Balance Sheet – A financial statement to know the company’s financial health

The balance sheet reflects the financial condition of the company at a point in time. It shows what assets are held, what liabilities are owed, what money (or capital) was initially put into the company, and how much was earned by the company. As the name implies, the balance sheet—sometimes referred to as the “Statement of Financial Condition” — must balance, meaning that assets (the left side) are equal to the sum of liabilities and owner’s equity (the right side).

                                     Assets = Liabilities + Equity 


Let’s study the Assets, liabilities and Equity in more detail to fetch the important information about the firm financial position using Balance sheet.

1.     Assets – These are anything of value that the company owns or has a claim to. Assets are essential to carry out the operation and production of goods, every company invest in some type of physical properties like land, machinery and non-physical items like patents and trademarks. These items come under the assets.
 It is further divided into the following parts:-
·        Current Assets – It consists of cash and items that are expected to be converted into cash within one year. The short-term assets are kept with a company to fulfil immediate cash obligations. Current assets can be cash, cash equivalents, marketable securities, accounts receivable, inventories, prepaid expenses.
·        Long term Assets – A company’s long term assets are the assets that cannot be turned into cash within a year. Long term assets include tools, office equipment, buildings, company cars and trucks, etc.

2.     Liabilities – Liabilities are debts the company owes and generally require by the company for the expansion or to carry out regular operation and production.
It is further divided into the following parts:-
·        Current LiabilitiesA company’s current liabilities are the bills that are due to pay within a year. If a company is not capable to clear their dues within a year, it can raise big trouble for a company. Current Liabilities can be account payables, short term debt, current portion of long term debt.
·        Long term Liabilities – Companies borrow money from lenders to start or maintain a business and paying interest on the borrowed money. It is an alarming situation if the amount of interest payable comes near to profit earning.

3.     Equity – Equity reflects the combination of the amount of money put into the company by the shareholders and the total amount of profit it ha earned through years, less any dividends the company has paid to its shareholders through the years. The equity includes the following sections:-
·        Preferred stock: Preferred stocks are the ownership stakes that companies that don’t give the voting right to the shareholder.
·        Common stock: Common stock is the stocks that traded on stock markets that can buy or sell in seconds.
·        Retained earnings: Retained earnings are the earning that is not distributed to shareholders in the form of dividends and utilised by the company for the expansion of the company
·       Treasury stock: Treasury stock are the pool of unused shares that company put it aside which is not available to buy by general public.

If insiders and outsiders want to study the financial position of a firm then Balance sheet is one of the important financial statement among three financial statements to study the firm’s financial position. The other two are the income statement and cash flow statement.

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