3/20/2017 Balance Sheet

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Balance Sheet
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What is a 'Balance Sheet'  

A balance sheet is a financial statement that summarizes a company's
assets, liabilities and shareholders' equity at a specific point in time. These
three balance sheet segments give investors an idea as to what the company
owns and owes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:

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Assets = Liabilities + Shareholders' Equity
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BREAKING DOWN 'Balance Sheet' SPONSORED BY CLUB MAHINDRA

The balance sheets gets its name from the fact that the two sides of the
equation above – assets
– assets on the one side and liabilities plus shareholders'
equity on the other – must balance out. This is intuitive: a company has to
pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it
from investors (issuing shareholders' equity). 

For example, if a company takes out a five-year, $4,000 loan from a bank, its assets – specifically the
cash account – will increase by $4,000; its liabilities – specifically the long-term debt account – will
also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from
investors, its assets will increase by that amount, as will its shareholders' equity. All revenues the
company generates in excess of its liabilities will go into the shareholders' equity account,
representing the net assets held by the owners. These revenues will be balanced on the assets side,
appearing as cash, investments, inventory, or some other asset.

Assets, liabilities and shareholders' equity are each comprised of several smaller accounts that Trading Center
break down the specifics of a company's finances. These accounts vary widely by industry, and the
same terms can have different implications depending on the nature of the business. Broadly,
however, there are a few common components investors are likely to come across.

Assets
Within the assets segment, accounts are listed from top to bottom in order of their liquidity
liquidity,, that is,
the ease with which they can be converted into cash. They are divided into current assets, those
which can be converted to cash in one year or less; and non-current or long-term assets, which
cannot.

Here is the general order of accounts within current assets:

assets:

Cash and cash equivalents:

equivalents: the most liquid assets, these can include Treasury bills and
short-term certificates of deposit,
deposit, as well as hard currency
Marketable securities:
securities: equity and debt securities for which there is a liquid market
Accounts receivable:
receivable: money which customers owe the company, perhaps including an
allowance for doubtful accounts (an example of a contra account),
account), since a certain proportion of
customers can be expected not to pay
Inventory:: goods available for sale, valued at the lower of the cost or market price
Inventory
Prepaid expenses:
expenses: representing value that has already been paid for, such as insurance,
advertising contracts or rent

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3/20/2017 Balance Sheet
Long-term assets include the following:
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Long-term investments:
investments: securities that will not or cannot be liquidated in the next year
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Fixed assets:
assets: these include land, machinery, equipment, buildings and other durable,
generally capital-intensive assets
Intangible assets:
assets: these include non-physical, but still valuable, assets such as intellectual
property and goodwill
goodwill;; in general, intangible assets are only listed on the balance sheet if they are
acquired, rather than developed in-house; their value may therefore be wildly understated—by not
including a globally recognized logo, for example—or just as wildly overstated

Liabilities
Liabilities are the money that a company owes to outside parties, from bills it has to pay to suppliers
to interest on bonds it has issued to creditors to rent, utilities and salaries. Current liabilities are
those that are due within one year and are listed in order of their due date. Long-term liabilities are
due at any point after one year.

Current liabilities accounts might include:

Current portion of long-term debt

Bank indebtedness
Interest payable
Rent, tax, utilities
Wages payable
Customer prepayments
Dividends payable and others

Long-term liabilities can include:

Long-term debt:
debt: interest and principle on bonds issued
Pension fund liability: the money a company is required to pay into its employees'
retirement accounts
Deferred tax liability:
liability: taxes that have been accrued but will not be paid for another year;
besides timing, this figure reconciles differences between requirements for financial reporting and
the way tax is assessed, such as depreciation
as depreciation calculations

Some liabilities are off-balance sheet,

sheet, meaning that they will not appear on the balance sheet.
Operating leases are an example of this kind of liability.

Shareholders' equity
Shareholders' equity is the money attributable to a business' owners, meaning its shareholders. It is
also known as "net assets," since it is equivalent to the total assets of a company minus its liabilities,
that is, the debt it owes to non-shareholders.

Retained earnings are
earnings are the net earnings a company either reinvests in the business or uses to pay off
debt; the rest is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has either repurchased or never issued in the first place. It can
be sold at a later date to raise cash or reserved to repel a hostile takeover.
takeover.

Some companies issue preferred stock,

stock, which will be listed separately from common stock under
shareholders' equity. Preferred stock is assigned an arbitrary par value—as
value—as is common stock, in
some cases—that has no bearing on the market value of the shares (often, par value is just $0.01).
The "common stock" and "preferred stock" accounts are calculated by multiplying the par value by
the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in
excess of the "common stock" or "preferred stock" accounts, which are based on par value rather
than market price. Shareholders' equity is not directly related to a company's market capitalization:
capitalization:
the latter is based on the current price of a stock, while paid-in capital is the sum of the equity that
has been purchased at any price.

How To Interpret a Balance Sheet

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3/20/2017 Balance Sheet
The balance sheet is a snapshot, representing the state of a company's finances at a moment in
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time. By itself, it cannot give a sense of the trends that are playing out over a longer period. For this
reason, the balance sheet should be compared with those of previous periods. It should also be
compared with those of other businesses in the same industry, since different industries have Search News, Symbols, Terms Newsletters

unique approaches to financing.

A number of ratios can be derived from the balance sheet, helping investors get a sense of how
healthy a company is. These include the debt-to-equity ratio and the acid-test ratio,
ratio, along with
many others. The income statement and statement of cash flows also provide valuable context for
assessing a company's finances, as do any notes or addenda in an earnings report that might refer
back to the balance sheet.

If you want more on the Balance Sheet, check out -- Reading The Balance Sheet and How To
Evaluate A Company's Balance Sheet.
Sheet.

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Liability
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Video Definition

What's a Liability?


A liability is a company's financial debt or obligations that arise during the course of its business
operations. Liabilities are settled over time through the transfer of economic benefits including
money, goods or services. Recorded on the right side of the balance sheet,
sheet, liabilities include loans,
accounts payable,
payable, mortgages, deferred revenues and accrued expenses.
expenses.

Liabilities are a vital aspect of a company because they are used to finance operations and pay for
large expansions.
expansions
00:00 / 01:47 . They can also make transactions between businesses more efficient. For example,
in
  most cases, if a wine supplier sells a case of wine to a restaurant, it does not demand payment
when it delivers the goods. Rather, it invoices the restaurant for the purchase to streamline the
dropoff and make paying easier for the restaurant. The outstanding money that the restaurant owes
to its wine supplier is considered a liability. In contrast, the wine supplier considers the money it is
owed to be an asset.

Other Definitions of Liability

Generally, liability refers to the state of being responsible for something, and this term can refer to
any money or service owed to another party. Tax liability, for example, can refer to the property
taxes that a homeowner owes to the municipal government or the income tax he owes to the federal
government. Liability may also refer to the legal liability of a business or individual. For example,

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3/20/2017 Balance Sheet
many businesses take out liability insurance in case a customer or employee sues them for
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negligence.

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Current Versus Long-Term Liabilities
Businesses sort their liabilities into two categories: current and long-term. Current liabilities are
debts payable within one year, while long-term liabilities are debts payable over a longer period. For
example, if a business takes out a mortgage payable over a 15-year period, that is a long-term
liability. However, the mortgage payments that are due during the current year are considered the
current portion of long-term debt and are recorded in the short-term liabilities section of the
balance sheet.

Ideally, analysts want to see that a company can pay current liabilities, which are due within a year,
with cash. Some examples of short-term liabilities include payroll expenses and accounts payable,
which includes money owed to vendors, monthly utilities, and similar expenses. In contrast,
analysts want to see that long-term liabilities can be paid with assets derived from future earnings
or financing transactions. Debt is not the only long-term liability companies incur. Items like rent,
deferred taxes, payroll and pension obligations can also be listed under long-term liabilities.

The Relationship Between Liabilities and Assets

Assets are the things a company owns, and they include tangible items such as buildings,
machinery, and equipment as well as intangible items such as accounts receivable, patents or
intellectual property. If a business subtracts its liabilities from its assets, the difference is its owner's
or stockholders' equity. This relationship can be expressed as assets - liabilities = owner's equity.
However, in most cases, this equation is commonly presented as liabilities + equity = assets.

What is the Difference Between an Expense and a Liability?

An expense is the cost of operations that a company incurs to generate revenue. Unlike assets and
liabilities, expenses are related to revenue, and both are listed on a company's income statement.
statement. In
short, expenses are used to calculate net income. The equation to calculate net income is revenues
minus expenses. For example, if a company has more expenses than revenues for the past three
years, it may signal weak financial stability because it has been losing money for those years.

Expenses and liabilities should not be confused with each other. One is listed on a company's
balance sheet, and the other is listed on the company's income statement. Expenses are the costs of
a company's operation, while liabilities are the obligations and debts a company owes.

BREAKING DOWN 'Liability'

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