The balance sheet , also known as the “statement of financial position”, discloses the assets, liabilities and equity of the company (net value) The balance sheet, together with the income statement and cash flow statement, constitute the cornerstone of each company’s financial statements. it is important that you understand how the balance is built, how to analyze it and how to read it.
How does the balance work?
The balance is divided into two parts, which on the basis of the following equation have to balance or balance each other.
BALANCE SHEET COMPONENTS: Assets = liabilities + equity
Assets or funds used to conduct business are offset by the financial liabilities of the company, along with the capital investment contributed to the company and the profits. Assets are used by the company to run its business, and its liabilities and capital are two sources supporting these assets. Equity is the amount initially invested in the company plus any profits earned, which is the source of financing the activity.
It is important to remember that the balance sheet is an image of the company’s financial situation at one time point.
Current assets have a life span of up to one year, which means that they can be easily converted into cash. They include cash and their equivalents, receivables and inventory. Funds, the most basic of current assets, also include non-reserved bank accounts and checks.
Non-current assets are assets that are not easily converted into cash, are expected to be converted into cash during the year and / or have a life span greater than one year. They may relate to fixed assets such as machines, computers, buildings and land. Non-current assets may also be intangible assets, such as goodwill, patents or copyrights.
Amortization is calculated and deducted from most of these assets, which is the economic cost of an asset during its useful life.
Equity is the initial amount of money invested in a business. If, at the end of the financial year, the company decides to reinvest its net income into the company (after tax), the profits will be transferred from the profit and loss account to the balance sheet and into the shareholder’s equity account. This account represents the total net worth of the company. In order for the balance to be consistent on both sides, the sum of assets on one side must be equal to the total of liabilities including equity on the other.
How to interpret the balance sheet?
The balance presents the state of the company’s finances at a given moment. The balance sheet should be compared with those already made in previous periods. A lot of information can be obtained from the balance sheet. They include ratio of debt to equity The statement of profit and loss and the statement of cash flows is also the basis for assessing the financial condition of an enterprise.