Understanding What Is In The Balance Sheet Of A Business Enterprise
Sometimes, a business owner would be in a quandary as to what a balance sheet means
. To a business proprietor, his main concern is whether or not the firm is having profit or incurring losses. The balance sheet is left to be less of a concern. So - what is the use of a balance sheet?The balance sheet is a snapshot of the financial position of a business at one specific time. It demonstrates the financial strength of the company. This can also be a gauge for business expansion. This part of the financial statement is comprised of debits and credits. As the accounting principle goes - "for every credit there is a corresponding debit". And the balance sheet's debits and credits are the assets, liabilities and owner's equity. Under the balance sheet, and under any point in time in the business, the assets should always equal the sum of the liabilities and equity. Assets are the things that are owned by the business which are given monetary values whereas liabilities are the amount due to the creditors. Of course, equity is how much is left to the owner after deducting the amount to be paid to the creditors.
Assets
The assets can have two kinds - the current and the long-term assets. The current asset measures the company's liquidity position - the amount that can be easily converted into cash within one accounting cycle. On the other hand, the long-term assets are properties that cannot be sold or converted into cash in an overnight period. The current assets are cash, deposits in banks, accounts receivable and notes receivable with a term of one year or less. The long term assets are notes receivable with tern of more than one year, land, buildings, equipments, machinery, furniture and vehicles. The debit side of the balance sheet equation comprise of the sum of the current and fixed assets.
Liabilities and Owner's Equity
This part of the balance sheet represents all debts and obligations of the business. These can be private or mortgage creditors. Often times this side of the balance sheet is referred simply as liabilities.
The liabilities are classified as current and long-term. The current liabilities consist of the accounts payable, notes payable, accrued payroll and withholding. The long term liabilities which are payable in more than one year is mortgage notes payable.
Owner's equity, also referred to as stockholder's equity, is composed of the initial investment to the business plus all the earnings of the business which were re-invested in the same business.
The total liabilities and equity is the credit side of the balance sheet equation.
Total balance sheet which may not be a major concern for business owners is equality between the assets and sum of liabilities and equity. This is a reflection of the financial condition of the firm.
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