by Daniel Schwartz

Created on: December 22, 2009   Last Updated: March 23, 2010

Understanding the Balance Sheet

There is a very simple yet very important equation in acccounting: Assets=Liabilities + Equity. Every business  transaction effects that equation. The equation is so important that   it  is the foundation of the balance sheet.  The balance sheet is one of four financial statements and it is my purpose here to explain its purpose and how you can use it to make better decisions regarding your investments.

I will begin by looking at the assets section of the balance sheet..  Assets are those things that a company owns and uses to either generate revenue or to acquire more assets. An example would be the assets of a hotel. A hotel owns beds and other furniture that it uses so it can attract guest.  Imagine staying in a hotel without beds.  The hotel can acquire those beds for cash which is another asset.  Assets fall under one of three classifications;current, ,long term assets and intangibles.

Current assets are anything that will either be converted to cash or used up(expensed) within a year or the operating cycle whichever comes first. This includes such things as cash, short term investments,accounts receivables, the current portion of long term motes receivables, inventories and prepaid expenses.  Current assets are listed in terms of liquidity,that is how fast it can be converted to cash, Of course cash would be listed first. 

Long term assets are those that the company expects to hold for longer than a year and include such items as long term investments,property, equipment and plants.  Long term investments include long term notes,stocks and bonds of other companies. Property includes land and buildings and any improvement made to them.  Plants usually refer to factories and other means of production.  There are another important set of long term assets that many may not think about.  These are called intangibles.

Intangible assets include copyrights,patents,trademark and goodwill.  Copyrights are basically grants given by the U.S. government for creative and artistic work such as books, songs, poetry and paintings. It gives the owner exclusive rights to sell or publish those works. Patents are grants given to inventors that give them the exclusive right  to produce their inventions or to sell it.  Trademarks are usually logos that people associate with a brand name. Now goodwill does not mean what you think it means. it has

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