The Balance Sheet
The Balance Sheet holds information of great interest to bankers and investors alike. The information represented on a Balance Sheet is very revealing to the keen eye, because it can forecast a company’s ability to pay its bills and discloses how much money has been invested.
Shareholders Equity is composed of the amount of capital invested by the business owners and company profits that are reinvested into the firm. Profits reinvested are shown on the Balance Sheet as Retained Earnings. When Liabilities and Shareholder Equity are combined the result completes the second half of the Balance Sheet Equation.
The Balance Sheet has two main purposes; (1) Listing the assets of your company and (2) Listing the liabilities of your company. A Balance Sheet is so named because the calculations reported should always lead to a balance between the dollar amount of Assets and the total of Liabilities and Shareholders Equity.
Assets = Liabilities plus Shareholders Equity.
An accurate Balance Sheet depends on a great deal on good record keeping. A journal of accounts will help provide the summary figures shown on a Balance Sheet. Construction of Balance Sheet details begins with a list of the firms’ Assets. There may be two types of Assets: Current and Fixed. Typical Current Assets include Cash on hand and Accounts Receivable and the value of Inventory (products purchased but not yet sold).
A company might also possess Fixed Assets such as a garage or equipment and possibly land. Fixed Assets such as a manufacturing plant have a useful life of more than one year and are counted on to help the company generate profits. Depreciation is also shown under the Fixed Assets heading. When Current and Fixed Assets are combined, the result is Total Assets and one half of the Balance Sheet equation is complete.
The second half of the Balance Sheet construction involves Liabilities and Shareholders Equity. Liabilities are so called because they represent amounts owed to others such as loan funds owed a bank. A Balanced Sheet may distinguish between Current and Long Term Liabilities; with Accounts Payable being an example of the former and a bank loan an example of the latter. Typical Accounts Payable items involve professional services fees such as money owed for ongoing accounting or legal services.