WHAT IS A BALANCE SHEET ?
A balance sheet is defined as a financial statement of a firm which displays the company’s assets , liabilities and net worth . It presents a summary form of a picture showing in detail the financial position of the firm at a particular date. It can also be referred to as a statement of net worth, or a statement of financial position. It serves as a valuable source of information to the users of the financial statement, primarily to creditors, investors and shareholders.
The balance sheet is based on the accounting equation :
Assets = Liabilities + Capital
COMPONENTS OF ASSETS
Assets represent things of value that a company owns and has in its possession . It is a resource which helps in generating revenue . They are primarily classified into : Fixed assets and Current assets .
Fixed assets are those assets that a company uses for generating revenue for a period of more than one year. Fixed assets can be of two types ,i.e Intangible assets and tangible assets .
TANGIBLE FIXED ASSETS – The assets which have a physical existence are called tangible assets . Examples of tangible assets include , land and building , furniture & fixtures, plant & machinery etc.
INTANGIBLE FIXED ASSETS – The assets which do not have any physical existence are called intangible assets . Examples of intangible assets – Goodwill, patents , trademark etc.
Current assets are those assets that a company expects to consume or use within a period of one year . These are short term, liquid assets which can be easily converted into cash in any given year. These include –
Cash and Cash Equivalents :- These are the most liquid assets and include treasury bills, as well as hard currency .
Accounts receivable (Debtors ):- It refers to the money that the customers owe to the company on account of credit sales .
Short term investments – The securities which can be liquidated in a period of 12 months .
Inventory :- Inventory refers to goods available for sale, valued at the lower of the cost or market price.
Thus, Balance-sheet is one of the essential financial statements needed to take appropriate and sound financial decisions & exhibits the true financial position of the firm ..