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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

  • What are Assets?
    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.

  • What are Liabilities?
    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.

  • What is Owners Equity?
     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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