Balance sheet is the summary of Assets, Liabilities and Owners equity. It allows the investors and the
interested third parties in business performance to have a snap shot look on performance of business. It
is referred as balance sheet because assets have to balance with liabilities.
Assets are what a business owns and liabilities are what business owns to others. The liabilities define
how the business has paid for its assets; a business can either pay for assets through borrowing or
through owner’s equity.
Owner’s equity is the claim of interest on business by the shareholder after the liabilities are paid. If
liabilities exceed the assets, then negative owners will exist for accounting context purpose. Owner’s
equity is calculated as (Assets-Liabilities), the difference is the claim of the owner on assets.
The balance sheet allows the owner to evaluate the financial strength of the company by computing
debts to the assets ratio. This can be used to determine the business percentage of collateralization of
debt financing; the determination assists the business owners to evaluate the action on how to raise
capital. If the business is over collateralized, the owner risk loosing control of the business through
bankruptcy or debtors influence on how business is run. A highly collateralized business by a major
debtor puts the owner into risk of loosing total control of business to the debtor.
The balance sheet has Assets and Liabilities. Assets are divided into current assets and fixed assets.
Currents assets are the assets which can easily be converted into cash within a short period, while fixed
assets are long term assets used by the firm to generate income. Liabilities part of balance sheet
includes current liabilities and long term liabilities. Current liabilities forms the part of business
obligations which are to be settled in cash within one year, while long term liabilities form part of
business obligation which do not fall with one year.
The balance sheet can be used by the business to analysis its efficiency and short term financial health
by computation of working capital. Working capital is calculated as Current Assets-Current
liabilities. If working capital is negative (that is current assets do not exceed current liabilities), this
might indicate difficulty in meeting current obligation which can force a business into bankruptcy.
Balance sheet can also be used to identify operation efficiency by comparing the current year working
capital with previous year working capital; an increase in working capital might be an indication of
operation inefficiency such as slow collections of accounts receivable and large amount of inventory in
The balance sheet is a snap shoot of business performance created by an accounting system which
summarizes the company activities in terms of assets and liabilities. Third parties will use the balance to
evaluate the f