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Balance Sheet

Balance sheet reports a company’s financial position at a specific date. It is important, as it allows investor to extract information to conduct different ratio analysis, such as ROE and Quick Ratio test. A balance sheet is made up of three main components – asset, liability and equity. A balance sheet is normally reported in the vertical format as shown below. Asset will always be on the left side, while liability and equity will be on the right. According to accounting rules, the summation of liability and equity should also always equal to the value of asset.
Asset = Liability + Equity
Understanding accouting

Asset

Assets are things that a company’s own. They are the resources of a company, which have monetary value. Asset is normally separated according to their liquidity. In simpler terms, how quickly can the asset be turned into cash. Current asset is the term to label those assets which can be easily converted / sold for cash.

Examples of current asset: Cash, account receivable, inventory, temporary investment.
Other assets are less liquid in comparison. These include liquid plant, property, equipment, investment. All these could be classified as fixed assets.

Lastly, trademark / brand such as Nike and Coca-Cola is a form of intangible assets.

Asset is always listed on the left side of balance sheet, starting with current assets and follow by fixed assets.

What is asset?


Liability

Liability refers to how much a company owes to other parties. Together with equity, liability is the source of company’s asset. For instance, if a company has RM1 million worth of asset and 60% is funded by debt, this signifies that the company has a total liability of RM600,000. The remaining 40% is then funded by equity. Another simple ratio to judge the liability of a company is by looking at gearing ratio. Since liability provide the money for a company to purchase asset, liability is also being regarded as the claim on a company’s asset.

Similarly, liability is categorized according to their time frame. Current liability generally consists of obligations / debts due within one financial year. This includes account payable, salaries payable, interest payable. On the other hand, longer term liability includes bank loans and mortgage.

components of liabilities in balance sheet

Equity

Equity is the second source to fund a company’s asset. Equity is funded by owner (for sole proprietorship) or shareholders (for public listed companies). Unlike liability that is funded by debtor, a shareholder / owner does not demand for interest on the fund borrowed. The reward for owner / shareholder is to see the increase in earnings, and sometimes, shareholders are rewarded by the payment of dividend.

Theoretically, equity can be viewed as the leftover of assets minus liabilities. In simpler terms, when you sell off all your assets and pay off all your debts, that is the amount left as equity.
components of shareholders equity


Example of a balance sheet:

example of balance sheet asset = liability + equity

Lastly, the value of total asset and value of total liabilities + equity must always equal to each other. This is because the formula earlier, asset = liability + equity.

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