Financial statements have been described as the final result of outcome of transactions among specific entity, individuals and companies. The transactions could include general cash flows, purchases and sales. Several financial statement types exist, which include simple balance sheet, cash flow statement, owner’s equity change statement and income statement.
Balance sheet is regarded to be a statement, which describes financial position of an entity at a specific point of time, which is usually at the accounting period’s completion. It tends to depict the owners’ equity, liabilities and assets.
Equation of balanced as followed:
Assets = Owners Equity + Liabilities
The equation’s two sides balance out, the reason why statement is known as Balance Sheet.
- Assets: These are economic benefits which would be controlled and acquired by the organization due to past transactions. The fact is that assets are tangible and include accounts receivable, equipments, inventory and cash. Assets could be broken further into long and current term. Current assets like accounts receivable and cash are assets, which could be converted to cash or benefit the organization in a year. Long term assets include inventory, equipment and land are paid off. It benefits the organization over extended time period. Accumulative depreciation is utilized on balance sheets for explaining as to how long term asset costs are ‘used up’ while running a simple or a huge business . Cost is spread across asset life.
- Liabilities: It is termed as amounts that other organizations are owed to, like asset transfer, services to be provided. It also is created of long term and current liabilities. The latter is said to be those which would be paid within a year, including notes payable, accounts payable, payroll taxes and long term debt maturities. Long term debt is paid off across extended time period.
- Owner’s equity: It is also known as net assets. It is regarded to be the entrepreneur’s ownership rights after subtracting liabilities. Few examples include additional paid-in capital, retained earnings and common stock.
Purpose of Balance Sheet
- Firstly, entrepreneurs make use of balance sheets to simply analyze the capabilities and strengths of the business.
- Secondly, it describes trends, more specially in accounts payables and receivables area.
- Finally, it is examined by investors, vendors and banks for determining credit amount to be provided to the entity.