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How to Finalize Balance Sheet & Analysis of Balance Sheet
Steps for making & Finalizing a Balance Sheet:
Determine the date of the balance sheet: The balance sheet is created to show the assets, liabilities, and equity of a company on a specific day of the year. Hence, it is necessary to decide that date.Divide into two heads: Assets & Liabilities.Calculating Your Assets: Assets are anything of value which is owned by the company.Classify them into Current & Non Current Assets.Current assets include cash, stocks and bonds, accounts receivable, inventory, prepaid expenses and anything else that can be converted into cash within one year or during the normal course of businessFixed Assets are also known as Long-term assets. Fixed assets are the assets that produce revenues. They are distinguished from current assets by their longevity. They are not for resale.Compute the Total Assets.Calculating Your Liabilities: There are two types of liabilities: current liabilities and long-term liabilities.Current liabilities are accounts payable, accrued expenses (such as wages andsalaries), taxes payable, etc. which are required to be ordinarily paid in the near future.Long-term liabilities may include financing from relatives, banks, finance companies or others.Compute Total Liabilities.The formula that defines the balance sheet: Assets = Liabilities + Net Worth.Net worth is what is left over after liabilities have been subtracted from the assets of the business. It indicates the capital existing on a particular date.After completing the above steps, the total of both the sides, that is, the debit & credit sides should be calculated and it must be the same.
Analyzing a Balance Sheet through various ratios:
We can calculate some financial ratios that will help us to easily analyze the balance sheet.Let us have a look on few such ratios/calculations:
i) Quick Ratio:
Quick Ratio = (Current Assets – Inventories)/ Current Liabilities The Quick Ratio indicates a company’s ability to meet its short–term obligations with its liquid assets. The higher the quick ratio, the better will be the liquidity of the company.
ii) Current Ratio:
Current Ratio = Current Assets/ Current Liabilities It is used to determine the company’s position with regards to its ability to repay its short term liabilities.
iii) Debt / Equity Ratios:
Short Term Debt to Equity Ratio = Short Term Debt/ Shareholders EquityLong Term Debt to Equity Ratio = Long Term Debt/ Shareholders EquityDebt to Equity Ratio = Total Liabilities/ Shareholders Equity
These ratios basically determine how the company can finance its growth.
iv) Turnover Ratios:
Debtors Turnover Ratio = Turnover / Average Debtors Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory Inventory to Sales Ratio = Inventory/ Revenue
v) Capital Structure Ratios:
Total Liabilities to Total Assets = Total Liabilities/ Total AssetsShort Term Debt to Total Debt = Short Term Debt/ Total DebtLong Term Debt to Total Debt = Long Term Debt/ Total Debt
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