The balance sheet
The balance sheet – what we own less what we owe
The balance sheet shows the difference between what the business owns (its “assets”) and what it owes (its “liabilities”). At the bottom of the balance sheet you will see the excess of assets over liabilities, recorded as “net assets” (= shareholders’ funds = shareholders’ equity = owners’ equity – they’re all just different terms for the same thing).
The balance sheet as a snap shot
The balance sheet is a snap shot. The balance sheet records the accountants’ value of the business at the end of the financial year. If we imagine the balance sheet as as a big tank of water, it’s our store of value/ the amount of water we have at the end of the year.
The balance sheet vs. other financial statements
If the balance sheet is our store of value, the profit and loss and cash flow statements tell us how much value we have created during the year. If we imagine the balance sheet as a tank of water, the profit and loss and cash flow statements tell us how much water has flowed into the tank during the year.
Profit and loss vs. cash flow statements
If the balance sheet tells us what the businesses’ value is at the end of the year, and the other two financial statements tell us how much value has changed during the year, what’s the difference between those other two statements? What’s the difference between the profit and loss and cash flow statements?
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