Understanding Balance Sheets

Choco-Bloc Company makes chocolate for retail and takes custom orders. To understand a balance sheet better, let us take a look at the elements of their balance sheet.

Current Assets: These are assets that are cash or cash like. They provide liquidity. Cash is the most liquid of assets. The company’s current account, cash reserves form its current assets. Cash reserves could be in the form of savings account, bank certificates, short-term assets .If the need arises these assets can be spent immediately.

Accounts Receivable: These monies are due from customers. These are amounts due from customers as a result of sales made on credit. Usually these amounts are due within 30 to 60 days of the sale. This is why they are considered current. Some businesses have longer credit periods. Six to nine months are the credit period in seasonal products. While credit periods are pre-agreed on, they usually extend beyond the term. This needs to be factored in during cash flow planning.

Allowance for Bad Debts: In some cases companies do not get paid for their purchases. Sometimes customers go under, withhold or deduct payments for quality issues. A reserve is made for this. This reserve usually absorbs the cost of bad debt and does not affect day to day functioning. This reserve enables a write off to expense. This allows for the bad debt to become a valuation adjustment.

Inventory: This is a term used for material held by the company. In the case of Chocó-bloc it would be coca, milk solids and so on would be part of the raw material inventory. Finished Chocolate bars and other products would be the finished goods inventory. Some part of the inventory would not be raw material but not yet finished goods. This would be part of the work-in-progress inventory. In the case of Choco’-blocs resellers and distributors only the finished products that they receive would be their inventory.

Pre-paid Expenses: Premium payments made in advance form part of pre-paid expenses. Tax payments made in advance is another pre-paid expense.

Fixed Assets: Physical assets of the company such as the factory, equipment within it are its fixed assets. They are not ‘liquid’ in nature. In the sense that they will not be converted to cash anytime soon. Fixed assets also depreciate in value over time, especially in the case of equipment. The land cost itself will appreciate over time.