UNDERSTANDING THE BALANCE SHEET

A balance sheet summarizes what a business owns and what it owes.It is one of the key financial statements and is a snapshot of the financial position of a business at a point in time.

*What a business owns: The top half of the balance sheet contains the different assets a business owns, which are:
>>Long-term(non-current) assets, such as property, plant and  equipment, intangibles and investments.
>>Short-term(current) assets, such as inventory, money owned by customers and cash.

*What a business owes: The  bottom half of the balance sheet contains the different liabilities a business owes to      shareholders and other third parties, which are:
>>Equity, which consists of  share capital and retained earnings.”Retained earnings” or “retained profits” are  unspent or non-distributed profits, which are retained in a business for future use.They effectively belong to the  shareholders and are therefore a liability of the business.
>>Long-term(non-current) liabilities, such as loans from a bank.
>>Money owed to suppliers and the other creditors.

*Why a balance sheet balances: The top half of the balance sheet will equal the bottom half of the balance sheet due  to the principle of double entry book keeping – every debit has an equal and opposite credit.A business’s assets (its  debits) will equal its liabilities(its credits).The exact format of a balance sheet will depend upon the type of business  and associated accounting conventions.

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