The balance sheet is a snapshot of the company’s assets, liabilities and shareholders’ equity at one point in time. Assets include everything that the company owns, such as physical products and equipment, and money in transit like accounts receivable.
Liabilities include short-term debts and other obligations, while shareholders’ equity represents the sum of all paid-in capital and retained earnings. The equation is always in balance, meaning that assets must equal liabilities plus shareholders’ equity.
Assets
A balance sheet discloses the assets and liabilities of a company at a given point in time. It consists of two main sections: assets and equity. Assets include anything with inherent, quantifiable value that a business can convert into cash. These can be either tangible (like office supplies, machinery or equipment) or intangible, like brand, patents or copyrights. They are generally further classified based on their convertibility and usage:
The most liquid of assets appears as the first line item in the balance sheet, cash or cash equivalents. This accounts for sales revenue still owed to the company by customers, less any allowance for doubtful debt.
Other current assets typically include accounts payable and inventory. Long-term assets usually consist of building and machinery. They’re amortized over their useful life and reflected in the income statement. Share capital and retained earnings are the other two components of the equity section in a balance sheet. They represent money invested by shareholders and profits that aren’t distributed to shareholders as dividends, respectively.
Liabilities
The liabilities section of a balance sheet displays what a business owes others. It is categorized into current and non-current accounts, much like assets. More liquid accounts, such as accounts payable and inventory are placed in the current section before illiquid accounts, such as property, plant and equipment (PP&E) and long-term debt.
Liabilities are typically arranged by due date on the balance sheet with those due within a year being classified as current liabilities and those not due for more than a year being classified as non-current liabilities. The largest account under this category is the company’s long-term debt, followed by post-employment benefits and deferred tax payments.
The final section on the balance sheet is reserved for Shareholders’ Equity. This includes the company’s common stock, which represents a part-ownership of the corporation, and retained earnings, which are the leftover income of the company after dividends have been paid to shareholders. The total of all of the above accounts equals the company’s total assets.
Shareholders’ Equity
Shareholders’ equity is the difference between a company’s total assets and its total liabilities. It can be determined by using the accounting equation: Total Assets – Total Liabilities = Total Shareholders’ Equity. Shareholders’ equity comes from investors’ initial investments into a business as well as from the retained earnings of a company. Generally, companies set aside some of their profits for dividends to shareholders.
A negative shareholders’ equity balance can indicate that a company’s debts are greater than its assets, which can be dangerous for a small business. A negative equity balance can also reveal poor accounting practices, which can affect how bankers and outside analysts perceive a company’s finances.
The shareholders’ equity section of a balance sheet includes paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock. It is important to understand these components when evaluating a company’s financial health and stability. The information can be used to develop a debt-to-equity ratio, which can be helpful in making investment decisions.
Cash
Typically, assets are listed on the left-hand side of the balance sheet with liabilities and shareholders’ equity on the right. Assets include anything that has inherent value and can be turned into cash or consumed to produce goods and services for sale. That includes tangible things like buildings, trucks and equipment as well as intangible ones such as trademarks and copyrights. They are arranged according to liquidity, meaning how quickly they can be turned into cash or sold, with current assets (those that can be converted within a year) being listed first followed by long-term assets.
Cash and cash equivalents are normally the most liquid of short-term assets, so they are listed as the top line item on a balance sheet along with a separate account for accounts receivable that includes the balance of money you still owe to customers less any allowances for uncollectible debt. This information can be useful for investors, lenders and shareholders.Bilanz