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Balance Sheet


24 Minute Accounting

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Unit Video

Unit Summary

The balance sheet follows the accounting equation concept of Assets = Liabilities + Equity. The three main use of the Balance Sheet are:
  • To determine if Working Capital is sufficient
  • To know the Net Worth of the business
  • To see if the company can sustain future operations

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Hi, in this video you will learn about the Balance Sheet.
A Balance Sheet is another important financial Statement that a company produces & you should follow. Put simply, it is a “Snapshot of the business, showing what assets the organization owns and how they are financed, whether with debt (liabilities) or with Equity. Some people may even refer to this as a Statement of Financial Position.
Assets are split into:
Current Assets – are assets that can be converted into cash within the short term (12 months). These include items like cash in the bank, inventories & Accounts Receivables.
Non-Current Assets – are assets that help a business to generate income, such as Equipment, Vehicles, Land, etc.
Liabilities are split into:
Current Liabilities – are debts that need to be paid back within a 12 month period. These include debts to suppliers, short term loans, payments to local municipalities, tax authorities etc.
Non-Current Liabilities – these include long term loans from banks, bonds payable and long-term lease obligations.
Equity / Capital are split into:
Share Capital – funds invested in the business
Retained Earnings – an accumulation of profits (or losses) that have been generated by the business.
There are three (3) main uses of the Balance Sheet.
  1. To determine if Working Capital is sufficient – Being able to pay off all your short term debt with your current assets will keep your managers and other stakeholders at ease.
  2. To know the Net Worth of the business – The net worth of a company provides investors and other interested parties with a quick snapshot of a company's financial strength. It represents how much value would remain if the business closed its doors and settled all of its debts.
  3. To see if the company can sustain future operations – as the economy (& demand for your products and services) go up and down, there should be enough assets to cover your overheads, in riding the wave of low sales.
At the end of the accounting period, it is the responsibility of the Chief Accountant to make sure that the books have been closed correctly and accounting standards & policies have been followed.
Just analyzing the Balance Sheet will not provide the full picture. Using the other two reports; the Income & Cash Flow Statements along with Balance Sheet will allow you to proper analyse the organization with the use of Ratios and other financial tools to make important and better informed business decisions.

The two most important things in any company do not appear in their balance sheet: its reputation and its people. Henry Ford