Facts in the Balance Sheet

This entry is not for the business students... Why I say so? It's probably something many business students SHOULD know.

I actually did study this whole accounting and finance thing during my Diploma for a year. Honestly, it's been years since I last take a look at it and when I started looking at it again, everything was a blur. I really can't remember crap.

So what's a balance sheet? A balance sheet is basically a summary of all the company's assets (what the company owns) and liabilities (what the company owes). A balance sheet usually gives one year worth of information.

Things you may find under Assets (What the company owns)

• Cash - Cash is the most liquid asset a company may possess. As much as you may think that having cash in the company's bank is a total waste of potential investments/income, you might just be wrong. Some companies maintain their cash reserves to earn extra cash in the money market funds, and some use them to pay outstanding loans that are soon to come.
• Accounts Receivable - Accounts receivable refers to money that is owed to the company. For example, if I purchase a washing machine from Courts at $200 and I have yet to pay for it, this sum will be recorded in the "Accounts Receivable" section of the balance sheet. Be weary of firms that has too high "Accounts Receivable" for they may not be able to return outstanding loans in time, despite the fact they have great amount of sales. Try analysing the company should this figure be too absurd.
• Investments - Just like our personal investments, some companies have investments too!
• Property and Equipment - This is the least liquid of all assets. Should the company be in a sudden need of money,  property and equipment takes a longer time to sell and liquidify (unlike investments and cash). Equipment depreciates over time and this is calculated as part of the cost of doing business each year. Depreciation is subtracted from the value of the equipment and reflected in the balance sheet.

Things you may find under Liabilities (What the company owes)

• Accounts payable - Accounts payable refers to the money that the company owes other firm/people when they place orders to purchase things. The "time lag" between recieving the bill and paying for it is called accounts payable. As much as companies with high accounts payable may seem like a worrying issue, this may also mean that the company is great with their financial management by taking a longer time to pay their bills. The longer time they take to pay their bills, the more money they have to increase revenue.
• Accrued compensation - This refers to the money that the company owes their employees. E.g. pension money which the company has to pay their employees someday.
• Income taxes payable - This refers to the taxes the company has to pay for its business.
• Dividends payable - Not all firms pay dividends, but those that do has to set aside money to pay dividends to their shareholders (like you and me!)

Equity
Equity is the difference between a company's assets and liabilities. It is what keeps the balanced sheet.... balanced!

Therefore.

Assets = Liabilities + Equity!

*it's really hard to put a balance sheet in words.. Find an example and the terms should be similar to the ones I have stated here.