The balance sheet reports an organization’s assets and liabilities at a given time—the balance sheet shows which assets are in the company and how they are financed. A balance sheet is also presented in the annual report, the income statement, the administration report, and the auditor’s report.
A balance sheet consists of the following:
- Assets
- Liabilities
- Equity
The balance sheet is usually set up in two columns, with assets on one side and liabilities and equity on the other. The balance sheet is a central part of the company’s accounts, and if you, as an entrepreneur, learn to understand, analyze, and use it, you can manage the business better and more efficiently.
The balance sheet is reported in the annual report.
A balance sheet reports the company’s assets, liabilities, and equity during the financial year. In addition to the balance sheet, one is a reported income statement, a board of directors’ report, and an annual report audit report. The balance sheet consists of the company’s assets, liabilities, and equity. A company’s assets must always be balanced against the company’s debts and those of the owner’s investments in a balance sheet.
What Does a Balance Sheet Contain?
A balance sheet has assets, liabilities, and equity. The assets are split into fixed and current assets on the balance sheet. Fixed assets like machinery and equipment are intended to be used for more than one year. Existing assets such as inventories and cash are instead designed to be traded within one year. Liabilities are divided on the balance sheet into long-term and short-term liabilities. Long-term liabilities such as bank loans are liabilities that fall due after more than one year, while short-term loans fall due within one year. Examples of current liabilities are VAT and accounts payable. Equity is the difference between the company’s assets and liabilities. Equity is a positive loss if a company’s assets are more significant than liabilities.
The Balance Sheet Reflects a Company’s Financial Condition
A balance sheet is also presented in the annual report, the income statement, the administration report, and the auditor’s report. The balance sheet consists of a company’s assets, equity, and liabilities at a specific time, which usually falls on the last day of the financial year. The two parts of the balance sheet, assets and equity, and liabilities, should be equal on the day when all accounts in the accounts are reported and closed, also called the balance sheet date. Thus, a company’s assets must be balanced by the company’s debts and the owners’ investments.
Parts of the Balance Sheet
The debit page on the balance sheet shows the company’s assets. These assets consist of fixed assets and current assets. Fixed assets are the assets that are permanently intended to be used or held. Existing assets are continuously consumed, sold, or converted into cash and cash equivalents.
The credit side of the balance sheet has the company’s equity and liabilities. Equity is the capital that the owners themselves have invested in the company and is called risk-bearing capital. Disadvantages include current liabilities that you must pay within one year and long-term liabilities that fall due after more than one year. It also includes untaxed reserves and provisions.
You can find the financial statements results from the income statement on the balance sheet. The result, therefore, affects the company’s equity by the same amount.
Budgeted Balance Sheet
The balance sheet is also used in budgeting, where the profit budget and liquidity budget form the basis. The budgeted balance sheet shows what assets, liabilities, and equity a company plans to have at a particular time and can be seen as a summation of the profit and liquidity budgets.
The Balance Sheet can Vary Depending on the Industry
A balance sheet’s content and size vary significantly between different industries. Consulting firms and service companies generally have smaller balance sheets. In contrast, banks, forestry companies, real estate companies, and other capital-intensive industries often have many items and large amounts on their balance sheets. Regardless of size, however, the balance sheet is relevant in both extremes.
Now you have gained insight into the balance sheet basics and how the report can be analyzed and used for you as an entrepreneur and external stakeholder. Understanding the balance sheet means that you better understand your company! Hopefully, the importance of its importance has been highlighted to implement different areas of use in your organization, to achieve better governance and control.
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