Blue ballpoint pen on a quarterly corporate financial report on a table waiting for the financial and investment analyst to analyse before public disclosure. Financial investment analysis concept.
A statement giving a clear picture of the net worth of a business is known as a balance sheet. A balance sheet is a financial tool for all businesses to list their assets, liabilities and their owner’s equity to calculate the actual worth of the business. Creating a financial statement is a standard practice for all businesses. These statements are later audited by governing agencies for taxes and other purposes. The commonly used financial statements of a business include the following.

  1. Income statement:
    1. An income sheet covers the revenues from sales, cost of goods sold, expenses, net income, taxes and earning per share. It is created annually, half-yearly or quarterly.
  2. Balance sheet:
    1. A balance sheet displays a snapshot of the net worth of the business. It is mostly drawn at the year-end and the date is specified on the balance sheet.
  3. Cash flow statement:
    1. A cash flow statement merges both of the above statements to display the utilization of the cash in three main business activities including:
      1. Operating activities
      2. Financial activities
      3. Investing activities

What is a Balance sheet?

A balance sheet is a financial statement which consists of the balances of multiple different ledger accounts. This bookkeeping method helps in listing the ledger balances in the below-mentioned categories so that a company is able to get an idea of their financial position. These categories are:

  1. Assets:
    1. Assets are all properties/belongings/things owned by the business. They can include the properties, cash, machinery and even prepaid expenses.
  2. Liabilities:
    1. Liabilities of a business include all of the expected dues which the business is supposed to clear in coming days or years. They include long-term loans, short-term loans and an accrued account of the business.
  3. Owner’s equity:
    1. Owner’s equity is the capital of the owner who invested in the business. It includes the retained earnings and finances generated from issuing stocks and debentures.

Therefore, a balance sheet can be easily defined as “A statement which consists of assets, liabilities and owner’s equity (capital) on a particular date”. The balance sheet got its name as the closing balance is balanced at the year-end.

Components of a Balance Sheet

  1. Types of assets
    1. Real assets
      1. Fixed assets
        1. Tangible assets
          1. Building
          2. Plant
          3. Fixture and fittings
          4. Furniture
          5. Machinery and vehicles
        2. Intangible assets
          1. Goodwill
          2. Patent rights
          3. Trademarks
        3. Current assets
          1. Quick assets
            1. Stock debtor
            2. Cash
            3. Cash at bank
          2. Floating assets: which keep on converting from one form to another such as:
            1. On sale of goods, the inventory is changed into debtors
            2. On purchase of goods, cash is converted into inventories
          3. Fictitious assets
            1. Preliminary expenses
            2. Loss on issue of shares
          4. Types of liabilities
            1. Fixed liabilities
              1. Debentures
              2. Long-term loans
            2. Current liabilities
              1. Deferred liabilities: Payback period is less than a year and more than a month
                1. Short term loans
              2. Quick liabilities: Payback period is within a month
                1. Bank overdraft
                2. Outstanding expenses
                3. Creditors
              3. Equity or internal liabilities
                1. Reserves
                2. Owner’s equity
                3. Shares capital
                4. Retained earnings

Features of a Balance Sheet

  1. The balance sheet is the final stage of the financial accounts in bookkeeping records.
  2. It is mostly prepared at the year-end.
  3. It is just a statement, not a ledger account.
  4. The balance sheet has two sides which show the assets on the left side and liabilities on the right side.
  5. Both the right and left sides of a balance sheet should always balance.
  6. The balance sheet only reflects the balances of the asset accounts and liability accounts. They do not reflect revenue accounts.
  7. The balance sheet also reflects the business’s solvency.
  8. The balance sheet is designed after the income statement as it requires the net profit or net loss in the equity section.

Why is a Balance Sheet Important?

There are plenty of benefits to creating a balance sheet for your business. However, for smaller businesses, the balance sheet is not an essential requirement as they are not opting for listing their businesses for stocks either they are paying huge taxes. Regardless, a balance sheet can be very helpful in reflecting the complete hearth of your business.

  1. It acts as a snapshot of the business’ financial health on a specific date
  2. Helps you in expanding your business
  3. Can help you get financial aid through investors or loans as your business performance and current health is already documented
  4. Prioritizes your work, showing you all of your liabilities that need your immediate attention
  5. You can even generate financial ratios very easily if you have a properly detailed balance sheet documented

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