What Is a Balance Sheet

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A Bilanz Hattingen (also known as a statement of financial position) provides a snapshot of your company’s assets, liabilities and shareholders’ equity at a moment in time. These components must reconcile with each other.

Assets are supported by the money your company owes, which comes from debt or through investors’ equity. It’s important to understand which items go into a balance sheet so you can calculate ratios.
Assets

Balance sheets are detailed accounts of a company’s assets, liabilities and ownership equity at a given point in time. They are used by investors, creditors and employees to assess a company’s current financial standing. They are also useful for comparing companies to determine their relative strength and weaknesses. The balance sheet lists all the basic accounts that go into a business’s financial picture, including cash, investments and accounts receivable. In some cases, lenders may request a balance sheet before giving a loan to a small business or nonprofit.

Assets are listed in the asset section of the balance sheet and can be classified based on convertibility, physical existence and usage. They are further broken down into current assets, such as cash and accounts receivable, and long-term assets such as property, plant and equipment (PP&E). These assets are matched with liabilities and shareholders’ equity to solve the accounting equation: Assets = Liabilities + Shareholders’ Equity. The balance sheet is a key reporting tool for companies, and its accuracy is critical to a company’s success.
Liabilities

The liabilities section of the balance sheet lists all debts and obligations a company has, including taxes, payables and salaries. A company’s assets should always equal its liabilities and shareholders’ equity to be considered a balanced sheet.

Companies sort their liabilities into two categories: current and non-current. Current liabilities include debts that are due to be paid within one year or in the operating cycle of the business, while non-current liabilities are those that will be paid out over a period of more than a year. These could include mortgage payments, interest on corporate bonds and tax liabilities.

The bottom half of the balance sheet includes a section for Shareholder’s Equity, which is reported as common stock value and retained earnings. These are the amounts contributed by owners to a business. A balance sheet should always be based on past data, as it communicates information about a company at a particular point in time. It can provide useful insights, but shouldn’t be used to predict future performance.
Shareholders’ Equity

The shareholder’s equity section of the balance sheet displays a company’s owner’s claims on assets after all debts have been paid. The section includes contributions to common stock, preferred shares and treasury stocks less paid-in capital and retained earnings. Investors can use this information to gauge a company’s financial health and determine whether it may be worth investing in.

A positive shareholder’s equity indicates that the company’s available assets exceed its debts. However, if the figure is negative for an extended period, it may indicate that a company is in trouble and may be insolvent.

The long-term liabilities section of the balance sheet contains the company’s debts that are due for repayment within a year or more. Typical accounts that belong in this category include mortgages, loan repayments and corporate bonds.
Ratios

Balance sheet ratios can help you assess your company’s financial position. For example, the debt-to-equity ratio is a measure of how much a company relies on borrowing versus its own funds. To calculate it, divide a company’s total liabilities by its total shareholder equity.

Other important ratios include liquidity ratios, which measure the ability to pay short-term debts and other obligations with current assets. The quick ratio, also called the acid test, measures how quickly a business can liquidate its current assets, such as accounts receivable and inventory, to pay its short-term liabilities.

Another important ratio is days sales outstanding, which measures how long it takes for a company to receive payment after selling goods or services. It can be combined with the inventory turnover ratio and the days payables outstanding to create a cash conversion cycle. This metric can help you benchmark your business against competitors. It also can help you determine whether your accounting practices are effective.

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