CHAPTER TWO BALANCE SHEET – THE BALANCE SHEET A company’s balance sheet shows the financial position of that company at a given point in time. It is simply a formal expression of the Accounting Equation. As you might have guessed, the three components of a balance sheet are assets, liabilities, and owners’ equity. Let’s look at an example of a balance sheet below. We consider each account (account) that this table refers to.
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Assets with Cash and Cash Equivalents (cash and cash equivalents): Balances in checking accounts and savings accounts, as well as any investments that will mature (mature) within 3 months or less.Inventory: Goods in stock, available for sale.Accounts Receivable: Money owed from customers for goods or services delivered .Property, Plant, and Equipment: Assets that are not easily convertible to cash – things like computers, production equipment, vehicles, furniture, etc.
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DebtsAccounts Payable: Amounts owed to suppliers for goods or services received.Notes Payable: Contractual obligations to lenders (such as bank loans) ).Common Stock (common stock): Money invested by company owners.
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Retained Earnings: The sum of all net income in the business that has not yet been distributed to owners as profits. (If this is ambiguous right now, don’t worry. It will be explained in detail later.) SHORT TERM VERSE LONG TERM Usually, assets and liabilities on a balance sheet are classified as assets. current assets or current liabilities and long-term assets or long-term liabilities. Current assets are assets that are expected to be converted to cash within 12 months or less. Typical current assets include accounts receivable, cash, and inventory. Everything that isn’t a current asset is, by default, a long-term asset. Sometimes long-term assets are called non-current assets. Property, plant, and equipment are long-term assets. Current liabilities are liabilities that need to be paid off within 12 months or less. The most typical example of a short-term liability is accounts payable. Notes payable, which is paid over time, is distributed on the balance sheet so that payments over the next 12 months are recognized as a current liability, and the remainder is recorded as a liability. recognized as a long-term liability. MULTIPLE-PERIOD BALANCE SHEETS What you often see when you look at published financial statements is that a balance sheet – such as the one below – consists of two columns. . One column shows the balance at the end of the most recent period, and the next column shows the balance at the end of the previous period. The report is presented this way so that the reader can see how the financial position of the company has changed over time. For example, looking at the balance sheet below we can tell something about the situation. operations of the company. Overall, things are going well. The company’s assets increase while its liabilities are being paid off. The only thing to worry about is the increase in accounts receivable. An increase in receivables can be a sign of difficulty in collecting payments from customers on time. On the other hand, it could also just be the result of increased sales, and nothing to worry about.