Components in Balance Sheet

Components in Balance Sheet

As an entrepreneur who is new to the world of business, do you know that you need to generate financial statements for every accounting period? The balance sheet, profit and loss statement, cash flow statement (Also see Why Do We Need Cash Flow Statement?) and the statement of changes in equity are the financial statements that you need to generate. However, producing financial statements and recording business transactions can be challenging for you as you need to put in a lot of time and effort to keep your books of accounts well-organised. Thus, feel free to contact a bookkeeping firm in Singapore and get assistance from the professionals so that you can have more time to focus on your core business activities.

In this article, the financial statement (Also see Who Needs the Financial Statements?) that we will shed light on is the balance sheet. This statement reports a company’s financial position at a particular time. Besides showing the assets that the company has, it also portrays the liabilities that it has incurred as well as the source of funds it is holding in the form of capital contribution. In short, one will be able to know the amount of money that the company has obtained to run its business operations and the way it uses the money.

A balance sheet comprises of three elements, which are assets, liabilities and equity.

Assets are the resources that the business can control. Business owners may divide them by using different ways of categorisation. For example, they can classify them by splitting them into the tangible asset (for example, land, equipment, inventories, etc.) and intangible asset (for instance, computer software, trademarks, etc.). Another way of asset categorisation is to divide them into current assets (for example, cash and cash equivalent, prepaid expenses, etc.) and non-current assets (for instance, plant assets like buildings, land, equipment, etc.).

Another element that the balance sheet includes is the liabilities. Liabilities are the sums that the company owes to its lenders and creditors. One can classify liabilities into current liabilities and non-current liabilities. The former refers to the debts that the company should pay within a year, while the latter is those that are not payable in a year.

The last section in the balance sheet is the owner’s equity. Some people may call it the capital contribution by the owner. This element illustrates the amount that the owners have invested in the business, less any withdrawals and add the net income that the business has earned since its commencement. If the business suffers from a loss, instead of adding the net income (Also see Why Do We Need the Income Statement?)  to the amount invested, the net loss should be deducted from the investment.

There is an accounting equation that can show the relationship between the assets, liabilities as well as the owner’s equity of a business, that is:

Assets = Liabilities + Owner’s Equity

This equation is also known as the balance sheet equation.

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