All You Need to Know about Balance Sheet
Balance Sheet – What Is It
When we talk about balance sheet we are referring to an accounting statement that helps to
find out details about the financial health and conditions of a company, big or small.
It takes into account the total assets and total liabilities.
It also reflects upon the total debts, owner’sequity and that
is for both shareholders and insiders.
When it comes to accounting of a company,
there are three important financial statements.
They are cash flow statement, trading and profit & loss account and finally Balance Sheet.
The balance sheet is the most important of the three financial
statements because it helps to find out the overall financial health of the company.
The others are basically income statements and cash flow statements.
The cash flow statement, income statement and balance sheet must be a part of the financial reports
that are submitted to share holders and also government regulators. Sole proprietorships and
partnerships are not obligated to file or prepare these reports, but doing so is recommended.
It could become importance internal financial documents for the persons running the business.
It could help to find out more about the health of these private businesses.
Balance Sheet Equation
The most important equation for balance sheet is total liabilities plus equity of shareholders = total assets.
In other words, the total assets of an organization should be equal to the total of shareholder equity and total liabilities.
If capital is in excess of liabilities it is generally considered as being a part of shareholder equity.
If a company has been able to generate revenue of around $10 million and has total liabilities of $8 million,
the excess of $2 million will became part of the capital that should belong to the shareholders and founders. Hence,
if the company decides to liquidate itself then the $2 million becomes a liability of the firm towards its shareholders
and therefore it is shown as a liability.
Breakdown of Balance Sheet
When we look at a balance sheet we find the current assets are listed first.
These are referred to as liquid assets and are usually listed in order of ease of liquidity.
The ease of liquidity could range from one year of less and these are shown on the top.
They might include inventory, cash or things that are equivalent to cash, accounts receivables, pre-paid expenses and inventory.
Total assets are holdings than take time to be converted into cash and within one year.
They include equipments, land, intellectual properties and marketable securities.
The liabilities section has current liabilities at the top. They include debts that fall due now and within a year.
Examples are interest outstanding, rent, wages, dividends and so on. Total liabilities follow and they include interest and principal due on bonds,
pension liabilities, and deferred taxes amongst others.
Total equity is also called as shareholder equity and is known as net assets.
This is the asset that becomes payable to the shareholders once all liabilities have been paid off.
This section could include treasury stock, retained earnings, additional paid-in capital and preferred stock.
These are funds that could be use for reinvesting in the business or for paying off debt.
Treasury stocks are referred to shares that the company has never issued or repurchased and this could
come in handy in case of a hostile takeover bid.
Preferred stock is different compared to common stock and is a separate item.
Additional paid up capital is that part of investment that shareholders have brought into
the company over and above preferred stock account.
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