A balance sheet is a financial statement that shows what the business is worth at a given point in time. The purpose of the balance sheet is to provide an idea of a company’s financial position.
Balance sheet is one of the important financial statements required to be maintained by each company. Balance sheet basically describes the financial position of a company at a certain point in time. Balance sheet can be made monthly, quarterly and yearly.
Parts of a balance sheet:
A balance sheet has three parts, assets, liabilities and owner’s equity.
- Assets are all those items which are owned by a business. The assets can be current as well as fixed. Formally, the assets of a company include land building, machines, inventory and more. These are the fixed assets. Cash and accountsreceivable are the intangible assets of a company. They are also called the current assets. These assets account for the basic operation of a business and they are required for the daily operations.
- Next comes liabilities. They are the loans a company has taken or in other words the amount owed to other organizations. Liabilities can be current and long term. The current liabilities are those that need to be paid within a single year whereas long term liabilities are those that get mature after 2 or more years. The current liabilities include notes payable and accounts payable whereas the long term liabilities include some long term debt like payroll taxes.
- Last but not the least is owner’s equity. It is the right of ownership of the business holder or the owner of the business after deducting the liabilities. Common stock, retained earnings, and paid in capital are included into the owner’s equity section. Common stock is investment made in the business. Retained earnings are the amount of net income left after the dividends have been paid to the shareholders of the company. Paid in capital is the additional amount paid by an investor above the stated value of the sold shares.
Balance sheets help business owners to analyze the strength as well as weakness of a business. It will tell how much a company is in debts, what assets the business has and what is the earning of the company. Many of the banks view the balance sheets of companies before giving loans. Even your creditor or investor will take a look at your balance sheet before doing business with you. This financial statement will help not only you but others interested in your business.
If you are a shareholder of a company then it is important for you to know how to read the balance sheet and understand it.
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