Friday, July 3, 2009

The balance sheet

The balance sheet, also called statement of financial position, because the balance sheet provides information about an entity's assets, liabilities and owner's equity as well as their relationships to each other at a point in time. The balance sheet is a picture of what the company owns and owes at a particular point in time (usually the end of period).
The balance sheet helps users to assess the liquidity, financial flexibility, profitability and risk of a company.
The balance sheet presents three of the elements of the financial statements, assets, liability and equity. It presents them in what is called the proprietary. This means that net assets are viewed as belonging to the owner or proprietor.
To can understand the elements of the balance sheet, you need to know some definition, such as:
1- Assets, probable future benefits obtained or controlled by a particular entity as a result of a past transaction.
2- liabilities , probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as the result of a past transaction.
Valuation accounts are used for both assets and liabilities. These valuation accounts are neither assets nor liabilities. An example of a valuation account is accumulated depreciation or unamortized bond premium.
3- Equity or net assets, the residual interest in assets of an entity that remains after deducting its liabilities. In a sense equity is the liability that the entity has to the owners of that entity.
Equity is found only in business (for-profit) enterprise.
In the balance sheet, assets and liabilities are classified as either current or non-current (this is the same split as between short-term and long-term, but the more correct terminology is current and non-current.). The distinction between current and non-current is based upon the time frame in which the asset or liability is expected to be settled (for liabilities) or converted into cash for asset).
the operating cycle is average time between the acquisition of resources (or inventory) and the final receipt of cash from their sale.

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