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A balance sheet is a financial statement that summarizes a company's assets, liabilities and

shareholders' equity at a specific point in time. These three balance sheet segments give
investors an idea as to what the company owns and owes, as well as the amount invested by

The balance sheets gets its name from the fact that the two sides of the equation above
– assets on the one side and liabilities plus shareholders' equity on the other – must balance

Uses of the Balance Sheet

Below are some of the uses and importance of a balance sheet:

1. To Determine If Working Capital is Enough

The balance sheet is used to determine if the business has enough working capital to sustain
its operation.

Working capital is the difference of current assets less current liabilities. It measures if the
company still has enough current resources after deducting its due loan or obligations. If the
result of computation is positive, that means the company is still doing okay. On the other
hand, if the computation becomes negative, that means the company is in trouble. There’s a
high risk of bankruptcy or inability to continue operating.

2. To Know the Business Net Worth

Net Worth is defined as the true value of an entity. It shows how rich or poor it is. It is
computed by the difference of total assets less total liabilities.

In simple terms, net worth is the amount the investor/owner owns from the company after
deducting all the liabilities.

3. To See If The Company Can Sustain Future Operation

By looking at the balance sheet, you can determine if the company can sustain future
operation. To do this, look at the value of its non-current assets such as property, plant and
equipment. If the total is higher than the current assets, it means the company has plans to
sustain future operations. On the other hand, if the amount is already lower than the
current assets, it can be an indication of inability to sustain future operation.

4. To Identify If There’s Possible Issuance of Dividend

Most business owners/investors are interested to know if when will they receive returns
from their investment. Such returns can be in the form of Dividends. Dividends are issued if
the company is profiting and has high amount of retained earning.

The balance sheet shows the balance of retained earnings. By looking at it, you can
determine if the company has enough retained earnings or not.

Assets are resources or things of value owned by an enterprise. Some of them have physical
form, but others have no physical form. For as long as future economic benefits are
expected to the entity and if they are controlled by the entity, they are assets.

Generally they are recorded in the book of accounts with normal debit balance. The assets
accounts are classified in current and noncurrent assets.

Current assets are balance sheet accounts that represent the value of all assets that can
reasonably expect to be converted into cash within one year.Current assets include cash and
cash equivalents , accounts receivable, inventory, marketable securities, prepaid expenses
and other liquid assets that can be readily converted to cash.

Noncurrent assets are company long-term investments where the full value will not be
realized within the accounting year. Examples of noncurrent assets include investments in
other companies, intangible assets such as goodwill, brand recognition and intellectual
property, and property, plant and equipment . Noncurrent assets appear on the company's
balance sheet .

Liabilities are present obligations to pay cash or cash equivalents by an entity. They
represent claims against the assets of the business.

Liabitity accounts have a normal credit balance. They are classified into current and
noncurrent liabilities.

Current liabilities is expected to be settled in the normal course of the enterprise’s operating
cycle. It is due to be settled within twelve months of the SFP date. Examples are accounts
payable, notes payable, accrued interest payable, SSS premium payable, withholding tax
payable, etc.

Noncurrent Liabilities also called long-term liabilities, are debts not anticipated to be
extinguished within the 12 months following the date of the balance sheet. If an entity’s
operating cycle is longer than 12 months, a noncurrent liability is an obligation not expected
to be extinguished in one operating cycle.

Shareholder’s Equity is the residual amount after deducting liabilities from assets. It
comprises the capital contribution and withdrawals by the owner. It is increased by capital
contribution of the owner and net income of the business, and decreased by the owner’s
withdrawals and net losses of the business.
Share Capital

Share capital , also called equity financing, is the total amount of money and property a
company has received for selling its shares to shareholders.

Share capital is listed in the company balance sheet in two sections. The first section is the
common or preferred stock section. This account is equal to the par value of the stock sold
to the shareholders. Since stock par value is usually a nominal amount, stock is rarely sold
for par value. The amount paid in excess of par is an account called Additional Paid In

Retained earnings refer to the percentage of net earnings not paid out as dividends , but
retained by the company to be reinvested in its core business, or to pay debt. It is recorded
under shareholders' equity on the

balance sheet . The formula calculates retained earnings by adding net income to, or
subtracting any net losses from, beginning retained earnings, and subtracting any dividends
paid to shareholders.

Share Premium is the portion of the paid in capital representing excess over the par or
stated value. It is usually utilized to pay off equity expenses, which include underwriter fees.
The account can also be used in the issuance of bonus shares and for costs or expenses
related to this issuance.

Treasury stock (treasury shares) are the portion of shares that a company keeps in its own
treasury. Treasury stock may have come from a repurchase or buyback from shareholders,
or it may have never been issued to the public in the first place. These shares don't pay
dividends, have no voting rights and should not be included in shares outstanding