Fundamental(Micro) "Balance Sheet"

     Previously, I mentioned that micro fundamental is to look deeply in the specific company via financial report. The followings are the 4 types of financial reports.

     1. Balance Sheet
     2. Income Statement = Profit and Loss = P&L
     3. Cash Flow
     4. Statement of change in equity

1. Balance Sheet

     Where does the name "balance" come from? What does it actually mean?.... In the accounting principle, it divides the balance sheet into 2 sides; left and right; and they need to be "balanced". If the left side has $100 value, the right side needs to have 100$ as well ( I will give you the example shortly). The next question is what do the left and right sides mean? The left side is the assets the company has/own. The right side is how company gets those assets by either from borrowing or from using their own (owner) money to get the assets. In the accounting term, we call borrowing "debt" and using owner money "equity".
     Example: There is a company named "Farmer Inc." which is founded by Mr.Lee. Farmer Inc. has two kinds of asset; a shovel and a horse. Assume that Mr.Lee uses his own money to buy the shovel, but he borrows money from a bank to buy the horse because it is expensive. Let's say the shovel price is $50 and horse's is $1,000. The following is the balance sheet of the Farmer Inc.

     In sum, a balance sheet will show you what assets a company owns at what value and how they acquire those assets (debt or equity).

    
     Actually, It's pretty easy if you understand the concept. Your next step is just to know the categorization and terminology.

• Categorization

              Both assets and debt are further categorized to short term and long term. The cross line between short and long term is 1 year. For example, if you have an assets that you are going to use it more than one year, it will be long term assets (e.g., building and car). And, if you borrow the money and need to return it in one year, it will be short term debt.

• Terminology

              There are a lot of jargons in accounting. You can study them by picking the balance sheet of some companies and googling words that you don't understand. If you are still confused, just email me:)

Next article we will talk about "Income Statement".