What Is a Balance Sheet?

By admin Nov 29, 2023
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A balance sheet gives you a snapshot of your company’s financial standing at one point in time. It reports assets, liabilities and shareholder equity.

Assets are classified based on convertibility and physical existence, including marketable securities and inventory. Current assets include cash or cash equivalents and accounts receivable. Calculating the current ratio reveals whether or not your company has enough liquid assets to cover its short-term liabilities.
Assets

Assets are the economic resources a company uses to increase sales, reduce costs or otherwise generate value. These can be physical objects, such as computer equipment or manufacturing facilities; financial assets like stocks and bonds; or intangible items such as patents, trademarks or goodwill. On a balance sheet, assets are listed on one side and liabilities and owner’s equity are on the other.

The assets are grouped by their liquidity, or how quickly they can be turned into cash. The most liquid assets are current assets, which include actual cash and marketable securities; inventory; and accounts receivable. These settle current liabilities in the normal course of business within a year.

Non-current assets are those that a company will use for longer than a year. These are typically recorded under the heading “property, plant and equipment” (PP&E). The quickest way to determine your firm’s current ratio is to add up all current assets and divide by all current liabilities.
Liabilities

Generally, everything that a company owes outside of its own assets is recorded as liabilities on a balance sheet. The total of all a company’s debts, as well as its budgeted future obligations, must equal its equity at the end of the reporting period.

Any amounts that are due in less than a year should be shown under current liabilities, which includes accounts payable and accrued wages. Amounts owed to vendors for supplies and bills for services such as electricity, phone or Internet that have been presented for payment are also considered a current liability.

Amounts that are due in more than a year are considered noncurrent liabilities, which includes bonds payable and pension benefits you may owe your employees. Noncurrent liabilities are listed on the right side of the balance sheet, together with shareholder’s equity. When subtracting your total liabilities from your total assets, the result must always be a positive value. This number is called your net worth.
Shareholders’ Equity

A company’s net worth (total assets minus total liabilities) is reflected as its shareholders’ equity. The shareholders’ equity section of the statement of financial position or balance sheet includes common stock, preferred stock, and retained earnings. It can also include the value of treasury shares.

The primary source of a company’s total shareholders’ equity is the amount paid in by investors for their share of capital stock. The secondary source is a company’s annual profits earned minus dividend payments. These accumulated profits are reinvested into the company, increasing its total stockholders’ equity.

The shareholders’ equity account may drop for a number of reasons. For example, a company might choose to pay out dividends or buy back its issued shares of stock. This decreases the cash on hand reflected on the Statement of Financial Position or Balance Sheet and therefore reduces the total shareholder’s equity. This value is also impacted by any liquidation of the company.
Other

Various factors can affect the figures posted to a balance sheet. For example, different accounting systems and depreciation methods can change the value of a company’s assets. Also, the quality of a company’s accounts receivable may vary from one year to another.

The resulting ratios can provide valuable insights into the financial health of a company, especially its ability to pay debt. Likewise, comparing two or more balance sheets from different points in time can show the business’s growth.

In addition to assessing a company’s net worth, balance sheets can also be used to evaluate its management. Internal managers can analyze the performance of a company’s departments to pinpoint areas for improvement. In addition, external parties can use the balance sheet to assess a company’s risk, including potential lenders or investors. A lender will examine the current assets of a company to determine its liquidity, while investors will compare the total liabilities with stockholders’ equity.Bilanz Hattingen

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