Understanding Financial Statements: A Health Checkup for Your Business

Balance Sheet Categories

  • Assets: An asset is anything the business owns that has monetary value.
  • Current Assets include cash, government securities, marketable securities, accounts receivable, notes receivable (other than from officers or employees), inventories, prepaid expenses, and any other item that could be converted into cash within one year in the normal course of business.
  • Fixed Assets are those acquired for long-term use in a business such as land, plant, equipment, machinery, leasehold improvements, furniture, fixtures, and any other items with an expected useful business life measured in years (as opposed to items that will wear out or be used up in less than one year and are usually expensed when they are purchased). These assets are typically not for resale and are recorded in the Balance Sheet at their net cost less accumulated depreciation.
  • Other Assets include intangible assets, such as patents, royalty arrangements, copyrights, exclusive use contracts, and notes receivable from officers and employees.
  • Liabilities: Liabilities are the claims of creditors against the assets of the business (debts owed by the business).
  • Current Liabilities are accounts payable, notes payable to banks, accrued expenses (wages, salaries), taxes payable, the current portion (due within one year) of long-term debt, and other obligations to creditors due within one year.
  • Long-Term Liabilities are mortgages, intermediate and long-term bank loans, equipment loans, and any other obligation for money due to a creditor with a maturity longer than one year.
  • Net Worth is the assets of the business minus its liabilities. Net worth equals the owner’s equity. This equity is the investment by the owner plus any profits or minus any losses that have accumulated in the business.

 

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