What is a balance sheet?
A balance sheet is a snapshot showing the company’s finances at a moment in time. The balance sheet is made up of: assets (things the business owns), liabilities (debts), and shareholders’ equity. It adheres to the accounting principle of Assets = Liabilities + Shareholders’ equity. Assets are listed in order of most liquid to least. (liquidity- is the level of ease an asset can be converted to cash). Assets are then broken up into short-term and long-term assets (cash vs land).
Liabilities are the outstanding balances a company owes to a third party. Similar to assets, liabilities are also separate into the current and long-term. Current liabilities due within one year are listed in order of their due date while long-term liabilities are ones that are due beyond one year. An example of current liabilities are wages payable, interest payable, and insurance payable. Examples of long-term liabilities are pension fund liabilities and long-term debt.
Shareholder's Equity (SE) is the money associated with the company’s owners, also known as its shareholders. The retained earnings portion of SE is the net earning a company reinvests or uses to pay off debt. What remains is distributed to shareholders (dividends).
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