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Financial statements are described as being the final outcome of transactions between a specific entity and other companies and individuals. Transactions include sales purchases and general cash flows. There are several types of financial statements which include balance sheet income statement statement of cash flows and statement of changes in owner s equity. This article will examine the one of the most important financial statements the balance sheet. Balance Sheet The balance sheet is a statement that describes an entity s financial position at a certain point in time usually at the end of an accounting period.
This includes amounts owed on loans accounts payable wages taxes and other debts. Similar to assets liabilities are categorized based on their due date or the timeframe within which you expect to pay them. Current liabilities are expected to be paid within a year; long-term liabilities in more than a year. Current liabilities are generally due within a year of the balance sheet date and are listed at the top of the right-hand column and then totaled followed by a list of long-term liabilities those obligations that will not become due for more than a year. Owners equity (sometimes called net assets or net worth or capital) represents the assets that remain after deducting what you owe. In simplified terms it is the money you would have left over if you sold your business and all of its assets and paid off everything you owe. Depending upon the structure of your business owners equity may be your own (sole proprietorship) collective ownership rights (partnership) or stockholder ownership plus the earnings retained by the company to grow the business (corporation). Total liabilities and owners equity are totaled at the bottom of the right side of the balance sheet.
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There may be an offsetting liability. For a house it would be the mortgage or any other debt secured against the home. For a car it would be a car loan. The difference between the value of the house or car and what is owed is the equity in that particular investment. This is like a net worth for that particular asset. There are appreciating assets and depreciating assets. A home is generally an appreciating asset over the long term. In recent times we have learned that in the short term a home can lose its value rather quickly. However most housing markets recover in the long term and a home should appreciate over time.