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Understanding the Balance Sheet in the Financial Statement

Financial Statement is document showing the clear picture of business & the information provided in the financial statements helps investors to understand the company or organization doing well or not? By reading the financial statements investors can be able to conclude that whether the company is prepared for any unforeseen conditions / crisis in future.

Financial Statements consist of three main statements:

  1. Balance Sheet
  2. Profit and Loss Statement
  3. Cash Flow Statement

In this article we are going to discuss about the Balance Sheet and in the upcoming articles we will discuss about the other two statements.

Money is the key element for every business so Money can be termed as a Oxygen for survival of a business of a company or an organization. Balance sheet is the most important & crucial document in of a financial statement and contains all financial aspects of a company and is a vital document that an investor must know how to crack the information from the Balance Sheet.

What is a Balance Sheet?

The term balance sheet refers to a financial statement that reports company’s assets, liabilities and shareholder’s equity at specific point of time. Balance sheet provides the basis for computing rates of return for investors and evaluating company’s capital structure. In short the balance sheet is a financial statement that provides a snapshot of what the company owns and owes as well as the amount invested by the shareholders.

Balance sheet study put together with other financial statements is the basis for fundamental analysis of the company and helps in calculating the important financial ratios.

The Balance sheet accounting equation consists of assets on one side and liabilities plus share holders equity on the other side.

Assets = Liabilities + Shareholders.

Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time. Balance sheet includes assets on one side, and liabilities on the other. For the balance sheet to reflect the true picture, both heads (liabilities & assets) should tally (Assets = Liabilities + Equity).

So to summaries with key points to remember are listed below

Understanding the 3 Elements of Balance Sheet :

Assets

Accounts within this segment are listed from top to bottom in order of their liquidity. This is the ease with which they can be converted into cash. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

General Layout of accounts within current assets:

Long-term assets include the following:

Liabilities

A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries. Current liabilities are due within one year and are listed in order of their due date. Long-term liabilities, on the other hand, are due at any point after one year.

Current Liabilities accounts might include:

Long Term Liabilities can include:

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet.

Shareholder Equity

Shareholders Equity is the money attributable to the owners of a business or its shareholders. It is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-shareholders.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt. The remaining amount is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has repurchased. It can be sold at a later date to raise cash or reserved to repel a hostile takeover.

Some companies issue preferred stock, which will be listed separately from common stock under this section. Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the market value of the shares. The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the common or preferred stock accounts, which are based on par value rather than market price. Shareholder equity is not directly related to a company’s market capitalization. The latter is based on the current price of a stock, while paid-in capital is the sum of the equity that has been purchased at any price.

So for more clarity you can go through the balance sheet enclosed below of reliance industries.

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