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Glossary

Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time.

What is a balance sheet?

A balance sheet provides a snapshot of a company's financial position at a specific moment in time. It displays the company's assets (what it owns), liabilities (what it owes), and the resulting equity, which is the difference between the two. This equity is referred to as shareholders' equity, representing the remaining value if the company were to liquidate its assets and settle its debts.

How do you create one?

Creating a balance sheet can be done through various methods. One approach is to use software like Microsoft Excel. Alternatively, you can utilize programming languages such as C++ or Python, or even employ spreadsheet software like Google Sheets.

What are assets?

Assets encompass anything of value owned by a company, whether tangible (like cash, equipment, or inventory) or intangible (such as trademarks, copyrights, or patents). In financial modeling, the goal is to estimate the value of a company's assets by calculating the present value of future cash flows, factoring in a risk-appropriate discount rate.

What are liabilities?

Liabilities are obligations arising from past transactions or events, including accounts payable, wages owed, taxes due, and long-term debts. In financial modeling, comprehending a company's liabilities is crucial for forecasting future cash flow and financial standing.

What is equity?

Equity is a financial term describing a company's ownership value in itself. It's determined by subtracting total liabilities from total assets, representing the residual value of assets after settling debts. Equity is a critical element of a balance sheet and serves as an indicator of a company's financial well-being.

What is debt?

Debt entails an agreement between two parties, a lender and a borrower, where the lender provides money in exchange for interest payments. The borrower commits to repaying the borrowed principal along with interest over a specified period. Debt is employed for various purposes, including purchasing a home, starting a business, or investing in financial assets.

How do you calculate total assets?

Calculating total assets involves combining two primary components: current assets and fixed assets. Current assets are those convertible to cash within a short period, typically a year or less, such as cash, short-term investments, and accounts receivable. Fixed assets, on the other hand, are not expected to be converted to cash quickly, including long-term investments, property, equipment, and intangible assets. The calculation is as simple as adding current assets and fixed assets together.

How do you calculate total liabilities and equity?

Calculating total liabilities and equity can be done by adding all the company's liabilities, both short-term and long-term, and then subtracting total equity. Liabilities are listed on the balance sheet, while equity is found in the shareholders' equity section of the balance sheet. This calculation provides an accurate representation of the company's total liabilities and equity.

What is the difference between net worth and total assets?

Net worth represents the difference between an individual's total assets and total liabilities. Total assets encompass the sum of all an individual's assets, which can be categorized as liquid (easily convertible to cash), illiquid (not quickly convertible to cash), and fixed (not easily convertible to cash at all). Total liabilities, in turn, include short-term (due within a year), long-term (due after a year), and contingent (may or may not become due) liabilities, like potential lawsuit costs.