What is a balance sheet?
A balance sheet is a type of financial statement that provides an understanding of your businesses’ financial health at a particular date. Your balance sheet is a summary of all the assets you have in the business (what you possess) and your liabilities (what you owe). The balance sheet is used to determine how much equity your business has (how much money you would have left if all assets were sold and all debts were paid).
It is called a balance sheet because it shows the balance of an equation: Assets – Liabilities = Equity.
Balance Sheet Terms and Definitions
To help you understand what’s in a balance sheet, let’s look at the terms and definitions used.
Your current assets represent all the assets that you expect will be exhausted within a year through the standard operation of your business. Current assets include liquid assets like cash and accounts receivable, as well as assets that can be quickly liquidated, like inventory stock.
Long-term assets are those that will provide a benefit to your business for more than a year. This includes fixed assets like your business facilities and equipment but can also include other things like copyright, trademarks, and long-term investments.
Your current liabilities are financial obligations that you are expected to pay for within a standard year of operation, also known as an operating cycle. Your operating cycle is the time it takes for your business to buy inventory and sell it, converting it into cash (assets). Current liabilities include things like accounts payable, dividends, and short-term debt.
Long-term liabilities are financial obligations that you will not resolve within a standard operating year. Long-term liabilities include things like mortgages on facilities and equipment, as well as the present value of lease payments that will extend past a year.
The equity displayed on your balance sheet describes the difference between total assets and total liabilities. Equity is the primary data point used to assess the financial health of your business.
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