Balance Sheet
What are financial statements?
The 3 main financial statements are:
Balance sheet;
Income statement; and
Cash flow statement.
What is a balance sheet?
A balance sheet, also known as the Statement of Financial Position, provides a snapshot of a company’s financial standing at a specific point in time.
The balance sheet typically comprises three sections:
Assets: These represent items owned by the company, such as cash, equipment, vehicles, inventory, and receivables (amounts owed by customers). For instance, revenue from sales is recorded as sales revenue and reflected as cash or receivables, depending on the payment status.
Liabilities: These are the company's obligations to external parties, including amounts owed to suppliers, unpaid expenses, and outstanding employee-related payments. For example, purchasing inventory on credit creates a liability—the obligation to pay the supplier in the future—and an asset—the inventory received from the supplier.
Equity: This represents the book value of the company, calculated by subtracting liabilities from assets. Equity encompasses both capital contributions and retained earnings.
It's crucial to understand that a balance sheet provides a snapshot of the company's financial position at a specific moment in time. For instance, the balance sheet of company XYZ as of December 31, 2023, reflects its financial status on that date. Therefore, the bank balance listed on the balance sheet is the amount available in the company's bank account at the close of business on December 31, 2023.
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