What you Should Know About the Balance Sheet: Accounts Payable/ Accounts Receivable
A balance sheet has been commonly described as a snapshot of a company’s financial status or condition. Just like a cardiogram indicates the condition of one’s heart muscles, a balance sheet makes a statement about a company’s financial health.
However, the balance sheet must not be confused with an income statement. A balance sheet is extremely useful to a company’s management for the evaluation and planning of accounts because it clearly indicates both the assets and liabilities of an entity. An income statement on the other hand is not as informative and is merely a statement of profit for a limited time interval alone. Furthermore balance sheets record not only cash flow but also non-monetary assets like equipment, buildings and land, whereas the income statement focuses solely on cash flow and capital.
Balance sheets are financial statements of accounts for businesses, both large and small organisations and also individuals. The balance sheets used today can be divided into three segments, namely, assets, liabilities and net worth. The category of assets is usually placed first, after which follows the liability section; finally an entity’s net worth or net assets is calculated by finding the difference between the assets and liabilities.
In the calculation of the assets of a company or financial entity, various factors come into consideration. Firstly, a company’s assets and liabilities can be further categorised as fixed and current. Accounts Receivable belongs to the Current Assets and Accounts Payable to the Current Liabilities. A company’s fixed assets also include Property, Equipment, Goodwill, Investments in Associates, Deferred Tax Assets and other intangible assets. The category of Current Assets also includes cash and cash equivalents, Inventories, and Trade Investments.
Accounts Receivable is revenue that is due to be received by the company. It is the expected income of the entity as a result of service rendered and profit incurred. Accounts Payable refers to the debts of an entity and is therefore a liability because it depletes finances. Similarly, since Accounts Receivable adds to a company’s finances it is calculated under the category of assets.
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