A balance sheet reports a company’s assets, liabilities and shareholder equity at a specific point in time. Typically, balance sheets adhere to an equation that equates total assets with the sum of liabilities and shareholder equity.
Assets are listed on the left side of the balance sheet and include things like cash, accounts receivable and inventories. Liabilities are on the right and include short-term debts due within a year, as well as long-term debt like bank loans or corporate bonds.
Assets
A balance sheet (also called a statement of financial position) provides a snapshot of your practice’s assets, liabilities and shareholders’ equity at a point in time. It is prepared at the end of a reporting period, which may be a month, quarter or year. The information is organized into two columns with assets on one side and liabilities and shareholder’s equity on the other. The values should ideally balance or equal each other.
Assets on the left side of the balance sheet include all items your company owns that have quantifiable value and can be turned into cash. These assets are classified based on convertibility, physical existence and usage. They are grouped into current and fixed assets, which are then subtotaled and totaled together. The right-hand side of the balance sheet includes all the debt obligations your practice owes to others, including accounts payable, wages and income taxes. These are also grouped and totaled, with the exception of long-term debt.
Liabilities
Liabilities include all amounts that your company owes to outside parties. This includes everything from invoices from your tofu supplier to business loans and bank debt. The balance sheet lists all liabilities and classifies them by their due date. Bills that are due within a year, such as accounts payable, are listed first. Then come the amounts that are due in less than a year, such as accrued expenses. Finally, the longer-term obligations are listed as noncurrent liabilities.
The assets and liabilities listed in the balance sheet are used to create a company’s financial statement, which shows how much your firm owns and how it is financed. The equation is important because it ensures that the sum of a firm’s assets equals its total liabilities. Those two figures are then compared to give you a sense of the firm’s liquidity and solvency. The balance sheet also provides the foundation for calculating ratios that measure these concepts.
Shareholders’ Equity
A company’s shareholders’ equity is the residual value of its assets after it pays off all its debts. This amount, which is also known as net worth, represents the value that would remain to be divided among shareholders if a company was liquidated. It is calculated by subtracting a company’s total liabilities from its total assets.
Shareholders’ equity is comprised of share capital, retained earnings, and treasury stock. Share capital includes the money that shareholders contribute to a company in exchange for ownership stakes, while retained earnings are accumulated profits that a company either reinvests or distributes to shareholders as dividends. Treasury shares are stocks that a company has repurchased and can be sold at a later date to raise cash or reserved as a hedge against a hostile takeover.
Liabilities are the financial obligations a company owes to non-shareholders, and they can be both current and long-term. Those that must be paid within a year are recorded as current liabilities, and those that will be paid out over longer periods of time are recorded as long-term liabilities.
Cash Flow
The bottom line of any financial statement is cash flow, which details how much your company has coming in versus how much it’s spending. The cash flow statement uses the ending balance found in each of the major accounts on your balance sheet to calculate your cash flow.
A balance sheet is a snapshot in time, but the cash flow statement shows how that snapshot has changed over the reporting period. You can even compare your current balance sheet to previous ones to see how you’ve grown over the years.
A balance sheet lists your business’s assets, liabilities, and owner’s equity at a specific point in time. The two sides of the balance sheet must balance out—assets should equal liabilities plus equity. Each of these items has a specific dollar value. But these items aren’t necessarily equivalent to the net income you find in your P&L. The information in your balance sheet can be used to calculate key financial ratios, like the debt-to-equity ratio and the working capital ratio (current assets minus current liabilities). The results of these calculations can help you make informed business decisions.Bilanz Hattingen
