Understanding the Balance sheet of a Company
A balance sheet is a critical and most important statement for any organization be it a Company, firm, or sole proprietor. It reflects the assets and liabilities of a company i.e. what it owns and owes
It compares the assets and liabilities of a company to find the shareholder’s equity at a specific time. Needless to say, the total amount of assets should be exactly the same as total amount of liabilities.
A balance sheet of a company is an important source for an investor to assess how a company is managing its finance. Below are the key elements of a balance sheet:
Assets: It is sub-categorized into current and non-current assets. Current or short-term assets are those assets that can be quickly liquidated into cash, normally within 12 months. For example, cash and cash equivalents, inventories, account receivables, etc. While Non-Current or Fixed assets are those assets that take more than 12 months to convert into cash. For example- Land, property, equipment, long-term investments, Intangible assets (like patents, copyrights, trademarks), etc.
Liabilities: By definition, liability means the obligation that a company has to pay in the future due to its past actions like borrowing money in terms of loans for business expansion purposes, etc. Alike assets, Liabilities are also broadly divided into two categories. Current liabilities, which are the obligations that need to be paid within 12 months. For example, payroll, accounts payable, taxes, short-term debts, etc. Non-current (Long-term) liabilities are those liabilities that need to be paid after 12 months. For example, long-term borrowings like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments, trade payable, etc.