A balance sheet is a financial statement that reports a company’s assets, liabilities and equity at a specific point in time.
Balance Sheet or Accounting Equation:
Assets = Liabilities + Equity
Assets are reported on balance sheet and are a resource with economic value with the expectation that it will provide a future benefit. These are recorded on the left side of the balance sheet.
Types of Assets:
- Short term or Current Assets: economic resources that are expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses.
- Fixed Assets: long-term resources, such as plants, equipment and buildings. Adjustment is done through depreciation.
- Financial Assets: investments in the assets and securities of other institutions. Ex: stocks and bonds.
- Intangible Assets: resources that have no physical presence. Ex: patents and copyrights.
- Noncurrent Assets: long-term investments, not expected to cash within a year. Ex: Property, Plant and Equipment (PP&E). PP&E are vital to business operations and not easily converted to cash.
General accounts that come under assets:
- Cash and cash equivalents.
- Marketable securities
- Accounts receivable
- Prepaid Expense: value that has already been paid. Ex: insurance.
Liabilities are the money that a company owes to outside parties. These are recorded on the right side of the balance sheet. Accounts might include:
- long-term debt.
- bank indebtedness.
- interest, tax, rent, wages
Equity is money attributable to a business’ owners. These are recorded on the right side of the balance sheet.
Retained earnings: net earnings a company either reinvests in the business or uses to pay off debt; the rest is distributed to shareholders in the form of dividends.
Reference: Investopedia Balance Sheet
Dual Aspect Concept: every business transaction required record in two different accounts.
Money Measurement Concept: every transaction is measured in terms of money.
Double entry book keeping: entry to one account requires a corresponding and opposite entry to a different account.
Going concern concept: Assumption that entity will remain in business for the foreseeable future. If an entity is not going concern then it means it has gone bankrupt and assets were liquidated. Entities that are going concern can defer reporting long-term assets until a later period.
T-account is also called general ledger. Used for double-entry bookkeeping.
Revenue: Money that company receives during a specific period, including discounts and deductions for return merchandise.
revenue = price of goods sold * quantity
- In Accrual accounting: sales made on credit will be included as long as goods or services have been delivered to the customer.
- In Cash accounting: Will only count sales are revenue if the payment has been received.
Reference: Investopedia Revenue Breakdown
Expense: Economic costs a business incurs through its operations to earn revenue.
Income statement primarily focuses on company’s revenues and expenses during a particular period.
- Asset and Expense accounts are increased with debit entries.
- Liability, Equity and Revenue accounts are increased with credit entries.
A company’s financial position tells investors about its general well-being. Following ways can we can evaluate company’s financial position:
- Calculate book value.
Book value/equity = total assets – total liabilities.
- Non-current assets and liabilities.
- Compare company’s market value to book value. That will give insight is stock is under or over priced.
- Calculate current ration.
Current ratio = current assets/current liablities
Reference: Investopedia Financial Position