Balance Sheets

Unit 44 | Balance sheets
Many of the performance indicators used by businesses are financial in nature. Accounting is the process of identifying, measuring, and communicating information to permitinformed judgments and decisions
Balance sheets show the financial position of a business at a particular point of time. They contain business assets and liabilities
* Assets are the resourcesthat a business owns and uses. Divided into current and fixed assets
* Liabilities are the debts of the business. They are a source of funds, either short term such as an overdraft, or long term suchas mortgage or bank loan. Divided into current and fixed liabilities (Liabilities that are owed for more than one year are considered fixed liabilities)
* Capital is the money introduced by theowners of the business
Net current assets (Working capital) = Current assets – Current liabilities
Net assets = Total assets – Total liabilities
Balance sheets can be used to evaluate theperformance and potential of a business
* Provides a summary and valuation of all business assets and liabilities
* Can be used to analyse the asset structure of a business
* Can be used to analysethe capital structure of a business
* Working capital can indicate if a business is able to maintain itself
* A balance sheet may provide a guide to a firm’s value
However, there arelimitations to using balance sheets to assess performance
* The value of some assets in the balance sheet may not necessary reflect the cash the business would receive from selling it
* It is hard toinclude intangible assets in a balance sheet since its value is inaccurate
* Balance sheets are static statements. The values established on it may change any given day
* A balance sheet oftenlacks detail. Many of the figures are total and not broken down
* Goodwill: The amount the business is worth above the value of net assets. A company’s reputation and customers’ loyalty to...