Accounts Receivable Balance Sheet
The purpose of the balance sheet. The balance sheet s purpose is to provide a detailed listing of the company s assets and liabilities. It is not unlike a personal credit report. If you think about your own financial net worth you probably have a number of assets such as a home a vehicle a stock portfolio cash in a savings account and so forth. You also likely have a list of liabilities or debts such as a mortgage a car loan electric or telephone bills that have not yet been paid etc. This concept is directly analogous to a company and the balance sheet lists out all of these. Like the income statement an investor needs to be aware of the potential accounting assumptions made for the balance sheet. Obviously some line items are unambiguous. For example the worth of cash in the bank is a pretty straightforward value. However the worth of a 5 year old computer or an undeveloped piece of land are less concrete.
Your assets are tangible items such as cash inventory buildings land and equipment as well as investments prepaid expenses and money owed to you (accounts receivable notes receivable etc.) On a balance sheet assets are listed in groups based on their liquidity. Liquidity is a measure of how quickly these assets can be converted into cash sold or consumed. Current assets - assets that one can reasonably expect to be converted into cash within a year (e.g. accounts receivable) or can be converted into cash on demand (e.g. stocks) are listed first on the left-hand side and then totaled. Fixed assets follow next - fixed assets are expected to be around a while and persist - these include buildings vehicles and equipment. Finally total assets are added-up at the bottom of the assets section of the balance sheet. Liabilities reflect all the money your business owes out to others.
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Long-term liabilities (non-current) found on the balance sheet include long-term bank loans and notes payable. The creditor s claims against the assets can be seen by examining the fundamental accounting equation stated above where the entity s assets equal the creditors claim which represents liabilities plus the owner s claim of the assets representing the company s equity. Equity: according to the fundamental accounting equation if we rearrange this to solve for equity one can conclude that Equity = Assets - Liabilities. Upon closer examination it can be clearly seen that equity represents the value of a business after liabilities have been reduced from the company s assets. Often equity is referred to as the residual interest of a company. Also it is important to note that the creditors claims to the assets are always settled first before the owner s claim can be realized.
In addition the basic formula for accounting is Assets = Liabilities + Equity and any US balance sheet will be organized into exactly three sections with at least two subtotals for assets and for liabilities and equity. Using the basic algebra that we learned in Ms. Arithmatic s 6th grade class we can shrewdly deduce that the two subtotals must be exactly equal. So far no problem because if your balance sheet doesn t balance then you have much bigger problems then simply worrying about understanding your financial records. How Assets Are Valued Great! you re thinking let s start with the assets! Well I love an enthusiastic learner and so I will oblige. To put it very briefly assets are the total of everything your business has that has some sort of value to the business.