About this lesson
The Balance Sheet is the financial report that shows what the business is worth at some instant in time. This lesson will focus on the Asset side of the Balance Sheet.
Balance Sheet Part 2
The Balance Sheet is the financial report that shows what the business is worth at some instant in time. This module will focus on the Asset side of the Balance Sheet.
When to Use Balance Sheets
The Balance Sheet is normally calculated whenever financial reports are prepared and submitted to investors or senior management. It is useful for tracking liquidity and debt.
- Unlike the other major financial reports, the Balance Sheet is for an instant in time, not a period of time.
- The Balance Sheet shows what the company has as assets and what the company owes as liabilities – the difference is the owner’s equity or the net worth of the company.
- The Balance Sheet indicates what types of assets the company has – cash, inventory, buildings, equipment, etc.
- Assets are used by operational managers to conduct the work of the business. They are used in business processes.
- Assets can be bought and sold.
- Current Assets are those which are cash or theoretically can be quickly converted to cash:
- Stocks, bonds and securities
- Accounts Receivable – in businesses using the accrual accounting method, this is money that is owed to the business for products or services that have already been recorded as sales – “The check is in the mail.” This is a current asset because it is expected that the customer will pay soon.
- Inventory – this is inventory of items that are to be sold to customers. It can be in any stage of production from incoming receiving to finished goods in the warehouse. This is a current asset because it is expected that a buyer can be quickly found for inventory.
- Fixed Assets are those that normally cannot be quickly converted to cash.
- Fixed Assets are investments by the business and the cost of the asset must be recorded and tracked in a special manner known as capitalization and depreciation. These will be covered in other modules.
- Depreciation is recorded on the Balance Sheet as a reduction in the value of a Fixed Asset. It represents the concept that the asset is “used up” or “worn out” over time and therefore loses value.
- An unusual category of Fixed Assets that will sometime be found on a Balance Sheet is Goodwill. This normally occurs when a company has bought another company. Often the price paid is not exactly the same as the equity value on the Balance Sheet. However, when buying a company the purchased company’s Balance Sheet is incorporated into the purchaser’s Balance Sheet. Since the purchaser paid more than the Balance Sheet said it was worth, the extra value is called Goodwill, treated as a Fixed Asset and then depreciated like other Fixed Assets.
- Fixed Asset categories are normally:
- Land and real estate
- Buildings and building improvements (not building maintenance)
- Capital equipment – which is equipment used in business processes such as IT equipment or manufacturing equipment. The equipment could be fixed in one location like an five-axis milling machine, or it could be used for transportation, like a fleet of trucks.
Hints and Tips
- The value used for each category is normally pulled from the accounts in the company’s financial system.
- Many companies will subdivide some of the Balance Sheet accounts to show specific categories of assets.
- For example: a company with a financing division to support the product division may show the Accounts Receivables for financing separately from the product because of the different risk profile.
- The value for Fixed Assets is normally based upon the purchase price of the asset, not the current market value.
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