Outlining Components on a Balance Sheet

Introducing Basic Components of a Balance Sheet

• A balance sheet includes the following basic components:

  1. Assets

     • Current assets
     • Fixed assets

  2. Liabilities

     • Current liabilities
     • Fixed liabilities
  3. Equity

• Intuitively, these components can be described as:

  • Assets: What you have
  • Liabilities: What you owe
  • Equity: What you own

$$\text{Assets} - \text{Liabilities} = \text{Equity}$$

Defining Terminology for Assets

• Current assets are considered liquid or short-term assets

  • Specifically, they can be converted to cash within the year
  • They're resources a company uses in its day-to-day operations
  • In other words, they're related to a company's current liabilities

• Fixed assets are considered illiquid or long-term assets

  • Specifically, they can't be easily converted to cash within the year

  • These resources are generally related to PP&E:

    • Product
    • Plant
    • Equipment
  • In other words, they're related to a company's fixed liabilities

• Operating assets are assets producing revenue in the daily operations of a business

  • Operating assets can include both current and fixed assets
  • Operating assets can include allocated cash, allocated inventory, buildings in use, machinery in use, etc.
  • Non-operating assets can include unallocated cash, unallocated inventory, vacant buildings, vacant land, unused machinery, etc.

• Capital is sometimes used to mean cash roughly

  • Sometimes, it can refer to machinery and ideas too

• Working capital is a measure of a company’s liquidity and short-term financial health

  • Working capital is the difference between a company’s current assets and current liabilities
  • High working capital isn’t always a good thing, since it could indicate that the business has too much inventory or is not investing its excess cash

Defining Terminology for Liabilities

• Current liabilities are considered short-term liabilities

  • Specifically, these are debts due in less than $1$ year
  • They are obligations that will be settled by current assets
  • These can be referred to as accounts payable

• Fixed liabilities are considered long-term liabilities

  • Specifically, these are debts due over many years
  • They are obligations that will be settled by fixed assets
  • These can be referred to as notes payable

Defining Terminology for Equity

• Common stock refers to the number of a company's shares of stock

  • Sometimes, equity more generally just refers to common stock
• Market capitalization refers to the dollar value of a company's shares of stock

Illustrating Types of Assets

• Current assets

  • Cash
  • Goodwill

  • Inventory

    • Finished product
    • Materials & supplies

• Fixed assets

  • Land
  • Buildings
  • Equipment
  • Vehicles

Illustrating Types of Liabilities

• Current liabilities

  • Payment required by distributor
  • Taxes owed to government
  • Payments on company credit card
  • A loan paid within a year

• Fixed liabilities

  • Mortgages
  • A loan paid over many years

Illustrating Types of Equities

• Common stock
• Preferred stock
• Retained earnings

References

• Video about Balance Sheets
• Describing Components of a Balance Sheet
• Defining Fixed Liabilities
• Defining Current Liabilities
• Defining Types of Liabilities