Understanding the Understanding the Balance SheetBalance SheetNayyar R. KazmiNayyar R. Kazmi

Every transaction that a company or Every transaction that a company or organization makes, involves either organization makes, involves either INFLOW or OUTFLOW of Cash.INFLOW or OUTFLOW of Cash.

InflowsInflows Sales, Loans, Sales of StockSales, Loans, Sales of Stock

OutflowsOutflows Expenses: Purchases, salaries, interest on a Expenses: Purchases, salaries, interest on a

loan etc.loan etc.

Everything that an organization owns is called Everything that an organization owns is called an Asset.an Asset. Furniture, inventory, building equipment, Cash.Furniture, inventory, building equipment, Cash.

Assets have one thing in common: They all Assets have one thing in common: They all generate cash, unless they are cash and even generate cash, unless they are cash and even cash can be invested.cash can be invested.

Assets also include Accounts Receivable: Assets also include Accounts Receivable: money owed by customers to organization, money owed by customers to organization, who have purchased goods or services on who have purchased goods or services on credit.credit.

Liability is amount of money owed by the Liability is amount of money owed by the company to an individual or another company to an individual or another organiozation. Liabilities must be paid on organiozation. Liabilities must be paid on some specific date for specific reason.some specific date for specific reason.

Liabilities arise from transactions that Liabilities arise from transactions that took place in the past.took place in the past.

Equity is the net left after subtracting Liabilities Equity is the net left after subtracting Liabilities from Assets.from Assets.

Equity = Assets – LiabilitiesEquity = Assets – Liabilities

Represents the actual stake of the owners in Represents the actual stake of the owners in the company and the actual value of the the company and the actual value of the company. Also called the Net Worth.company. Also called the Net Worth.

Balance Sheet shows the assets, liabilities and Balance Sheet shows the assets, liabilities and Equity at a certain time, usually at the end of a Equity at a certain time, usually at the end of a fiscal quarter or year.fiscal quarter or year.

Balance sheet presents assets on left hand Balance sheet presents assets on left hand side and equity and liabilities on the right hand side and equity and liabilities on the right hand side. Some use Assets at the top and Equity side. Some use Assets at the top and Equity and Liabilities at the bottom of the page but the and Liabilities at the bottom of the page but the concept is the same.concept is the same.

Assets are financed by liabilities and Assets are financed by liabilities and owners Equity. Liabilities and Equity exist owners Equity. Liabilities and Equity exist to finance assets. Assets exist to to finance assets. Assets exist to generate cash to pay off liabilities with generate cash to pay off liabilities with enough left over to give owners a profit.enough left over to give owners a profit.

How Money Flows How Money Flows through a Businessthrough a Business

Owners invest money in the company Owners invest money in the company and suppliers extend it credit. That and suppliers extend it credit. That creates owner Equity and Liabilities. creates owner Equity and Liabilities. Management uses that money to buy Management uses that money to buy assets. Assets generate cash that flows assets. Assets generate cash that flows back to the right hand side of balance back to the right hand side of balance sheet to pay off liabilities with money left sheet to pay off liabilities with money left over for owners (Which is profit or over for owners (Which is profit or income)income)

Balance Sheet is described as a Balance Sheet is described as a snapshot of a companysnapshot of a company

But that sometimes leads people to But that sometimes leads people to forget the dynamic relationship between forget the dynamic relationship between assets, liabilities and equity.assets, liabilities and equity.

What is the difference between an What is the difference between an Investor and a Creditor.Investor and a Creditor.

Income StatementIncome Statement

Sales – Expenses = IncomeSales – Expenses = Income