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Business Finance 101 – Understand the Balance Sheet or Financial Position

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Business Finance 101 – Understand the Balance Sheet or Financial Position

Understand the Balance Sheet or Financial Position

At Account Keeping Plus we help businesses and bookkeepers to understand the Balance Sheet (also known as the Financial Position) which presents a look at a point in time (eg end of month or year) of the assets and liabilities of the business. In other words, it is a picture of what the business has and how it is funded.

There are three areas in the Balance Sheet – Assets, Liabilities and Equity –

Assets include bank accounts, petty cash, inventory, debtors or accounts payable, which are also grouped as Current Assets because they turn over in less than 12 months. Long Term Assets show Plant & Equipment and Motor Vehicles.

Liabilities include credit cards and short term loans, creditors or accounts payable, GST, payroll withholding tax, PAYG and super accounts, which are grouped as Current Liabilities as they also turn over in less than 12 months. Long Term Liabilities show business loans and overdrafts, car loans/finance.

Equity is the difference of assets less liabilities. Sometimes known as net worth  or Shareholder Equity.

The Balance Sheet can be likened to a house with a loan. The house has a value, say $450,000 and if there is a loan, say of $250,000 there would be a net of $200,000 which is also called Equity.

Buying a Home - Illustration

In a similar way, a business reports these as the Balance Sheet  assets, less its liabilities, leaves Equity (Shareholder’s Equity)

Business - Balance Sheet Diagram

 Look for future Posts where we will look at important ratios that can be calculated from parts of the Balance Sheet

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Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

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Author: accountkeepingplus

Administration, bookkeeping and compliance for small business, and Self-Managed Super Funds (SMSF) Training, trouble-shooting, or we can do the books and payroll for you! Self Managed Superannuation Fund Service Provider, Free support MYOB Certified Consultant, Reckon/QuickBooks Professional Partner.

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