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Balance Sheet

Definition: A financial statement that lists the assets, liabilities and equity of a company at a specific point in time and is used to calculate the net worth of a business. A basic tenet of double-entry book-keeping is that total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance. Subtracting liabilities from assets shows the net worth of the business A basic tenet of double-entry bookkeeping is that total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance.

The top portion of the balance sheet should list your company's assets in order of liquidity, from most liquid to least liquid. Current assets are cash or its equivalent or those assets that will be used by the business in a year or less. They include the following:

"Total current assets" is the sum of cash, accounts receivable, inventory and supplies.

Other assets that appear in the balance sheet are called long-term or fixed assets because they're durable and will last more than one year. Examples of long-term assets include the following.

"Total long-term assets" is the sum of capital and plant, investments, and miscellaneous assets.
"Total assets" is the sum of total current assets and total long-term assets

After listing the assets, you then have to account for the liabilities of your business. Like assets, liabilities are classified as current or long term. Debts that are due in one year or less are classified as current liabilities. If they're due in more than one year, they're long-term liabilities. Here are examples of current liabilities:

"Total current liabilities" is the sum of accounts payable, accrued liabilities and taxes.

Long-term liabilities include the following:

"Total long-term liabilities" is the sum of bonds payable, mortgages payable and notes payable.
"Total liabilities" is the sum of total current and long-term liabilities.

Once the liabilities have been listed, the owner's equity can then be calculated. The amount attributed to owner's equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors to evaluate the company. Many times, it determines the amount of capital they feel they can safely invest in the business.