The balance sheet, presents a snapshot of the firm's assets and the source of the money that was used to buy those assets at a point of time. The assets are listed on the right-hand side of the balance sheet, while liabilities are reported on the left hand side. It also shows the ownership equities on the left hand side along with liabilities.
So the components of the Balance sheet can be listed down as follows:
1. Assets: These are firms economic resources from which the firm is expected to generate revenues and earn profits.
2. Liabilities: These are future costs to the firm. Generally debt obligations owed to creditors as a result of operations to generate sales revenue; to be paid in the near future with assets.
3. Owner's equity: Ownership equity represents claims to assets of a business entity. So it is the residual interest in the net assets of an entity that remains after its liabilities.
Common Balance sheet Assets:
1. Cash 2. Inventory 3. Debtors
4. Accounts Receivables 5. Prepaid expenses 6. Plant and Machinery
7. Land 8. Intangible Assetsp; 9. Deferred tax assets
Common Balance Sheet Liabilities:
1. Accounts payables
2. Notes Payables
3. Accrues Expenses
4. Deferred Tax Liabilities
5. Bonds Payable
Common Balance sheet Equity items:
1. Capital 3.Retained earnings
Classification of Assets and Liabilities:
Current Liabilities: it includes those payment obligations which will be satisfied within one financial year.
Current Assets: It includes those assets which will convert into cash in the near future, normally within one financial year.
Current Assets less Current Liabilities give us Working Capital. Working capital is an important measure to capture the firms’ liquidity position. A low working capital means that the firm may face problems in meeting its short term obligations.
The main Balance Sheet Items
Current asset Current liabilities
Cash & securities Payables
Receivables Short-term debt
+ = +
Fixed assets Long-term liabilities
Tangible assets +
Intangible assets Shareholders’ equity
The sum total of the right side of the equation, total assets, A, must equal the total sum of the left side of the equation, liabilities, L, plus ownership equity, OE. When a transaction affects both sides of the equation, equality of the equation should always be maintained.
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