An Introduction to Balance Sheets

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A balance sheet is a document that gives an account of a company's financial position at a specified point in time. It is often known to be a brief snapshot of the financial condition of a business. The balance sheet of a firm mainly contains a summary of the assets, liabilities and equity of a business at a particular time. The purpose of a balance sheet is to portray the total net worth of a business. The balance sheet forms an important part of the business plan of a company. The usual frequency for generating a balance is once a year in most businesses. However, there may be businesses that produce a balance sheet on a quarterly or half-yearly basis depending on their requirements. Assets of the company are listed first in the balance sheet followed by the total liabilities. The difference between assets and liabilities is known as equity or the net worth of the business which is mentioned at the bottom of the balance sheet. Below is a detailed look at the different sections of the balance sheet.

Assets

The assets of a business include both current assets and fixed assets. Current assets of a company include both cash and assets that can easily be converted into cash. Accounts receivable and prepaid expenses for future services can also be considered as current assets. Fixed assets, also known as tangible, are those which cannot be easily converted into cash. Some important fixed assets of a company may be real estate or property, office equipment, plant and machinery, furniture, financial and biological assets.

Liabilities

A liability can be defined as any debt, obligation or responsibility that a business may be owing to another entity. They are obligations that must be paid under certain conditions and time frames. The liabilities of a company include the accounts payable and also financial liabilities such as promissory notes and corporate bonds. These may also include current tax liabilities and deferred tax liabilities. Provisions for warranties or court orders and any unearned revenue for services not yet provided to customers can be considered as liabilities.

Equity

Equity of a business can be done with full awareness of the likely consequences by subtracting the total value of assets with the liabilities of the firm. A company's equity represents the retained earnings and funds contributed by its owners or shareholders. Equity can also be referred to as the total net worth of the company.

Conclusion

The balance sheet can serve as an important tool for business in order to recognize its current standing and improve its performance by identifying the problem areas and addressing them promptly.

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