Balance sheet explained in Simple way

 

What is a Balance Sheet? (with examples)

We made a balance sheet for "Bright Future Tech Ltd."

It's a type of financial statement that shows the company's finances at a certain point in time, in this case December 31, 2023.

 It is set up to show what the company owns (assets), what it owes (liabilities), and how much stock each member has in the business. Here's a full breakdown:

Assets are things that a company owns that it thinks will bring it money in the future. They can be broken down into two groups:

Current Assets: Assets that will be turned into cash or used up within a year are called current assets. Here are some examples from our balance sheet:

• As well as cash, there is money in the bank and other types of cash.
• Customers owe a business money for goods or services that have been provided but not yet paid for. This is called accounts receivable.
• Inventory is the list of goods that can be bought by customers.
• Payments made ahead of time for things or services that will be received in the future are called prepaid expenses.

Non-Current Assets: Long-term assets that aren't expected to be turned into cash or used up within a year are called non-current assets. Some examples are:

• Property, Plant, and Equipment (PPE) are real things that are used to make other things, not things that are for sale. The value shown here does not include the amount of money that has been lost due to normal wear and tear. This is called "accumulated depreciation."
• Intangible Assets are: Things that aren't real, like copyrights or patents.

What You Owe

Liabilities are the debts that a business pays to outsiders. These debts can be paid off over time by giving economic benefits like cash. There are also the following types of liabilities:

Current Liabilities: These are debts that need to be paid within a year. Among them are:

• Accounts Payable are the bills that need to be paid to sellers or suppliers for goods or services that have been received but not yet paid for.
• Loans or borrowings that are due in less than a year are called short-term debt.
• Expenses that have been made but not yet paid for are called accrued liabilities.

Long-Term Liabilities: These are debts that come due after a year. This is what's on the sample balance sheet:

• Long-Term Debt: Loans or other borrowings that don't come due for another year.
• When you owe taxes but won't pay them right away, you have deferred tax liabilities.

Equity

Equity, which is also called shareholders' equity or owners' equity, is the owners' claim to the company's assets after all debts have been paid off. What's in it:

• Common Stock is the ownership stake that buyers have bought.
• Earnings that have been kept by the company instead of being given to owners as rewards are called "retained earnings."

How assets equal debts plus equity

A balance sheet is based on the following equation:

Assets = Liabilities + Equity

This equation works because a company's assets are paid for by either borrowing money (liabilities) or investing money from its owners (equity). How it works:

• The company bought all of its assets with either borrowed money (which created a debt) or money from its owners (which increased equity).
• The value of all assets will always be equal to the value of all debts plus the value of all property. Both sides of our equation add up to $225,000 in this case.

This basic relationship on the balance sheet shows where the company's resources come from (liabilities and equity) and how those resources are used (assets).

                                                                                        By - MISS MBA TUTOR