Join Rudolph Rosenberg for an in-depth discussion in this video Introduction to the balance sheet, part of Financial Literacy: Reading Financial Reports.
- [Voiceover] As we briefly saw earlier, the balance sheet is one of the three key documents that make up a financial statement. Every company has the obligation to produce a balance sheet at least once a year. This document summarizes everything that the company owns, and everything that it owes. Unlike the other two reports, it is a snapshot of the company at a certain point in time, meaning that if a balance sheet is prepared on the 31st of December it is reporting the situation for each category as of that day, whether (mumbles) is completely different from the picture of the day before or the day later is inconsequential.
It is made of two sections called assets and total liabilities and equity. The assets section is focusing on what the company owns. It is the positive side of the balance sheet and it covers everything that has a tradable value, such as cash, property, machinery, or any money that is due to the company, such as payments expected from customers. If we go back to our ice cream shop example, this includes any money that is on the bank account, the ice cream production machines, the furniture in the store, and the store itself if the company was to own it.
The total liabilities and equities section is the flip side of the assets, it is the negative side of the balance sheet and covers two areas. The first one, called liabilities, sums up all the debt of the company. For the ice cream shop, it is the loan that was contracted to purchase new machinery, or the refurbishment of the store, or any payment that is due to suppliers. The second section is called equity and is summarizing the accounting value of the company, which is the accounting value of 100% of the shares of the company.
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- What is a financial statement?
- Reading the balance sheet
- Understanding depreciation, liabilities, and equity
- Reading the income statement
- Understanding revenue, costs, profitability, and net income
- How cash flow works
- Analyzing financial documents with context<br><br>
- The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.