Balance sheet

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8 Terms

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Balance sheet

A snapshot of a business’s health (what it owns and owes) at a specific date - also known as the statement of financial condition.

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Balance sheet features

  • Assets (what it owns)

  • Liabilities (owes to external stakeholders)

  • Equity (owes to owners, e.g. sole trade, partners or shareholders)

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Assets

Things of value to the business (e.g. car, cash, premises, equipment, intellectual property). Can be either:

  • Current: easily converted into cash.

  • Non-current: considered long-term, where their full value won’t be recognized until at least a year.

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Liabilities

Things the business owes (e.g. bank loans, accounts payable (bill or invoice). Can be:

  • Current: Must be paid within 12 months.

  • Non-current: Paid over long-term, usually more than 12 months.

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Owners Equity

The owners (or shareholders in a company) investment in the business (capital). As an investment, owners expect a return on this investment in the form of profits. It also represents the amount of money that would be returned to a company’s shareholders or a business owner if the business finished.

  • When a profit is made the owner or directors of a company will decide to either pay out the profit in the form of drawings (sole trader, partnership) or dividends (shareholders in a company), OR retain the profits for a specific future purpose such as expansion.

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Balance sheet purpose

It tells investors a lot about a business:

  • How much debt it has (internal vs external),

  • Will the business be able to pay its short term debts on time (liquidity),

  • How much it needs to collect from customers (and how fast it does so),

  • What kinds of funds/savings the business has generated over time,

  • How much the business relies on loans from external financial institutions (stability).

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Balance sheet issues

It only represents one point in time, and the very next day or hour the position may change. E.g. a customer (debtor) who owes a lot of money pays their accounts receivable.

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Balance sheet equation

Assets = Owners Equity + Liabilities