This source of funds enables your business to continue or expand operations. Lenders generally consist of trade suppliers, employees, tax authorities and financial institutions. Liabilities represent sources of cash or its equivalent invested into the business by lenders. Intangibles are similar to prepaid expenses because you're purchasing a benefit that will be expensed at a later date. Intangibles consist of assets such as research and development, patents, market research and goodwill. Therefore, for most analysis purposes, intangibles are ignored as assets and are deducted from equity because their value is difficult to determine. Intangibles are assets with an undetermined life that may never be converted into cash. Non-current assets are made up of fixed assets and intangibles.įixed assets represent the use of cash to purchase assets whose life exceeds one year, such as land, buildings, machinery and equipment, furniture and fixtures, and leasehold improvements. These include cash in the bank, trade accounts receivable, prepaid expenses and inventory.
You'll notice they're also divided between current assets, fixed assets and intangibles.Ĭurrent assets are those that can be converted into cash in less than one year. This is the ease with which you can convert them into cash. The business will use cash or other funds provided by either a creditor or investor to acquire assets.Īssets on the balance sheet are listed from top to bottom in order of their liquidity. They are all the things of value that are owned by your business or due to your business. Let's look into each section of the balance sheet in more detail.Īssets represent the use of funds. That's because your business has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from you, the owner (issuing shareholder equity). The statement must always balance, hence the name. The way they are shown on the statement is based on the fundamental accounting equation: The balance sheet is made up of three parts: Then you'll be able to see how far your business has come since day one. It tells you exactly what your business owns and is owed, as well as the amount you as an owner have invested.īut what it can't do is give you a sense of the trends playing out over a longer period on its own.įor this reason, you will need to compare your latest balance sheet to previous ones to examine how your finances have changed over time. It's generally used alongside the other two types of financial statements: the profit and loss account (also known as the profit and loss statement or income statement), and the cash flow statement.īecause the balance sheet reflects every transaction since your business started, it reveals your business's overall financial health. The balance sheet provides an overview of the state of your business finances at a specific point in time, also known as the reporting date. It's one of the three core financial statements. What is a balance sheet and why is it important?
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