Understanding Balance Sheets: Assets, Liabilities, and Equity
Balance is the general state quantifiable nature of samples and quantification of the economic resources owned by a company at any given time, the rights of creditors against the company, and the participation of owners and shareholders over these resources. It reflects the nature and amount of:
- The economic resources owned by the company (Assets)
- Rights of creditors against the company (Liabilities)
- The residual interest of the owners (Equity)
Assets
All property and rights that a company holds, as well as expenditures that will be exploited in future fiscal years. This is composed of tangible and intangible resources (assets and rights) that were transmitted, both being owned by third parties as partners, and expenses not consumed during the accounting period.
Categorized According to Permanence
According to their time remaining within the company’s ownership, assets can be grouped as follows:
Current Assets (Short-Term Assets)
These are assets that remain within the company for a period less than one year from the time the fiscal year ends. Their rotation is equal to or greater than one. These are also called short-term assets. In accordance with technical standards of Argentina, these are called current assets. Examples include accounts receivable, merchandise, and debtors.
Non-Current Assets (Long-Term Assets)
These are assets that remain in the company’s ownership for a period exceeding one year from the time the fiscal year ends. These are also called fixed assets. In accordance with technical standards, these are called non-current assets. Examples include property, plant and equipment, vehicles, and investments. Current assets should be sorted according to their decreasing degree of liquidity.
Liquidity
Liquidity is the ability of the company to meet its financial obligations. Not all assets have the same degree of liquidity. The most liquid asset is cash. Items of current activities are called captions, which are account groupings that fulfill the same function within the company.
Cash and Cash Equivalents
This includes cash on hand and in banks, both domestically and abroad, and other similar negotiable instruments. These are assets with unlimited legal power and others with similar characteristics of liquidity, certainty, and effectiveness. Examples: Cash on hand, checks, bank accounts, foreign currency, petty cash, deposit receipts.
Regulatory Account: Allowance for foreign currency depreciation.
Investments
These are placements made with the intention of obtaining income or profit, and are not part of the normal commercial or industrial structure of the company. They are not part of the assets subject to the ordinary activities of the enterprise. Examples: Time deposits, stocks, bonds, loans, shares of other companies, rental properties.
Regulatory Accounts: Allowance for impairment, allowance for doubtful accounts for loans, accumulated depreciation on rental properties, unearned interest on loans receivable.
Accounts Receivable
These are the rights the company has against third parties to collect sums of money or other goods or services provided that do not possess the characteristics of other asset categories. These should be discriminated between receivables from sales and services and other receivables that are not of that origin. Examples: Receivables, debtors for sales, customers, defaulting debtors, accounts receivable.
Other Receivables: Advances to suppliers, prepaid expenses, advances on salaries and taxes.
Other Receivables: Partner contributions, prepaid rent, prepaid expenses, shareholders, interest receivable.
Regulatory Account: Allowance for doubtful accounts, unearned interest on accounts receivable.
Inventory
These are goods held for sale in the ordinary course of business, or that are in the process of production for such sale. Examples: Merchandise, manufactured products, finished products, materials, raw materials.
Regulatory Account: Allowance for depreciation of merchandise or stock.
Non-Current Assets
These are assets that cannot be considered current.
Investments
These are placements made with the intention of obtaining income or profit, and that are not part of the normal commercial or industrial structure of the company. Their realization is not considered within one year. Examples: Buildings, land, mortgage loans receivable.
Regulatory Account: Accumulated depreciation of property, unearned interest receivable.
Property, Plant, and Equipment (PP&E)
These are tangible goods used in the company’s operations and are not intended for sale. Examples: Buildings, vehicles, machinery and equipment, facilities, land.
Regulatory Account: Depreciation (the original value less accumulated depreciation).
Intangible Assets
These represent franchises and privileges. Examples: Trademarks, concessions, key businesses.
Regulatory Account: Accumulated amortization of intangible property.
Deferred Charges
These express a value whose existence depends on the future possibility of producing profit. Examples: Costs of organization, study and research.
Regulatory Account: Accumulated amortization of deferred charges.