Balance sheet basics

Balance sheet basics

Beginner

30th November 2019
Updated: 10th September 2020

Business accounting is a prerequisite for any entrepreneur interested in running a business efficiently. As such, you must understand balance sheets, current assets, and current liabilities. This article explains these aspects of business accounting in detail.

What is business accounting?

Business accounting entails monitoring a company’s economic events. Professional accountants identify transactions and investments made by a company and record them using bookkeeping techniques. The final phase of business accounting is the development of financial statements. Financial statements enable accountants to communicate a company’s financial information.

Financial analysts analyze financial statements to enable management to determine the financial health of the organization. Many other stakeholders make use of a company’s financial information to help them make decisions concerning investment in the company’s stock. Ultimately, business accounting serves a much larger purpose than just reflecting the financial position of the business.

The basics of the balance sheet

Financial statements are the specific components of business accounting. The balance sheet is a crucial financial statement that helps compute the financial position of a company at a particular time. A balance sheet consists of three items; the assets of the company, the liabilities, and the shareholder’s equity. Usually, businesses strive to ensure that the aspects of the balance sheet balance. A company’s total assets should always match the sum of shareholder equity and liabilities in value i.e., Assets = Liabilities + Shareholder Equity. This is the accounting equation.

The balance sheet provides a snapshot of the company’s financial position at that particular time. This financial statement can represent the long-term financial position of the company. If an accountant wanted to determine the current financial position of a business, she would consider the current assets and current liabilities of the company.

  • Current assets – This represents everything the company owns that it can convert to cash in the operating cycle. The liquidity measure of different assets differs. Examples of current assets include cash and cash equivalents, short-term investments, inventories, money that customers owe to the company, accrued income and prepayments, current income tax assets, derivative assets, and assets held for sale. Current assets enable financial analysts to compute the financial position of the company. Together with long-term assets, a financial analyst can use current assets to model the financial future of a business.
  • Current liabilities – A balance sheet captures both a company’s assets and liabilities at any given time. While there are current assets under the company’s ownership, there are also current liabilities that emanate from the day-to-day operations of the business. Examples of current liabilities include the money that the business owes to suppliers, short-term debt, long-term debt that needs repayment within the financial year of the financial statement, unearned revenue, salary and employee bonuses, sales payable, bank overdrafts, and interest payable among others.

By Harry Atkins
Harry joined us in 2019 to lead our Editorial Team. Drawing on more than a decade writing, editing and managing high-profile content for blue chip companies, Harry’s considerable experience in the finance sector encompasses work for high street and investment banks, insurance companies and trading platforms.
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