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Business Financials – Balance Sheet and how to understand it
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Published on Thursday, 14 May 2015 16:43
The Balance Sheet like many things and doesn’t take too much to learn how to understand it. In short it is a snapshot of the assets and liabilities at any given time, usually produced at the end of a month or any period required. In another expression, it is a picture of what the business has and how it is funded.
There are three areas in the Balance Sheet – Assets, Liabilities and Equity.
The assets include bank accounts, petty cash, inventory, debtors or accounts payable, which are also grouped as Current Assets because they turn over in less than 12 months. Long Term Assets include Plant & Equipment and Motor Vehicles.
The liabilities include credit cards and short term loans, creditors or accounts payable, GST, payroll withholding tax, PAYG and super accounts, which are grouped as Current Liabilities as they also turn over in less than 12 months. Long Term Liabilities include business loans and overdrafts, car loans/finance.
The equity is assets less than liabilities.
The Balance Sheet can be likened to a house with a loan. The house has a value, say $450,000 and if there is a loan, say of $250,000 there would be a net of $200,000 which is also called Equity.
In a similar way, a business has its assets, less it’s liabilities, leaves an Equity (Shareholder’s Equity)
Future Posts we will look at important ratios that can be calculated from parts of the Balance Sheet.
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