“Why are female accountants the best lovers? Because they’re like a ‘balance sheet’. If it does not reconcile, it does not’ but if it does, it agrees in all positions” Haha!
Unlike the popular attitude expressed with adding numbers which require even more attention when dealing with finance, understanding the balance sheet is as simple as the joke above; your entries must be balanced.
A balance sheet is the financial summary of an organization which reveals its financial position. It includes values/resources owned by the owner (Assets), the organization’s debts/obligations (liability) and the net worth of that organization, which is the difference between assets and liabilities (Equity). It is one of three(3) major financial statements:
Income statement– a financial report showing the company’s profit and loss over time. The profit and loss are revised as the difference between its revenues and all expenses.
Cash Flow statement– This financial statement reveals the inflow and outflow of cash and its equivalent from current and completed operations. It reveals the weakness and strength of an organization by stating its liquidity position and its financial strength to fund a project or consider debt.
Although the balance sheet is a financial summary, It does not and should not contain all financial information; in fact, it is impossible. It has its area of application and function, sharing such tasks of financial health evaluation with the income statement and cash flow statement, hence there are contents to be found on a balance sheet and what should not be seen.
It should interest you that no matter how much information a balance sheet contains, it is split into just two sections- the assets and the liabilities, with a lower addition of the shareholders’ equity. That way, it can create a clear demarcation of what is owned from what is owed. Note that the balance sheet should list assets in order of their liquidity- their easy cash conversions.
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The assets are divided into
Current assets are categorized into:
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They can be categorized into:
LIABILITIES
This fragment contains debt and recurring expenses. It is Categorized Into
This refers to the Monetary returns of each shareholder of an organization, say its debts were cleared and all assets liquidated. It is the net assets of a company and calculated as:
Stakeholders Equity = Total Assets – Total Liabilities
Note:
Shareholders’ equity can be positive or negative, the former being that an organization has matching assets for its liabilities and the latter that its liabilities/debts are greater than its assets.
Shareholders’ equity has the following performing under it:
As per definition, a balance sheet presents a summary of the financial health of a company’s business which, of course, comes with revising the other two(2) financial statements, as earlier stated. The importance of a balance sheet lies in its ability to expose:
BALANCE SHEET FORMAT AND EXAMPLE
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