The Balance Sheet - Assets, Liabilities and Owners' Equity
Contents
Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
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The Balance Sheet
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The Balance Sheet

The balance sheet is like a flash, a snapshot of the company's financial situation at a given moment. You must (absolutely must) memorize this equation.


Assets = Liabilities + Equity


Assets something that is valuable that the company owns

Assets can include...
  • Cash you know. Cash is money.
  • Accounts Receivable is the money that the customers owe the company.
  • Inventory is stuff a company buys and then resells to make a profit.
  • Notes Receivable is money owed to a company when the company makes a loan. Why is the company making loans? Are they a bank? No, but loans are sometimes made to people like customers or employees. For example if a customer couldn't pay for something (i.e. didn't pay an invoice on time) the money could go from being an account receivable to a note receivable. Another example would be if the company loaned money to an employee for a down payment on a house or car or something.
  • Fixed Assets are when cash is used to buy stuff that you expect will still be useful one year from now, like land machinery and equipment, furniture buildings.
  • Intangibles are when you use cash to buy stuff that may or may not eventually become profitable. Things like patents, market research, research and development and organizational expenses. Intangibles are usually amortized over a period of time because they have a long life.

Liabilities money the company owes


Liabilities include...
  • Current Liabilities - money that has to be repaid within 1 year
    • Notes Payable are loans the company has to pay back within 1 year.
    • Accounts Payable is money the company owes its suppliers and vendors for raw materials, inventory, that kind of stuff.
    • Current Portion of Long-term Debt would be like if you had a 10-year loan, then money you had to pay during the next 1 year as part of that 10-year loan.
    • Accrued Expenses - is basically a labor related category. Wages, salary, payroll taxes, employee benefits like pension funds go here.

  • Non-Current Liabilities - money that doesn't have to be paid within 1 year.
    • Non-current Portion of Long Term Debt - remember that 10-year loan we talked about before? Well, the other 9 years of the 10-year loan would go here.
    • Subordinated Officer Loans are kind of tricky. Say an officer of the company or an owner loans money to the company. OK, now say the company needs more money so it goes to a bank to get another loan. Well, the bank loan would take a higher priority than the Officer Loan, so the Officer Loan is said to be subordinated. It means they are kind of put on standby. Because the owner/officer would be willing to wait until later to collect the loan, it is non-current, and would go here. Generally, these loans are considered to be equity, rather than debt, when they are subordinated.
    • Contingent Liabilities - are possible liabilities, but aren't usually listed in the balance sheet itself, and are listed in the footnotes. The company hopes that these liabilities never actually develop. A good example is ongoing lawsuits. If the company has been sued, or reasonably expects that it will be sued, but doesn't know how much it will have to pay to settle the suit (if anything) it will be mentioned here. Another example is if the company acted as a guarantor on a loan for a third party, there is the possibility that the third party will default on the loan, and then the company will have to pay, so that would also go here.

    Equity Equity is what is left over, the value the owners have. It's sometimes called Net Worth or Owner's Equity.

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    About the author

    Mark McCracken

    Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

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