Wednesday 29 May 2013

Understanding the balance sheet: The Basic Balance Sheet


All public companies and large proprietary companies are required by law to prepare a balance sheet as part of their formal annual financial report that complies with Australian Accounting Standards.

The balance sheet states a companies assets, liabilities and equity (net worth). It is also known as a "statement of financial position". Last weeks post discussed in detail the definitions of assets and liabilities.

The balance sheet provides a good picture of the financial health of a business and is a tool used to evaluate a business's liquidity. It helps a small business owner identify trends and quickly grasp the financial strength and capabilities of their business.
How the Balance Sheet Works
The balance sheet is divided into two parts that, based on the following equation, must equal each other, or balance each other out. The main formula behind balance sheets is:

Assets = Liabilities + Shareholders\' Equity

This means that assets, or the means used to operate the company, are balanced by a company's financial obligations, along with the equity investment brought into the company and its retained earnings.


  • Current assets:
    are items of value that are expected to be consumed or converted into cash within the next 12 months. Examples include cash, inventory that is turning over regularly and accounts receivable.
  • Non-current assets:
    are not expected to be consumed or converted into cash within the next 12 months. Examples include assets that the business would generally keep for more than one year such as plant and equipment, cars and buildings.


Working Example:

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