A balance sheet, like a photo, provides a financial picture of a company on a given day and time. It categorizes all of a company’s resources as assets, all of its debts as liabilities, and all of the owner’s investments as equity. A company uses its assets, such as accounts receivable, inventory, and equipment, for manufacturing or purchasing products for sale or to provide a service. A company’s assets are financed by its liabilities (debt) and the owner’s equity (net worth). On a balance sheet, the following equation always applies:
Assets = Liabilities + Owner's Equity
Assets are shown on the balance sheet according to the ease with which an asset can be converted to cash, referred to as an asset's liquidity. Similar to assets, liabilities are displayed according to their current and noncurrent status. Current liabilities represent debt that can be settled by the next operating cycle, which is usually considered one year (Finkler, 1993). The Assets Side
The simplest way to classify assets is to make a distinction between assets that are short-lived and will convert into cash in less than a year, the current assets, and those that are expected to have a relatively long life, the fixed assets. Companies use current assets to pay expenses and fund operations. These short-term assets include cash, marketable securities, account receivables, inventory, and any other assets that can be converted quickly into cash, such as marketable securities. Fixed assets, on the other hand, represent all other assets with an expected life span above 1 year. Fixed assets, also commonly labeled property, plant, and equipment, can be tangible or intangible. Examples of tangible assets include machinery, plant, trucks, land, and so on. Intangible assets are generally intellectual property, such as patents, trademarks, copyrights, and so on. One should note that goodwill is also referred to as intangible asset, but it is of a very different nature because it corresponds (in the...
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