Continuing the Fundamental Analysis series…here is another post.
What really is a Balance sheet?
It is a summary of the assets that a company owns and the money that is owes to outsiders. Remember as far as the company is concerned, you the shareholder, is an outsider too.
Remember – it has its own existence?
Also the word ‘Balance’ is one of the basic concepts of accountancy – every debit has a credit. If a company wants to buy something (or incur an expense) it needs money and this has to come from its shareholders or lenders. A Balance sheet has a list of assets (on the Right side) and liabilities (borrowings) on the Left side.
Another way of looking at a balance sheet is to look at it as a ‘Sources and Application of Funds’. This also helps you undersatnd that
Assets = Liabilities + Share owner’s funds
The balance sheet has all the assets – and is usually arranged in a manner that the least liquid asset (Factory, Land, buildings) are at the top, followed by machinery, then by current assets (like debtors, stocks, raw material, and cash).
On the other side (liabilities) is the share capital (owners funds), followed by the surplus that the business has retained (without giving it to the shareholders) – called Reserves (this is also part of owners funds). Then come the long term borrowings (banks and institutions lend money to companies), debentures, etc. Then follows short term borrowings from banks, and then current liabilities. The current liabilities are things like bank borrowing, loans which have to be repaid in 1 year or less, amount payable to vendors, etc…
Is it easy to understand or does it sound like a regulator’s take away? If this is tough to understand, will try to do better the next time….
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