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The balance sheets are one of the major financial statements that investors look at when analyzing a company. The balance sheet displays a snapshot on the financial position of the company at a specific point in time.
Balance sheet displays:
- What the company owns (its assets or the resources it controls)
- What the company owes (its liabilities, obligations to lenders, or debt)
- Shareholders’ equity, which is the capital that investors provided to the company
The balance sheet shows the resources/assets that a company has (like lands, buildings, equipment, etc.) and how it is financed by those resources. Financing could be either by a liability ( like loans or credit payments) or by equity (cash paid by shareholders). That’s why the balance sheet has always to be in balance, following this simple conditional equation:
Assets = Liabilities + Shareholders equity
Assets are the resources that the company owns and are classified into two major categories.
- Current Assets: The resources that are expected to be sold or converted into cash during a short period of time (usually 1 year). Current assets include cash, inventories and accounts receivable
- Non-current Assets: Also known as fixed assets as they remain fixed for more than a year. This includes the company’s tangible assets like buildings, equipment & lands, intangible assets like intellectual property and patents, or financial assets like bonds or other companies shares.
Liabilities is the financial debt or obligation that a company incurs and it is classified into
- Current liabilities: This is the short-term debt that must be repaid in the short term (usually the current or next financial period). Current liabilities include accounts payable, short-term borrowing, or interests that are due..
- Long-term liabilities: They represent the long-term debt that are not payable within the reporting period. It includes long-term loans borrowed from banks or other institutions.
Shareholder’s equity is the net worth of shareholders of the company after paying all their debt. In other words, it’s the difference between the total assets and total liabilities. It includes the following main components:
- Paid in capital: The money received from investors in for issuing a stock
- Retained earnings: The profits that a company has earned to date after paying its shareholder’s any dividends
The total shareholder’s equity is the value that would be returned to shareholders if the company was to liquidate today. This is different from the current market value of a public company, which is based on the current trading price of the stock (how much investors are willing to pay for it).