09 May 2012

What is Balance Sheet and the importance of it ?

If you are a share holder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

What is Balance Sheet?
Balance Sheet is a financial statement of a company.

There are three segments summarizes in this Balance Sheet.
1.Company's Assets
2.Company's Liabilities
3.Share Holders Equity


Balance sheet always follows the following formula.

Asset=Liabilities+Share holder's equity

By using this Balance Sheet investors will get an idea as to what the company owns and owes as well as the amount invested by the share holders.
Assets

Assets are what a company uses to operate its business.


There are two types of assets.


1.Current Assets: Current Assets have a life span of one year or less,they can easily converted into cash.
They are
Cash: Non restricted bank accounts and checks.
Cash equivalents: These are very safe assets that can be readily converted into cash.
Accounts receivable:It consists of the short term obligations owed to the company by its clients.
Inventory:This represents the raw materials, work-in -progress goods and the company's finished goods.
2.Non-Current Assets: Non-current assets are assets that are not turned easily into cash.
They are
Tangible assets: machinery,computers,building and land.
Intangible Assets:Good will,patents or copy right.
In tangible assets: Good will,patents or copy right.

Liabilities

Liabilities are the financial obligations a company owes to outside parties.
There are two types of liabilities
Current liabilities: Current liabilities are the company's liabilities which will come due or must be paid, with in one year.
Example: Accounts payable, current portion of longer term borrowing such as the latest payment on a 10 year loan.
Long-term liabilities: These are debts and other non-debt financial obligations.

Share Holder's Equity 

Share holder's equity is the amount of money initially invested into the company plus any retained earnings.This is the source of funding for the business.This account represents a company's total net worth.

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