Explain Balance Sheet: Define Assets, Liabilities, and Net Worth

A Sample balance sheet is a financial statement which provides an idea of a company’s financial position. The ultimate purpose of the balance sheet is to disclose the financial position of the company at a given time. A balance sheet is mostly prepared at the end of accounting period like a month, quarter or year-end depends on the organization. For larger organizations, a balance sheet must be filled once in a year as a part of company’s statutory accounts. It does by outlining the total assets that a company owns and any amounts that it owes to lenders or banks. A standard company balance sheet has three parts as assets, liabilities, and owner’s equity. Let us discuss in detail as follows.

1. Assets: Asset is anything that a company owns in order to generate income. This could be cash, property, equipment, inventory and so on. As asset is expected to be converted into cash. In a simple balance sheet, assets are indicators of company’s holdings. Assets are further classified into tangible and intangible assets. The tangible assets are further divided into current, long-term and other assets. On the other hand, the intangible assets could be trademark, copyrights etcetera. In a balance sheet, assets having alike properties are usually grouped together. A widely known approach is to bifurcate the assets into current assets and non-current assets.

• Current Assets: Current assets can be defined as the assets which include cash and the assets that could be converted into cash. Current assets are expected to be consumed within a year. Cash, cash equivalents, accounts receivable, prepaid expenses are some examples to mention.
• Non-Current Assets: Non-current assets are also often referred as long-term assets. Here, investments are known as the accounting year. Examples of non-current assets are buildings, land, machinery and all intangible assets.

While preparing a balance sheet, the currents assets are mentioned first and non-current assets later.

2. Liabilities: Liabilities can be defined as the amount that an organization holds. Liabilities are further divided into current and long-term liabilities on the balance sheet. Let us discuss them in detail.

• Current Liabilities: Current liabilities are the claims that are expected to meet within a year. These are accounts payable, accrued expenses, taxes payable, or by the provision of goods or services.
• Long-Term Liabilities: All liabilities that are not current liabilities are considered as long-term liabilities. These are the debts that must be repaid in more than a year from the date on the balance sheet.

3. Owner’s Equity: In the balance sheet, owner’s equity is often referred as a shareholder equity. This is also known as a book value. Owner’s equity can be considered as the net assets. It is the assets minus the liabilities. Any remaining value in assets can be attributed to owner’s equity.

The formula of the balance sheet can be defined as:

Assets = Liabilities + Owner’s Equity

How to prepare a simple Balance Sheet?

There are two formats to represent the balance sheet. In the account format the items are presented horizontally whereas, in the report format, the asset items are listed vertically.

Why is the Balance Sheet important?

A simple balance sheet provides a whole picture of the financial health of an organization at a given period of time. The balance sheet tells you the current value of your assets and the complete view of your business. A balance sheet could also serve as an indicator before any disaster occurs in the business. With the help of a balance sheet, you can analyze the following things such as, the general financial position of the business, productivity and growth of the business and Warning signs that there is a threat ahead.

Components of the Balance Sheet

The three major components of the balance-sheet that indicate what the company owns and owes are Assets, Liabilities and Owner’s Equity.

Assets:

Assets can be defined as the valuables that the company owns to benefit from or are used to generate income. They are the resources of the company that have future economic value. These are categorized into tangible and intangible assets. The tangible assets are further bifurcated into current, long term and other assets. The non tangible assets are trademark, copyrights, goodwill to mention a few.

Current assets include the cash, accounts receivable, prepaid expenses and all that can be converted into cash within a year.

Long term assets are also called fixed assets. They are distinguished from the current assets due to their longevity in generating revenues. All fixed assets except for land are shown on the balance-sheet at original cost less depreciation.

Liabilities:

Liabilities are debts owed by the business. These are claims of the creditors against the assets of the business. These are claims or obligations that arise out of past or current transactions. Liabilities are classified into current and long term liabilities.

Current liabilities are accounts payable, accrued expenses, taxes payable, the current due within one year portion of long term debt and any other obligations due within a year.

Long term liabilities are debts that must be repaid by the business in more than one year from the date of the balance sheet.

Net worth (Owner’s Equity): Owner’s equity (called when it’s sole proprietorship) sometimes is also referred to as the book value of the company because owner’s equity is equal to the reported asset minus the reported liability.

Assets = liabilities + Net worth, this can be reposed to yield the definition of net worth, which is the balance after the liabilities are subtracted from the assets of the business.