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The balance sheet provides a snapshot of the business's assets, liabilities and owner's equity for a given time. Again, using an apparel manufacturer as an example, here are the key components of the balance sheet:
- Current assets: These are the assets in a business that can be converted to cash in one year or less. They include cash, stocks and other liquid investments; accounts receivable; inventory; and prepaid expenses. For a clothing manufacturer, inventory would include raw materials (yarn, thread, etc.), work-in-progress (started but not finished), and finished goods (shirts and pants ready to sell to customers). Accounts receivable represent the amount of money owed to the business by customers who have purchased on account.
- Fixed assets: These are the tangible assets of a business that will not be converted to cash within a year during the normal course of operation. Fixed assets are for long-term use and include land, buildings, leasehold improvements, equipment, machinery and vehicles.
- Intangible assets: These are assets that you can't touch or see but that have value. Intangible assets include franchise rights, goodwill, noncompete agreements, patents and many other items.
- Other assets: There are many assets that can be classified as other assets, and most business balance sheets have an other assets category as a "catch-all." Some of the most common other assets include cash value of life insurance, long-term investment property, and compensation due from employees.
- Current liabilities: These are the obligations of the business that are due within one year. Current liabilities include notes payable on lines of credit or other short-term loans, current maturities of long-term debt, accounts payable to trade creditors, accrued expenses and taxes (an accrual is an expense such as the payroll that is due to employees for hours worked but has not been paid), and amounts due to stockholders.
- Long-term debt: These are the obligations of the business that are not due for at least one year. Long-term liabilities typically consist of all bank debt or stockholder loans payable outside of the following 12-month period.
- Stockholders' equity: This figure represents the total amount invested by the stockholders plus the accumulated profit of the business. Components include common stock, paid-in-capital (amounts invested not involving a stock purchase), and retained earnings (cumulative earnings since inception of the business less dividends paid to stockholders).
Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press