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Last Updated : Sunday, July 14, 2002 03:04:19 PM
|
 
 Glossary
of G/L Terms
Balance Sheets
A balance sheet is a snapshot of a business’ financial
condition at a specific moment in time, usually at the close of an
accounting period. A balance sheet comprises assets, liabilities, and
owners’ or stockholders’ equity. Assets and liabilities are divided
into short- and long-term obligations including cash accounts such as
checking, money market, or government securities. At any given time,
assets must equal liabilities plus owners’ equity. An asset is
anything the business owns that has monetary value. Liabilities are the
claims of creditors against the assets of the business.
What is a balance sheet used for?
A balance sheet helps a small business owner quickly
get a handle on the financial strength and capabilities of the business.
Is the business in a position to expand? Can the business easily handle
the normal financial ebbs and flows of revenues and expenses? Or should
the business take immediate steps to bolster cash reserves?
Balance sheets can identify and analyze trends,
particularly in the area of receivables and payables. Is the receivables
cycle lengthening? Can receivables be collected more aggressively? Is
some debt uncollectable? Has the business been slowing down payables to
forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the
most basic elements in providing financial reporting to potential
lenders such as banks, investors, and vendors who are considering how
much credit to grant the firm.
1.
Assets
Assets are subdivided into current and long-term assets to
reflect the ease of liquidating each asset. Cash, for obvious reasons,
is considered the most liquid of all assets. Long-term assets, such as
real estate or machinery, are less likely to sell overnight or have the
capability of being quickly converted into a current asset such as cash.
2. Current assets
Current assets are any assets that can be easily converted into
cash within one calendar year. Examples of current assets would be
checking or money market accounts, accounts receivable, and notes
receivable that are due within one year’s time.
•
Cash
Money available immediately, such as
in checking accounts, is the most liquid of all short-term assets.
•
Accounts receivables
This is money owed to the business for
purchases made by customers, suppliers, and other vendors.
•
Notes receivables
Notes receivables that are due within
one year are current assets. Notes that cannot be collected on within
one year should be considered long-term assets.
3. Fixed assets
Fixed assets include land, buildings, machinery, and vehicles
that are used in connection with the business.
•
Land
Land is considered a fixed asset but,
unlike other fixed assets, is not depreciated, because land is
considered an asset that never wears out.
• Buildings
Buildings are categorized as fixed
assets and are depreciated over time.
•
Office equipment
This includes office equipment such as
copiers, fax machines, printers, and computers used in your business.
•
Machinery
This figure represents machines and
equipment used in your plant to produce your product. Examples of
machinery might include lathes, conveyor belts, or a printing press.
• Vehicles
This would include any vehicles used
in your business.
•
Total fixed assets
This is the total dollar value of all
fixed assets in your business, less any accumulated depreciation.
4. Total assets
This figure represents the total dollar value of both the
short-term and long-term assets of your business.
5. Liabilities and owners’ equity
This includes all debts and obligations owed by the business to
outside creditors, vendors, or banks that are payable within one year,
plus the owners’ equity. Often, this side of the balance sheet is
simply referred to as “Liabilities.”
•
Accounts payable
This is comprised of all short-term
obligations owed by your business to creditors, suppliers, and other
vendors. Accounts payable can include supplies and materials acquired on
credit.
•
Notes payable
This represents money owed on a
short-term collection cycle of one year or less. It may include bank
notes, mortgage obligations, or vehicle payments.
•
Accrued payroll and withholding
This includes any earned wages or
withholdings that are owed to or for employees but have not yet been
paid.
•
Total current liabilities
This is the sum total of all current
liabilities owed to creditors that must be paid within a one-year time
frame.
•
Long-term liabilities
These are any debts or obligations
owed by the business that are due more than one year out from the
current date.
•
Mortgage note payable
This is the balance of a mortgage that
extends out beyond the current year. For example, you may have paid off
three years of a fifteen-year mortgage note, of which the remaining
eleven years, not counting the current year, are considered long-term.
•
Owners’ equity
Sometimes this is referred to as
stockholders’ equity. Owners’ equity is made up of the initial
investment in the business as well as any retained earnings that are
reinvested in the business.
•
Common stock
This is stock issued as part of the
initial or later-stage investment in the business.
•
Retained earnings
These are earnings reinvested in the
business after the deduction of any distributions to shareholders, such
as dividend payments.
6. Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside
creditors, vendors, or banks and the remaining monies that are owed to
shareholders, including retained earnings reinvested in the business.
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