Text: What is a Balance Sheet?

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Text: What is a Balance Sheet?

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What is a Balance Sheet? From Wikipedia, the free encyclopedia
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In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of asole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a “snapshot of a company’s financial condition”.
  • Of the three basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business calendar year. A standard company balance sheet has three parts: assets, liabilities, and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.
  • Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
  • Another way to look at the balance sheet equation is that total assets equals liabilities plus owner’s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner’s money (owner’s or shareholders equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections “balancing”.
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they cannot, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words, businesses also have liabilities.

A balance sheet summarizes an organization or individual’s assets, equity and liabilities at a specific point in time.

Two forms of balance sheet exist. They are the report form and the account form. Individuals and small businesses tend to have simple balance sheets.
  • Larger businesses tend to have more complex balance sheets, and these are presented in the organization’s annual report.
  • Large businesses also may prepare balance sheets for segments of their businesses.
  • A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.
Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual’s total assets and total liabilities.
A small business balance sheet lists current assets such as cash, accounts receivable, andinventory, fixed assets such as land, buildings, and equipment, intangible assets such aspatents, and liabilities such as accounts payable, accrued expenses, and long-term debt.

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