BASIC FINANCIAL STATEMENTS
1 Balance Sheet
The balance sheet is basically a statement showing what you own and what you owe. It consists of two sections: namely, the assets of the company, and the liabilities and owner’s equity. These two parts form an equation which must hold in any balance sheet. That is:
ASSETS = LIABILITIES + OWNER’S EQUITY (OR NET WORTH)
In other words, what you put into the business yourself, plus what you borrow must equal your assets (e.g. cash, machinery, building, supplies, etc.). The distinction between liabilities and owner’s equity is made in order to show you how many dollars you have put in to purchase assets and how much you have borrowed to purchase assets.
The balance sheet shows you the condition of the business at one point in time. This statement is rarely the same for any two points in time because the items on the balance sheet are constantly changing. For example, you are always buying new assets, selling others, paying off debts (liabilities) etc. when you compare two balance sheets at different points in time, you can see what happened in that period with regard to your assets, liability and equity positions. A typical balance sheet along with definitions is included in this section.
Balance Sheet Terms Definitions
1. ASSETS: Anything which the business owns (recorded cost). These commonly included cash, accounts receivable, inventories, land, buildings and other assets.
2. CURRENT ASSETS: Cash and other assets that will be converted into cash during the normal operating cycle of the business, generally a year.
3. CASH: Money on deposit in the bank and pretty cash.
4, ACCOUNTS RECEIVABLE: The amount due from costumers for merchandise or services sold to customers, but cash has not yet been collected from the customers
5, INVENTORY: The amount of finished product, work in process and other raw material and supplies on hand.
6. FIXED ASSETS: Items secured for long-term use in business. They are usually not for resale, and are recorded at cost less depreciation.
7. DEPRECIATION: Allowance made for loss in value of certain Fixed Assets due to wear and tear, obsolescence or other factors.
8. TOTAL ASSETS: Current, fixed assets, and other assets totaled.
9. LIABILITIES: claims of creditors, i.e. the debt owed.
10. CURRENT LIABILITIES: The money owed is due within one year.
11. PAYMENT DUE ON LONG-TERM LOANS: Represents money owed due within one year
12. ACCOUNT PAYABLE: the amount owed to suppliers and other businesses creditors for materials, merchandise, insurance, and services acquired.
13. GST PAYABLE: most transactions are subject to goods & Services Tax (GST). The balance represents the net of GST collectible less GST payable.
14. LONG-TERM LIABILITIES: Those debts or other obligations that are not due within one year. For example, long-term mortgages on property owned, long-term loans, and long-term purchase contracts.
15. SHAREHOLDER’S LOAN: loan made by the owner to the business
16. TOTAL LIABILITIES: total of current and fixed liabilities.
17. OWNER EQUITY: Owner’s investment in the business.
18. RETAINED EARNINGS: That part of profits earned since the business started, left in the business.
19. TOTAL LIABILITIE AND OWNER’S EQUITY: Liabilities and owner’s equity are totaled and must equal total assets, i.e.
Total Assets = Total Liabilities + Owner’s Equity. Next Basic Financial Statements 2