Balance Sheet Part 1
The Balance Sheet is the financial report that shows what the business is worth at some instant in time.
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.
- The Balance Sheet indicates what types of liabilities a company has – debt, unpaid bills, etc.
- The value on the Balance Sheet of equity is the value of the company – at least on paper – and is sometimes called book value.
- The market value of a company is often quite different from the Balance Sheet equity because the market will assign value to expected future sales, profits, or opportunities, whereas the Balance Sheet only includes what has already happened.
- The personal equivalent of the Balance Sheet is the net worth statement that you prepare with your financial advisor. It shows everything you own, all the debts you have, and the remainder is your net worth.
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 or liabilities
- For example: payables may be divided into payables to suppliers, payables for taxes, and payables of dividends for shareholders.
- The value for Fixed Assets is normally based upon the purchase price of the asset, not the current market value.
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