Learning What The Balance Sheet Of Your Company Tells You

by Waqar Hassan Blogger, Author and Entrepreneur

There are different types of financial statements that are generated for businesses to get an idea of what state the business is in. When you are running a business you would want it to be in a position strong enough to expand in future and remain active for decades. Since the globes that can allow you to look into future don’t really exist, these financial statements serve their purpose and tell you how prepared a business is for the future. The most important financial statements of a business include cash flow statement, income statement and balance sheet.

Looking at the balance sheet of a company you will find out that it contains three types of entries on it: equity, liabilities and assets. What this means is that you will have to understand the meaning of these three in order to know the value of a balance sheet. The most important thing to keep in mind while looking at the balance sheet is that the assets of a company have to be equal to its liabilities and equity. This is why it is called the balance sheet, i.e. you are trying to balance both sides of the equation through it.

The first thing that you need to get your head around is assets. What exactly are assets? Everything in the ownership of the company is considered as its asset. It includes its possessions and items that it is meant to own in near future. Liabilities are the exact opposite of your assets. They represent the value of things that a company owes. It could be the money that the company is going to give to its suppliers, employees, tax collectors etc. Minus the total liabilities of the company from its total assets and the value you will have is the equity.

When you look at the assets, you will find them separated into 2 different categories: the current assets and non-current assets. In the accounting terms, you could say that the terms like current and non-current are interchangeable with short-term and long-term respectively. When referring to current assets, these are the assets that the company will use within a year. These are also the assets that will convert into cash within one year or less. This is why they are also referred to as short-term assets. Account receivables, inventories and cash are the most prominent entries under this category.

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The next most important part of the balance sheet is liabilities. Just like assets, you will divide the liabilities into current and non-current liabilities. When referring to current liabilities, you are talking about obligations that have to be paid by your business within one year. The payments that you have to make to your suppliers are a great example of this type of liability. Non-current liabilities are the ones that your company will have to pay after a year. You could say that the debt your company owes to the bank is a non-current liability.

Equity is also known as shareholder’s equity. This term is used because this is what the shareholders of the company own in the business. You can divide equity into two different categories: retained earnings and paid-in-capital. Paid-in-capital is the term that refers to the total money that shareholders generated by buying the shares that went public for the first time. The other part is the retained earnings. Retained earnings is the term used for the portion of money from the income that the business has chosen to invest in expansion and other business operations. In short, this income is not to be given to the shareholders.

It is always best to know about these things so you can comprehend your balance sheet properly. If you want to gain more insight into what these terms mean and what purpose the balance sheet really serves, you could pay a visit to CrashTestEntrepreneur.com. There is some really useful information available for you to learn about the basics of balance sheets and other financial statements. Moreover, if you have made all the entries on your balance sheet but both sides of it are not balanced, there must be something wrong with the entries you have made.