01. The Balance Sheet

The balance sheet shows on the right side from where the money is coming, or to whom it belongs.  It shows the equity, which is my own money. And it shows the liabilities, which is money from others. Both - if added - result in what is called the balance total. If I have 50 in equity and 100 in liabilities, my total balance sheet is 150. Now I can also look at relationships. My own money, being the equity, makes a third of my total balance sheet, or 33.3%. And the money I have from others, makes two thirds, or 66.6% of my total balance sheet. Banks often require that a company has at least 30% equity. Otherwise they fear that the company would become to weak. What does that mean, to weak? It means that its own capital, its own equity, would then become too low and its dependency on other peoples money, like banks, would become too strong.

On the left side of the balance sheet the assets are shown. It is shown, where the money has been spent for, where the money currently is active, is being used for. Assets are for instance office equipment or production facilities, like a factory to produce things. Assets can also be rights, patents, or ownerships of other companies. It is also the money at hand, the cash in my cashier, or on my bank account.

The balance sheet also shows on its left side what the company has already delivered as products or services to clients, but which have not been paid yet. This is shown as accounts receivables. But my company also has suppliers which are delivering products and services to me, to my company. In most cases and at a certain moment in time I will not yet have paid them in full. These are shown as accounts payable on the right side of the balance sheet.

The balance sheet is shown in the form of a T. Always, the right side of it equals the left side. Why is that? It shows how my assets are being financed and who owns them. Therefore it must always be equal, or the exact same amount. I might own all my assets, but in case of bankruptcy - in the example above - the bank would claim two thirds, or 66.6% of the remaining assets as being their own.

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