The balance sheet shows the financial situation of a company at a given time. It shows the assets, liabilities and capital stock of the company. Assets are the economic resources of a business, including cash, inventory, and equipment. Liabilities are the debts of a company. Owners’ equity is an owner’s right to the assets of a business.
The relationship between assets, liabilities and equity is as follows:
Assets = Liabilities + Owner’s Equity
Definitions of the terms listed on the balance sheet:
Since it takes you a long time to search all these definitions individually, I organized them on one page so that you can quickly and easily refer to them in the future. I streamlined the process so you can focus on what’s most important – making decisions to capitalize on information.
Asset: The economic resources of a company. Assets are divided into two categories: current and non-current.
Current assets: all assets that are expected to be converted into cash within 1 year.
Cash: Physical cash available.
Short-term investments: investments that will mature in 1 year.
Net Accounts Receivable – The amount your customers owe you.
Inventory: Raw materials, work in progress, and finished goods for sale.
No Current Assets – Assets are not expected to be converted to cash within 1 year.
Long-term investments – Investments that your company intends to hold for more than 1 year, such as stocks, bonds, real estate, and cash reserved for specific projects.
Property, plant and equipment – Assets that cannot be easily liquidated, such as buildings, furniture, office equipment, vehicles, and machinery.
Goodwill: The difference between the price paid by a company minus its net assets. It is usually needed after an acquisition.
Intangible Assets – Assets that cannot be physically seen, touched, or measured. They include copyrights, patents, and trademarks.
Liabilities: The claims of creditors on the assets of your company.
Current liabilities: debts or obligations that mature within 1 year.
Accounts Payable – How much your business owes to your suppliers.
Short Term Debt: Loans maturing within 1 year.
Non-current liabilities: debts or obligations that do not mature this year.
Long Term Debt: Loans and financial obligations with a duration greater than 1 year.
Deferred Long-Term Liability Charges: Tax liabilities to be paid next year. They can also include contractual forward obligations such as swaps and derivatives. It is best to refer to the footnotes of the financial report to better understand what they are made of.
Capital of the shareholders: Claim of the owners on the assets of the company. For a publicly traded company like Apple, it is the amount of cash you receive in exchange for “shares” in the company. It also includes the retained earnings (defined below) that a business can accumulate over time.
Preferred Stock – A type of stock that has a greater claim on the assets of a company than ordinary shares in the event of liquidation. This stock pays a dividend, however the price does not appreciate as quickly as ordinary shares. Preferred shareholders do not have the right to vote.
Common Stocks: Common stocks have the lowest priority level over a company’s assets. The price of common stocks generally appreciates faster than stocks and preferred bonds. You probably have common stocks in your investment portfolio.
Retained earnings: earnings that are reinvested in the business.
Treasury shares: shares that a company maintains in its own treasury. They may come from a buyback or they were never issued to the public in the first place.
Capital surplus: capital that cannot be classified as equities or retained earnings. Usually shares that were issued at a premium over their value.
There are many pieces to the balance sheet and you may feel a bit overwhelmed reading each definition. Don’t worry, we’ll only focus on a few of these elements when looking at a business investment. That being said, it is critical that you understand how a business is organized financially. I hope I was able to help you with this.