The Balance Sheet is like a snapshot because it shows what the company is worth at that set date that it was compiled. It is a record of the company's financial structure. The statement shows:
It is called a balance sheet because of the way one part - assets - is in balance with the sum of the other two parts - liabilities and Shareholders' equity.
Assets = Liabilities + Shareholder's Equity
In the UK the balance sheet is set up a little differently. The first part of this balance sheet measures total assets (fixed + current) minus current liabilities. The second part measures total equity and shareholders' equity.
(Total Assets - Current Liabilities = (Total Equity + Shareholder's Equity)
In an annual report, the balance sheet or statement of financial position includes information for at least the last two years to allow comparison of changes between years.
Assets
Companies own things, called assets. These things might be physical assets such as buildings, trucks, inventories of products, equipment, and cash. Or they may also be ownership rights such as intangible assets, goodwill, trademarks, and patents.
Assets are either current or noncurrent. Current assets are things a company expects to convert to cash within one year. Examples are accounts receivable or inventories of products to sell. Finally, current assets include cash and securities such as treasury bills and certificates of deposit the company expects to convert to cash within the year.
Noncurrent assets are things a company does not intend to convert to cash or that would take longer than a year to convert. Noncurrent assets include fixed assets, often listed as "Property, plant, and equipment" because that's what they usually are. Companies use fixed assets to manufacture, display, store, and transport products.
The amounts of fixed assets vary by company and industry. For example, manufacturing companies generally have a large investment in fixed assets because making things requires property, plant, and equipment. Service companies usually have fewer fixed assets.
Liabilities
On the balance sheet, debts are called liabilities. All companies have liabilities. Examples of liabilities include:
Liabilities are either current (short term) or long term. Current liabilities are financial liabilities of the business that are due to be paid within one year. In the normal course of business, current liabilities are expected to be paid from the current assets (products) into cash. Cash is then available to pay off a current liability. Long-term liabilities are due in longer than one year.
Although liabilities are a necessary part of doing business, companies must manage their liabilities carefully. If a company cannot make interest payments on time and repay the principal when due, the company can be forced to declare bankruptcy and either reorganize or disband.
Shareholders' Equity
Shareholder's equity is the owner's share of the business's assets in excess of claims on those assets by liabilities. On the balance sheet the amount of Shareholders' equity always equals the value of all the assets minus all the liabilities. For example, if a company's assets are valued at $10,000 and liabilities total $6,000, the equity is $4,000. Shareholder's equity is on the liability side of the balance sheet because it is technically a liability of the firm to its owners.
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