Unit
- Assets: Resources owned by the business, such as cash, accounts receivable, inventory, and equipment. Assets are classified as current (expected to convert to cash within one year) or non-current (held longer).
- Liabilities: Obligations the business owes to others, including accounts payable, loans, and accrued expenses. Liabilities are also split into current (due within one year) and long-term.
- Equity: The owner's residual interest in the assets after deducting liabilities. It includes contributed capital and retained earnings from profits kept in the business.
- Accounting Equation: Assets = Liabilities + Equity. This foundational relationship must always balance, providing a snapshot of financial health at a specific date.
- Current Ratio: A liquidity metric computed as current assets divided by current liabilities. A ratio above 1.0 indicates the business can cover its short-term obligations.
- Working Capital: Defined as current assets minus current liabilities. Positive working capital suggests the business has sufficient buffer for day-to-day operations.
- Debt-to-Equity Ratio: Total liabilities divided by total equity. A high ratio implies greater financial leverage and increased risk to creditors.
- Book Value: The net value of the business shown on the balance sheet, calculated as total assets minus total liabilities. It serves as a baseline for valuation.
- Depreciation: Allocation of the cost of tangible assets over their useful lives. Accumulated depreciation reduces the book value of assets on the balance sheet.
- Intangible Assets: Non-physical resources like patents, trademarks, and goodwill. These are recorded at cost and amortized over time.
- Accumulated Depreciation: The cumulative sum of all depreciation expenses charged against a tangible fixed asset since its acquisition. As a contra-asset account, it reduces the asset's original cost to its net book value on the balance sheet, representing usage and obsolescence over time.
- Allowance for Doubtful Accounts: A contra-asset account that estimates the portion of accounts receivable likely to be uncollectible. By subtracting this allowance from total receivables, the balance sheet reports a realistic net realizable value that reflects expected credit losses.
- Prepaid Expenses: Payments made in advance for goods or services to be received in the future, such as insurance premiums, rent, or subscriptions. These are classified as current assets and gradually expensed as the benefit is consumed over the coverage period.
- Accrued Liabilities: Expenses that have been incurred but not yet paid, including wages payable, interest payable, and taxes payable. These obligations are recorded as current liabilities because they must be settled within the normal operating cycle.
- Contributed Capital: The total value of cash or other assets that shareholders have invested in the business in exchange for ownership shares. This equity component reflects the original funding provided by owners and does not include retained earnings.
- Retained Earnings: The cumulative net income that a business has earned and reinvested rather than distributed as dividends to shareholders. Retained earnings increase equity over time and provide internal capital for expansion or debt reduction.
Current Ratio
1.5
+0.2 YoY
Quick Revision
- The balance sheet shows what a business owns (assets) and owes (liabilities) with the owner's equity as the balancing figure.
- Assets and liabilities are categorized as current or non-current to assess liquidity and long-term solvency.
- The accounting equation assets = liabilities + equity must always hold true.
- Key metrics derived from the balance sheet include current ratio, working capital, and debt-to-equity ratio.