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Balance Sheet Preparation

What is a Balance Sheet?

  • A balance sheet is a picture of a company’s financial position as of a point in time. A balance sheet can be prepared as of any date, but it’s usually prepared at the close of an accounting period, such as month-end, quarter-end, or year-end.
  • A balance sheet is a very valuable statement that provides information about financial health of a company. Things like cash, accounts receivable, accounts payable, net worth, etc. can be determined by looking at a balance sheet.

Why does your business need a Balance Sheet?

Balance Sheet helps you understand where your company stands in terms of financial health at a point in time.

There are several other parties who might be interested in knowing your company’s financial situation, especially to make a decision on giving you a loan, extending credit, or audit your records. Such parties are:

  • Banks – Banks would want to know your financial condition to make sure your business can pay any amount they lend you with interest in accordance to the loan agreement.
  • Customers – Customers might want to make sure you would be able to refund any amount due, in case they want to return the products/services they buy from your business.
  • Government Authorities – For e.g. IRS might want to know the financial situation of your business.
  • Investors – Investors might want to make a decision before investing any amount of capital in your business.
  • Vendors – Vendors/Suppliers might want to make a decision on whether your business will be able to make a payment if they offer credit terms.

What is a Balance Sheet made of?

Current Assets

Current Assets are of the following types:

  • Cash
  • Accounts Receivable
  • Inventory and
  • Prepaid expenses

Fixed Assets

  • Assets that produce revenues are fixed assets. They are distinguished from current assets by their longevity. They are not for resale.
  • These include furniture and fixtures, motor vehicles, buildings, land, building improvements (or leasehold improvements), production machinery, equipment and any other item that can be measured by a lifespan in years.
  • All fixed assets (except land) are shown on the balance sheet at original (or historic) cost, minus any depreciation.

Current Liabilities

Current Liabilities are liabilities owed to the Creditors shown on the Balance Sheet which usually has to be repaid in a short period of time i.e. 30 or 60 days.

Current Liabilities consist of:

  • Accounts payable
  • Notes payable to banks (or other creditors)
  • Accrued expenses (Wages/Salaries)
  • Taxes payable
  • The current amount due within a one year portion of long-term debt

Long-term Liabilities

  • Long-term liabilities are any debts that must be repaid by your business more than one year from the date of the balance sheet.
  • This may include start up financing from relatives, banks, finance companies, or other creditors.
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