An important part of helping our clients at Account Keeping Plus, is to educate and help businesses and bookkeepers to understand what is the Balance Sheet (also known as the Financial Position) and here we give an example and definition.
Definition –
The Balance sheet presents a look at a point in time (eg end of month or year) of the assets and liabilities of the business. In other words, it is a picture or summary of what the business has and how it is funded.
There are three areas in the Balance Sheet – Assets Liabilities and Equity –
Assets include bank accounts, petty cash, inventory, debtors or accounts payable, which are also grouped as Current Assets because they turn over in less than 12 months. Long Term Assets show Plant & Equipment and Motor Vehicles.
Liabilities include credit cards and short term loans, creditors or accounts payable, GST, payroll withholding tax, PAYG and super accounts, which are grouped as Current Liabilities as they also turn over in less than 12 months. Long Term Liabilities show business loans and overdrafts, car loans/finance.
Equity is the difference of assets less liabilities. Sometimes known as net worth or Shareholder Equity.
Example –
The Balance Sheet can be likened to a house with a loan. The house has a value (Asset), say $450,000 and if there is a loan (Liability) say of $250,000 there would be a net of $200,000 which is also called Equity or net worth.
In a similar way, a business reports these as the Balance Sheet – Assets, less its Liabilities, leaves Equity (Shareholder’s Equity)
Look for future Posts where we will look at important ratios that can be calculated from parts of the Balance Sheet.
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