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Balance Sheet
A balance sheet is a financial statement that discloses the financial position of a business, showing the firm’s assets, liabilities and shareholders’ funds. It is composed of 3 main elements:
- Assets – These are what a company owns, such as cash, inventory, property, and equipment. Assets are categorised into 2 types:
- Current Assets – Assets that can be easily converted into cash within a year, like cash, accounts receivable, and inventory.
- Non-current Assets – Assets that cannot be easily converted into cash within a year, like property, plant, and equipment.
- Liabilities – There are what a company owes to others, such as loans, accounts payable, and accrued expenses. Liabilities can also be categorised into 2 types:
- Current Liabilities – Debts that must be paid within a year, like short-term loans.
- Non-current Liabilities – Debts that are due more than a year from now, like term loans and bonds payable.
- Shareholders’ Equity – This represents the residual value of a company, or the amount left over after liabilities are subtracted from assets. It includes:
- Common Stock – The value of shares issued to shareholders.
- Retained Earnings – Accumulated profits that have not been distributed to shareholders as dividends.
The balance sheet equation is:
Assets = Liabilities + Shareholders’ Equity
This equation ensures that the balance sheet always balances, hence the name.
