For today’s investors, accounting has proved to be an essential tool when choosing which companies receive their investments. Before applying the available resources, it is necessary to take stock of how profitable the business is, and this is done through the balance sheet accounts.
The assessment of an organization’s assets and liabilities is essential both for the investor who wants to risk little or for the one who is willing to risk a lot of capital. Even an intermediate investor is still quite confused by so many numbers. Therefore, it is important to understand the concept of each account and how they dictate the value of a company.
In this post, you will understand each equity account, get to know its sub-accounts, and learn why it is important to analyze them in detail before investing. Follow up!
After all, what are the balance sheets?
First of all, it is essential to know that the balance sheet (BP) is an accounting report that consists of the presentation of accounts, evaluating the equity and financial conditions of a company for an annual period.
The BP is like a photo taken at the end of the financial year (usually on December 31st), which shows the company’s situation on that date. In this way, it is possible to see all the company’s movements throughout the year and what are the pending years for the following years. Thus, it is possible to analyze whether it will bring appreciation to the invested capital or not.
The accounts that make up the BP are assets, liabilities, and equity & securities. Get to know each one of them in detail.
It corresponds to the assets and rights of a company, that is, anything that offers present or future currency liquidity. In general, it is the income that comes from conversions into sales, capital invested, machinery, among other specifications.
At present, when selling the product or providing the services, the cash flow guarantees the rapid holding of capital. This increase in cash in the box is a practical example of an asset.
Future profitability exists when there is a fixed asset, a property, for example, which, when acquired, projects an additional value over the years and, when sold, earns profits for the investor.
This account receives two classifications: current and non-current assets. Meet them!
CURRENT ASSETS Are
those that have a rapid capacity to transform into capital also called high liquidity. These are accounts that hold amounts of cash or otherwise have conversion value, such as free-moving bank checking accounts, cash in cash, for working capital or profit, inventory of goods, receivables from customers, taxes to be refunded, among others.
These have a lower conversion value than current assets; that is, they have a lower liquidity potential. They are goods and rights that take time to transform into capital and that, in some way, serve the organization.
Some examples are fixed assets, which are, in fact, real estate and equipment, investments, which are investments in durable goods for future sale, intangible assets, which do not have a physical size and have strong financial value such as trademarks and patents.
It is the complete opposite of the asset. Liability accounts are the duties that a company needs to bear, and, of course, they do not generate liquidity but debt.
These are items that companies own and that generate an obligation to pay. Therefore, everything that is a cost or expense can be placed in the liability accounts.
Like assets, it is also divided into current and non-current, which measures how quickly business obligations will be honored.
It is the one that has less time to be settled, such as payroll and monthly suppliers.
This concern accounts for waiting a little longer to be paid and can only be demanded after the fiscal year (one year), such as suppliers of large equipment and debentures payable.
Considered the result between the asset and liability accounts, derived from the fundamental equity equation (Assets = Liabilities + Shareholders’ Equity), it is the book value of a company.
In this account is the true value of the organization’s equity; the two main equity accounts are: accumulated profit during the fiscal year and the amounts made available by the partners.
What are the benefits of reviewing balance sheets before investing?
For you who seek to be an investor, it is important to pay attention to the details when investing. The first step is taken by knowing a little about the accounts. Subsequently, you need to analyze whether or not it is profitable to invest your capital in a given organization, starting from a thorough observation of the balance sheet accounts.
We list here some benefits of doing a correct analysis before disposing of your capital.
SAFETY IN PURCHASING A COMPANY
Analyzing the balance sheet is an essential step when acquiring a company. After all, it is there that you will see if she is in debt or not if it will bring her losses or not.
EVALUATION OF THE CORRECT PRICE OF THE STOCK
Even if you don’t buy the whole company, when you buy a stock, you will be investing in part of it. Therefore, it is essential to pay attention to the balance sheet accounts in order to know if the enterprise generates profits or losses and if it correctly pays dividends to shareholders.
VALUATION OF INVESTED CAPITAL
Through the equity accounts, you can see if the brand in which you intend to invest in growing and increasing in value. In this way, it is possible to reduce the risks of the investment you are making.
Do you understand how important equity accounts are? In addition to knowing what they are, it is essential to know what they are for.
In this post, you were able to find out which are the balance sheets (assets, liabilities, and equity), their sub-accounts (current and non-current), and it was also possible to see how they can help you when investing your money – whether in the purchase of a company, whether investing in stocks or analyzing the possibility of your invested capital increasing over time.
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