A simple understanding of a balance sheet leads us to the equation of Assets to the sum of Liability and Equity. A balance sheet is a holy book to any business. It echoes the risk and net worth of the assets.
Assets = Liability + Equity
(Value of what we already have) (Borrowings) (What we own ourselves)
Balance sheet tracks our business to the specific moment. If we want to look where we have been spending all year and what are we left with, then that’s where a balance sheet comes in handy. It is an overview of the assets dealing with every aspect of it. It will inform about their source, their availability and how much of it is left to the enterprise or company. The balance sheet is a panorama of the dealings and business done over a period of one year.
The two sections of a balance sheet give a complete picture of transactions, dealings, the outflow of cash allocation of stocks etc. On the left is the asset section divided into the Current and Non-current section. Any current section will only be available for a year or duration less than a year. While the non-current section remains stationary for a longer term. The very first section of the sheet introduces us to the current asset which is inclusive of Cash which is available at any time, Accounts Receivable refers to the money which is to be received by customers, Inventories are list of goods that are to be sold and followed by prepaid expenses, a sum paid in advance.
Accounts receivables (AR)
As the term receivable suggests Accounts receivables are the amount or sum that your customers owe you. Unlike received, receivable adheres to the future prospects of the payment. This could be because of the good and services they took from you or simply because of the transaction that is still undone. This amount is due usually because the payment was meant to be done through a credit card. This period of credit may range from few months to a whole year. Once a product is sold or a service is provided, an invoice of a sale is generated but because the transaction was made on credit it leads to an extension in the time period during which a customer can pay.
Consider the example of Alex the retailer of handbags. A customer named Emily placed an order for 50 of them which cost her around 1, 00,000. She used her credit card and was given an extension of Thirty days to make that payment. Once Emily purchased all the fifty handbags, an invoice was generated and an amount of 1, 00,000 was added to Account Receivable. Once Emily made the payment the amount was added to the Cash section and deleted from AR.
Many companies put few portions of their sale on credit. This way they lure their customers to make hassle free transaction after the service has been provided. AR is crucial in the analysis of fundamentals of business as it tracks the liquidity of a business.
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