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Explain about balance sheet in accounting.
Balance sheet is one of the important aspect in financial statements. Balance sheets tells about firm’s assets, liabilities and equity. By analysing balance sheet tracks firm’s performances, need of improvements, financial obligations etc. can be identified. We can also compare previous years’ balance sheet with present to know the firm’s improvements over the years.
Balance sheet is divided into three parts. One each for assets, liability and equity. Left side of sheet consists of company assets and right side is divided into two parts, one for liabilities and other for owners’ equity. There will be a header and date at the top of balance sheet.
Date tells about fiscal year or sometimes quarterly in the given accounting period. Header tells about firm’s name. Finally, both the columns should be balanced, otherwise necessary adjustment to be done to balance the two columns.
Relation between assets, liabilities and equity
Assets = liabilities + equity
Assets
There are two types of assets, one is liquid assets and other is non-liquid assets. Liquid assets are those assets which are easily convertible to cash. Whereas, non-liquid assets are those assets, which are not easily convertible to cash.
Liquid assets − Accounts receivable, cash and its equivalents, cash at bank, inventories, cash on hand, accrued revenue, etc.
Non-liquid assets − Property, plant, equipment, intangibles assets (copy rights, patents, goodwill), notes receivables, biological assets etc.
Liabilities
Liabilities are divided into two types, current liabilities and long term liabilities. Current liabilities are those which are due in less than one year and long term liabilities are those whose due is more than one year.
Current liabilities − Accounts payable, wages, income tax deductions, utilities, interest, line of credit, maturing debt, sales tax etc.
Long term liabilities − Long term debts, bonds, tax liabilities etc.
Equity
It consists of issued capital and reserves attributable and non-controlling interest. It consists of number of shares authorised, issued and fully paid, issued but not paid and partially paid. Par value, reconciliation of share outstanding etc.
Sample format of balance sheet is as follows −
| Header and date | |
|---|---|
| Assets | Liabilities |
| Equity | |
| Total: XXXX | Total : XXXX |
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