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What is a Balance Sheet ?
What is a Balance Sheet
is a question that small business owners ask too often. Often focused on net income and the bottom line, owners and managers sometime loose sight of the fact the true health of a business is found in the balance sheet.
The balance sheet, or otherwise known as the statement of financial position, shows the financial position of a company at a certain point in time. The foundation of this statement is the Accounting Equation, which is:
ASSETS = LIABILITIES + OWNERS EQUITY
Assets are things that provide economic benefit to a business. What a balance sheet is put together assets are broken up
between current assest and long term assets. Current assets are the liquid assets, including Cash, Accounts Receivable, and Inventory. A companies long term assets are things like machinery, buildings, and vehicles, to name a few. These assets are used for extended periods and are generally amortized over their useful life.
Liabilites are obligations that the company is required to pay back. Like assets, liabilites are broken up into short and long term items. Short term liabilities include accounts payable, notes payable, and wadges payable. For a liability to be short term it must be due in within one year, (or current business cycle in cases where a year is not an appropiate business cycle). Long term liabilities includes items such as Bonds Payable, Loans, and Mortgages, obligations that often stretch for extended time periods.
Owners equity is the owners or shareholders claim on the business, is the net assets of the business (assets - liabilities). For the small business owner this would gernerally represent cash invested in the business plus net income retained by the business over the years. Full details of Owners Equity can be found in the Statement of Owners Equity, covered elsewhere on this site.
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