily, expected to be turned into cash within a year and/or have a life-span of over a year.
They thus include tangible assets such as machinery, computers, buildings and land.
Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated.Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

• Types of Liabilities :

On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term.

Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.
Current liabilities are the company’s liabilities which will come due, or must be paid, within one year. This is comprised of both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan.

Shareholders' Equity :Shareholders' equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder’s equity account. This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.

Organizing the Balance Sheet:Another interesting aspect of the balance sheet is how it is organized. The assets and liabilities sections of the balance sheet are organized by how current the account is. So for the asset side, the accounts are classified typically from most liquid to least liquid. For the liabilities side, the accounts are organized from short to long-term borrowings and other obligations.

Ending this learning series on balance sheet and Income sheet with a prayer that all your balance sheets will balance in the ensuing future !!!! I am reminded about a simple advice from my Accounts Professor Mr.Sanjay Sahani that the basics and the summation of accounting lies in the following golden rule:

• Debit: All expenses, losses and Assets.
• Credit: All incomes,gains and Liabilities.

Follow the above golden rule to achieve academic excellence in accounts. Enjoy accounting

Disclaimer: The author of this page is not a registered financial advisor, and you should not construe anything written here to be investment advise. You should consult a qualified broker or other financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. No representation is being made that any investment made on the basis of data or information on this blog will result in profits. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.