Balance sheet
A balance sheet is a financial statement that provides a snapshot of a business's net worth at a specific point in time, typically issued at the end of a financial quarter or year. It summarizes a company's assets, liabilities, and equity, allowing stakeholders to assess its financial health by comparing what the company owns versus what it owes. The balance sheet follows the accounting equation: assets = liabilities + equity. Assets are categorized as either liquid—easily converted to cash, like cash on hand and accounts receivable—or fixed, which include properties and patents that are not readily liquid. Liabilities are financial obligations, divided into current liabilities, due within a year, and fixed liabilities, which are long-term debts. Equity represents the owner's residual interest in the business after subtracting liabilities from assets. A balance sheet is structured in two columns, listing assets on one side and liabilities and equity on the other. Understanding a balance sheet is essential for evaluating a company's financial stability, as businesses with negative equity may face challenges in obtaining financing, while those with positive equity are generally viewed as financially sound.
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Balance sheet
A balance sheet is financial statement that reflects the net worth of a business at a given point in time. These statements are usually issued at the end of the year or financial quarter and take into account a company's assets, liabilities, and equity. They are helpful in determining a company's financial health by comparing what a company owns to what it owes. Balance sheets are an example of double-entry bookkeeping, a revolutionary accounting practice first developed in fifteenth-century Europe.
Overview
Italian mathematician Luca Pacioli is often credited with popularizing the concept of double-entry bookkeeping in a 1494 encyclopedia on mathematics. The system is based on the idea that every transaction creates a credit and debit on a business account. For example, if a merchant sells three dollars' worth of apples that would mean a three-dollar credit; at the same time, it would also create a three-dollar debit, or loss, in inventory. An accountant would record both the gain in money and the loss in inventory. If the process was done correctly, the credits and debits should be equal, or "balance" out.
A balance sheet is a method of double-entry bookkeeping used to determine how well a company is performing financially. It is based on the formula: assets = liabilities + equity. Assets are items of value owned by a company. They are categorized based on their liquidity, the ease at which they can be converted into cash. In addition to cash on hand, other liquid assets can include investments, inventory, and money owed by clients or customers (accounts receivable). Property, buildings, copyrights, and patents are not so easily converted into cash and are considered fixed assets.
Liabilities are financial obligations in the form of money owed by a business. These are also divided into two types. Current liabilities are due to be paid within a year. Payroll, employee medical insurance, taxes, and money owed to suppliers (accounts payable) are examples of current liabilities. Fixed liabilities are bills that are owed for periods longer than a year and can include mortgages, loan payments, and long-term interest payments. Equity is the value left over when a company's liabilities are subtracted from its assets. In a privately owned business, equity is referred to as owner's equity; for publically traded companies, it is called stockholder's equity.
Balance sheets are usually laid out in two columns, with assets on the left and liabilities and equity on the right. Businesses with negative equity—more liabilities than assets—are considered financially troubled and often have a more difficult time securing loans and other financing. Companies with positive equity are financially healthy and can generate more money by selling part of that equity or using it to gain financing. Privately owned businesses can create a balance sheet to gauge financial health on a yearly or quarterly basis. Financial quarters are three-month periods that run from January through March, April through June, July through September, and October through December. By law, publically traded companies must file financial reports at the end of each quarter.
Bibliography
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