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A balance sheet is a statement of a company's financial position at a particular moment in time. This financial report shows the two sides of a company's financial situation -- what it owns and what it owes.
What the company owns, called its assets, is always equal to the combined value of what the company owes, called its liabilities, and the value of its shareholders' equity. Expressed as an equation, a company's balance sheets shows assets = liabilities + shareholder value.
If the company were to dissolve, then its debts would be paid, and any assets that remained would be distributed to the shareholders as their equity. Bankruptcy occurs in situations where there is nothing left to distribute to the shareholders, and the company balance sheet is in fact unbalanced because the company owes more than it owns.
balance sheetAn accounting statement of a firm's ASSETS and LIABILITIES on the last day of a trading period. The balance sheet lists the assets which the firm owns and sets against these the balancing obligations or claims of those groups of people who provided the funds to acquire the assets. Assets take the form of FIXED ASSETS and CURRENT ASSETS, while obligations take the form of SHAREHOLDERS' CAPITAL EMPLOYED, long-term loans and CURRENT LIABILITIES. The balance sheet is compiled by summarizing information derived from the LEDGER accounts and provides a condensed financial snapshot of a company's state of affairs.
A simple balance sheet is illustrated in Fig. 9 overleaf. Assets include fixed assets (such as equipment and buildings) and current assets (stocks, debtors and cash); liabilities include money owed to the bank and suppliers of raw materials and components. The difference between current assets and current liabilities is referred to as the net current assets or WORKING CAPITAL. Working capital plus fixed assets equals NET ASSETS employed or NET WORTH. This is equal to LONG-TERM CAPITAL of the company and represents monies subscribed by SHARE HOLDERS (the owners of the company), together with any profits retained in the business. Thus, fixed assets + (current assets – current liabilities) = long-term capital (‘net worth’).
balance sheetan accounting statement of a firm's ASSETS and LIABILITIES on the last day of a trading period. The balance sheet lists the assets that the firm owns and sets against these the balancing obligations or claims of those groups of people who provided the funds to acquire the assets. Assets take the form of FIXED ASSETS and CURRENT ASSETS, while obligations take the form of SHAREHOLDERS’ CAPITAL EMPLOYED, long-term loans and CURRENT LIABILITIES.
A semi-itemized listing of all assets and liabilities of a person or a company in order to arrive at a net worth, which is the difference between the assets and the liabilities. Most lenders require a balance sheet as part of the loan application process.Short-term debt,which will be paid off in one year or less,is treated by lenders in a different manner than long-term debt when calculating their various ratios to determine loan eligibility. As a result, consumers would be well advised to separate the two types of debt when completing a balance sheet form provided by the lender.
One of the primary weaknesses of a standard balance sheet is that it does not reflect any contingent liabilities—matters which may become liabilities in the future,but then again,may simply disappear. These are things like loans guaranteed for children, the results of pending litigation, and penalties and interest that may be imposed at the end of a current tax audit.In accounting,such matters are noted in footnotes. Some mortgage application forms specifically ask about contingent liabilities, and others do not. Obviously, the rosy picture presented in the preceding example balance sheet would change markedly if the owner disclosed involvement in a multimillion dollar lawsuit for which there was no insurance coverage,and which might result in a judgment in the future.