What is a Balance Sheet?
A balance sheet is an overview of the financial statements of a business at a specific point in time. It includes the total assets and liabilities of a business or organisation. Also, it reflects the financial position of a company during the financial year. A balance sheet consists of three entities likewise assets, liabilities and ownership equity.
In the balance sheet, the assets are listed category-wise. Assets are of two types-current assets and fixed assets. Alongside the assets, there are liabilities mentioned in the balance sheet. One side of the balance sheet displays assets such as cash, property and inventory, whereas the other side reports liabilities such as accounts payable and long-term debt.
It is to be noted that there is an array of balance sheet software available in the market. But we should opt for the Best Gen Balance Sheet Software with highly considered main features.
Main Components of Balance Sheet
From another perspective, balance sheets can be observed as.
Assets = Liability + Owner's Equity
All-in-all, the balance sheet has two important phases, which are as follows:
1. Assets: In Finance language, assets are the resources of the company or an organisation, which are owned by the company. Also, in the future, they are expected to bring fortune to the company. There are two types of assets, which are
A. Current assets: Resources, which can easily be converted into cash within a year, are known as current assets. For instance, they could be cash in the bank, inventory, machinery, prepaid expenses, accounts receivable, stocks, etc.
B. Fixed assets or non-current assets: Resources, which can be used by the company for the long term, are considered fixed assets. They comprise property, buildings, items such as equipment, etc.
2. Liability: Several financial legal obligations of a person or a company are considered liabilities. They are the outcome of previous transactions and events performed by the person or a company. For example, any loan from banks or other sources for a business purpose that has to be paid in the prescribed period (short or long) is termed as a liability. Liability is also further categorised into two phases-current liability and non-current liability.
It can render the true picture of the company’s financial position and show whether it is operating under debt or profit.
Also, if one wants to file the balance sheet, they can try the Gen balance sheet software for a free download for a few active hours to check out the major features given by the software.
Assets = Liability + Owner's Equity
All-in-all, the balance sheet has two important phases, which are as follows:
1. Assets: In Finance language, assets are the resources of the company or an organisation, which are owned by the company. Also, in the future, they are expected to bring fortune to the company. There are two types of assets, which are
A. Current assets: Resources, which can easily be converted into cash within a year, are known as current assets. For instance, they could be cash in the bank, inventory, machinery, prepaid expenses, accounts receivable, stocks, etc.
B. Fixed assets or non-current assets: Resources, which can be used by the company for the long term, are considered fixed assets. They comprise property, buildings, items such as equipment, etc.
2. Liability: Several financial legal obligations of a person or a company are considered liabilities. They are the outcome of previous transactions and events performed by the person or a company. For example, any loan from banks or other sources for a business purpose that has to be paid in the prescribed period (short or long) is termed as a liability. Liability is also further categorised into two phases-current liability and non-current liability.
Importance of Balance Sheet
Balance Sheet Analysis provides many inputs for the company’s performance. The growth of the organization is completely determined by comparing the balance sheet of different years. It also determines the creditworthiness of the company. It can describe if the company is in expansion mode or not. That is why it is needed to be furnished to the banks for disbursal of loans.
It can render the true picture of the company’s financial position and show whether it is operating under debt or profit.
Details on Sections and Sub-Sections
Current Assets are the assets of the company that can be liquidated in a short period and used to cover the operating expenses of the company.
The key components of the current asset are cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets. Account Receivables are the money that is due to the company and due to be paid by the customer. Stock Inventory is the stored products that can be converted into sales for the generation of revenue.
The current ratio measures the company’s ability to pay short-term and long-term obligations and takes into consideration the total current assets of the company relative to the current liabilities. The quick ratio is the ability to measure the ability to pay short-term obligations with its liquid assets. The cash ratio defines the company’s ability to pay off its short-term liabilities.
Final Conclusion
The current liabilities are the short-term financial obligations of the company that are due within one year or the normal operating cycle of the company. An operating cycle is the cash conversion cycle of the company. It is the time it takes a company to purchase inventory and convert it into cash. Accounts payable form an important part of the current liability of the company. This, along with short-term debt, dividends payable, deferred revenue, taxes owed, etc, are the key components of current liability.
Also, if one wants to file the balance sheet, they can try the Gen balance sheet software for a free download for a few active hours to check out the major features given by the software.
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