When someone, whether a creditor or investor, asks you how your company is doing, you’ll want to have the answer ready and in relation to investments made by the firm retained earnings. The way to show off the success of your company is a balance sheet.
A balance sheet is a documented report of your company’s assets and obligations, as well as the residual ownership claims against your equity at any given point in time. Many people and organizations are interested in the financial affairs of your company, whether you want them to be or not. You of course want to know about the progress of your enterprise and what’s happening to your livelihood. However, your creditors also want assurance that you will be able to pay them when they ask. On the balance sheet you list your assets and equities under classifications according to their general characteristics. It is a relatively simple matter to make a comparison of one classification with another or to make comparisons within a classification because similar assets or similar equities are listed together. Current assets include cash and other assets that in the normal course of events are converted into cash within the operating cycle.
For example, a manufacturing enterprise will use cash to acquire inventories of materials. These inventories of materials are converted into finished products and then sold to customers. Cash is collected from the customers. This circle from cash back to cash is called an operating cycle. It is always listed first on a balance sheet.